EV Battery Division Likely to Turn to Loss in 1Q22
The author is an analyst of NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com. -- Ed.
Impacted by production disruptions at clients, LGES’s EV battery division will likely turn to loss in 1Q22. However, results should still surpass consensus slightly, thanks to robust demand for cylindrical batteries.
Raise TP to W550,000
Adhering to a Buy rating, we raise our TP on LG Energy Solution (LGES) by 28% to W550,000. To reflect expansion plans for GM’s third EV plant (mass production set for 3Q24; announced shortly after the firm’s listing) and strengthening demand for EV batteries, we hike 2024F EBITDA by 17% and adjust our target multiple from 17.4x to 21.0x (CATL’s 2024F EV/EBITDA, the past one-year average). While the previous target multiple of 17.4x applied a 22% discount to the CATL figure, since LGES’s listing, it has become increasingly appropriate to remove the discount, as: 1) LGES now boasts 2025F capacity of 510GWh (vs 630GWh at CATL), with the gap with CATL having narrowed compared to that when LGES was listed; and 2) CATL is moving production out of China to Germany and North America (likely Mexico). CATL’s plant relocations will likely cut the OPM gap between the two firms (OPM gap of 9.7%p in 2021 → 2.3%p in 2025F). LGES shares are currently trading at a 2024F EV/EBITDA of 15.8x.
Cylindrical batteries driving everything
We forecast 1Q22 sales of W4.4tn (+4% y-y, -0.4% q-q) and OP of W170bn (-50% y-y, +124% q-q), with sales and OP to exceed consensus by 1% and 6%, respectively. In 1Q22, the EV battery division will likely turn to loss due to disrupted production at VW, which accounts for about 20% of LGES’s EV batteries sales. In addition, the recognition of sales for GM models is likely to fall significantly in response to GM’s Bolt recall. However, sales and profitability for small-sized batteries should surpass expectations thanks to strong demand from Tesla for cylindrical batteries.
In 1Q22, Tesla’s production in China (116,000 units through February) will likely outpace that of 4Q21 (178,000 units). Despite production disruptions at automakers, Tesla is continuing to enjoy steady shipment growth.
We estimate LGES’s 2022 sales at W21tn (+21% y-y) and OP at W1tn (+34% y-y), in line with consensus. By product, sales are forecast to divide as W11.2tn for EV batteries, W6.8tn for small-sized batteries, and W3.5tn for ESS batteries.