Enjoying Robust Gen5 Shipments

The author is an analyst of NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com. -- Ed.

 

Solid earnings growth continues at Samsung SDI thanks to Gen5 effects. Moving ahead, the firm is expected to both secure additional new customers (not counting Stellantis) and enjoy an uptick in new cathode material-related battery orders.

Expect solid earnings to beat recently-lowered expectations

We maintain a Buy rating and TP of W1,000,000 on Samsung SDI. Despite some market concerns towards production disruptions at downstream clients, raw material price burden, etc, both downstream demand and the firm’s earnings appear to remain in line with the start-2022 projections. Moving ahead, Samsung SDI is likely to report solid earnings, slightly exceeding the recently-lowered forecasts. We expect shipment growth to be driven by a rise in shipments to existing customers in 1H22 and the operation of a second Hungary plant in 2H22. By excluding non-operating value (W5.3tn), net borrowings (W3.8tn), and the electronic materials business (W7.1tn) from the company’s current market cap of W35.8tn, we value the rechargeable battery business at W26.8tn. Foreseeing 2024 EBITDA for the rechargeable battery business of W3.9tn, we arrive at a 2024F EV/EBITDA of around 7x, a level suggesting excessive undervaluation given the peer average multiple of 20x.

Enjoying robust Gen5 shipments

Samsung SDI is forecast to post 1Q22 sales of W3.8tn (+30% y-y, +1% q-q) and OP of W300bn (+125% y-y, +13% q-q), beating consensus by 2% and 4%, respectively. For EV batteries, Gen5 shipments to BMW remain sound despite the production setbacks impacting downstream customers and raw material cost burden. Profitability is estimated somewhere in the low single digits. Affected by off-seasonality, ESS-related sales and profitability will likely show q-q decline.

For 2Q22, we predict sales of W4.3tn (+28% y-y, +11% q-q) and OP of W367.1bn (+24% y-y, +22% q-q), expecting consensus to be topped by 7% and 2%, respectively. Our rosy outlook reflects both increasing Gen5 shipments to BMW and the likelihood of ESS shipment recovery.

In 2H22, volume should pick up in earnest on the operation of a second Hungary plant and the addition of Gen5 supply to Audi. Although the burden of utility and logistics costs at European plants is weighing upon profitability, the firm’s portion of Gen4+Gen5 supply has now climbed to over 50%. In other words, product mix enhancement is offsetting detractors to profitability. If cost burden stabilizes downward in the future, profitability should only improve further.

Over the mid/long term, we expect orders to increase for Gen5 and Gen6 (high-nickel) products via the securing of additional new customers (other than Stellantis), alongside new pre-order activity for volume models based on cobalt-free and manganese-rich cathode materials, which are on track for mass-production in 2023~2025.
 

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