The author is an analyst of KB Securities. He can be reached at yc.baek@kbfg.com. -- Ed.

 

Initiate coverage with BUY and TP of KRW580,000     

We initiate coverage on LG Energy Solution (LGES) with a BUY rating and TP of KRW580,000. Derived using the DCF model, our TP is based on 8.97% WACC, 5.32% TGR, and 9.34% COE. In calculating COE, we have used the levered beta, taking into account the company’s debt-to-equity ratio and the median unlevered beta for peers Contemporary Amperex Technology Co., Ltd. (CATL) and Samsung SDI. 

Investment points: Technological competitiveness, aggressive capacity expansions, increased product safety, synergies with LG Group       

Investment points for LGES include: (1) competitive advantages in terms of technology and materials; (2) robust growth via aggressive capacity expansions; (3) increased product safety via process innovation; and (4) greater synergies with LG Group. Thanks to its top-notch manufacturing technology for ternary batteries, LGES has become the first company in the world to succeed in the commercial scale production of high-nickel NCMA (quaternary) batteries. The company’s high-performance silicon anode materials and double-layer coating technology should also allow for higher energy density and improvements in charging speed. Aggressive capacity expansions underway at facilities in four regions (Korea, U.S., China, and Europe) should boost the company’s battery production capacity from 150GWh at end-2021 to 485GWh in 2025. 

Profit margins to surpass those at key competitor as of 2023 

We believe LGES will surpass China’s CATL in terms of profitability as of 2023; margins at LGES should rise in the long term, while those at CATL decline. CATL faces risks of declining yields on overseas capacity expansions and reduced growth potential for China’s EV market. LGES, on the other hand, offers greater long-term growth potential given preemptive capacity expansions overseas as well as a more diverse customer base (i.e., customers outside of China).

2022E revenue, OP to grow 15%, 31.9% YoY 

For 2022, we estimate revenue at KRW20.53tn (+15.0% YoY) and OP at KRW1.013tn (+31.9% YoY). Battery shipment volume and ASP should both grow, by 14.8% and 14.7% YoY, respectively. From 2023, LGES should see significant earnings improvement, thanks to a decrease in orders for battery replacement (i.e., GM’s Bolt EV) as well as an increase in overall battery shipment. We estimate 2023 revenue at KRW32.62tn (+58.9% YoY) and OP at KRW2.87tn (+183.7% YoY).