Share Price to Remain Range Bound until Securing New Contracts
The author is an analyst of NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com. -- Ed.
Thanks to its sound cylindrical battery and electronic materials earnings, the firm is overcoming the negative impact of production setbacks for finished vehicles. Share price improvement is to hinge upon achieving higher earnings forecasts by attracting new contracts, rather than upon immediate earnings.
Securing new contracts to be more important than short-term earnings
We maintain a Buy rating and a TP of W1,300,000 on Samsung SDI. In general, rechargeable battery sector share prices tend to be sensitive to upward or downward revisions to earnings estimates. In 2H21, changes to annual OP forecasts for SDI were limited (2021E: +5%; 2022F: +8%; 2023F: +8%), whereas corresponding figures for other materials makers fluctuated by 30~50%, accompanied by sharp upward revisions to earnings forecasts and share prices. In 2022, VW MPE and BMW Gen6 battery suppliers are scheduled to be selected, with Samsung SDI to be in the running for both. Should the firm secure such new supply contracts, we expect its share price to rise in response to upward revisions to earnings estimates from 2023F.
Overcoming impact of production setbacks on cylindrical battery and electronic materials earnings
Samsung SDI booked 3Q21 consolidated sales of W3.4tn (+11% y-y, +3% q-q), 4% below consensus, and OP of W373.4bn (+40% y-y, +26% q-q), topping the market projection by 7%.
Sales at the mid/large-sized battery (EV+ESS) division missed our estimate by 11% on production setbacks stemming from semiconductor supply shortages, in turn dragging down OP at the firm’s mid/large-sized battery business. On the other hand, sales and margins at its small-sized battery and electronic materials domains proved robust, with OP for both beating consensus.
Looking at 4Q21, we forecast overall OP of W425.3bn (+72% y-y, +14% q-q), 8% higher than current consensus (W394.1bn). It is inevitable that ongoing semiconductor supply-demand issues in 4Q21 will continue to dampen mid/large-sized battery shipments. However, earnings should be bolstered by the impending start in earnest of Gen5 supply, product mix improvement, and solid demand (centering upon cylindrical batteries).
In 2022, new clients for cylindrical batteries (Volvo) and prismatic batteries (Audi) are to be added, a positive which should translate into further earnings growth. But, we believe that share price improvement will hinge upon the appearance of upward revisions to earnings forecasts. Such will require Samsung SDI securing new contracts, in turn ushering in capacity expansion. Until such point, its share price is to remain range bound.