Expansion Effects Go beyond Simply Higher Capacity
The author is an analyst of NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com. -- Ed.
We raise our TP on Dongwha Enterprise by 20% to W145,000, reflecting a change in base year for our TP calculations. With a US capacity expansion looking increasingly likely, we believe that expansion effects would go beyond simply higher electrolyte production capacity—we believe that two fundamental changes would be brought about that should act as catalysts for share price re-rating.
Boost earnings estimates for battery materials division
Adhering to a Buy rating, we raise our TP on Dongwha Enterprise by 20% to W145,000, reflecting a one-year change in the base years for earnings for its timber and battery divisions (to 2022F and 2024F, respectively). Meanwhile, we trim back our 2021~23 consolidated OP estimates by 5~7%, as we have slightly lowered our margin assumptions, believing that timber prices will shift from an upcycle to a normal cycle. On the other hand, we revise up our 2022~2024 OP projections for the battery materials division by 10~15% in reflection of sales of new materials (other than electrolytes) and expansion of the firm’s electrolyte production capacity.
Expansion effects go beyond simply higher capacity
US capacity expansion for Dongwha Electrolyte is looking increasingly likely. Accordingly, its electrolyte production capacity is estimated to expand from 53,000 tons as of end-2021 to at least 136,000 tons by end-2025. As this does not reflect capacity ramp-up for new potential customers, additional upward revisions will be necessary if the schedule materializes. If this is reflected, the expected production capacity gap with Enchem in 2025 (225,000 tons) should narrow considerably (current market cap of Enchem: W1.7tn; vs Dongwha Electrolyte: W749bn).
US capacity expansion would be significant in that (in addition to an increase in electrolyte capacity) it entails two fundamental changes. First, cost competitiveness should improve by stably procuring more than 50% of LiPF6 purchases from 2H22 via a JV with a top-tier Chinese LiPF6 player. Second, the speed of top-line growth is to be steepened as more than two new battery materials are expected, including NMP (cathode organic solvent) purification in addition to electrolytes. Once any specific magnitude of capacity ramp-up and orders is confirmed, it will likely be necessary for us to boost our related earnings estimates.
Despite a recent uptrend in LiPF6 prices, we believe that Dongwha Electrolyte’s OP still reached W2.9bn (OPM of 12.5%) in 3Q21 on ASP hikes. Helped by the ASP increases, we see 4Q21E OP of W2.5bn (OPM of 9.0%). Spread changes due to LiPF6 price movements should be limited from 2H22, when the JV is to start up.