To Benefit from Cylindrical Battery Market Expansion
The author is an analyst of NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com. -- Ed.
Based upon its material/process technology, SCM establishment, and mass production capabilities, LGES’s preemptive efforts to secure major clients look to continue. We also expect it to benefit from cylindrical battery market expansion thanks to development of wider-diameter batteries. We initiate coverage with a Buy rating and a TP of W430,000.
Fair market value of W101tn
We initiate coverage on LG Energy Solution (LGES) with a Buy rating and a TP of W430,000. We calculated our TP of W430,000 (market cap of W 101tn) by applying a target multiple of 17.4x (22% discount applied to CATL multiple) to 2024F EBITDA (W5.8tn) and then deducting 2022F net debt (W153.3bn).
Investment points: 1) sustainable preoccupation effects; and 2) cylindrical battery market potential
LGES has secured most of the major automakers as clients. It has established JVs with 3 of the top-6 automakers (Hyundai Motor, GM, and Stellantis) as well as Tesla, the number-one EV manufacturer. By establishing the largest number of JVs among domestic battery makers, it boasts a competitive edge over rivals in terms of winning additional orders, developing new technologies, and securing raw materials.
Order backlog and production capacity represent the most objective indicators of whether a company has preempted the battery market. LGES is estimated to have secured an order backlog of W260tn (versus SK On W220tn; Samsung SDI W90tn). To meet this hefty order backlog, LGES’s production capacity is set to expand to around 418GWh by 2025, a sustainable gap of more than double that for domestic competitors.
We believe that LGES will also benefit from cylindrical battery market expansion following a transition from 21700 to 4680 (battery with wider diameter), as cylindrical battery is expected to be more widely adopted, thanks to: 1) the larger diameter translating into cost reductions and energy density improvement; and 2) the maximizing productivity improvement via process innovation. Following Tesla, BMW, JAC, Hyundai Motor Company (HEV), Volvo (truck), Lucid, Rivian, and Proterra plan to apply cylindrical batteries. Using the capital raised through the IPO, LGES plans to expand its production facilities for cylindrical batteries (including 4680) in the US and Poland. And, mass production of 4680 batteries is forecasted from 2024. If the adoption rate rises in line with the advancement in battery technology, the firm should enjoy stronger sales and margins.