Electrolytes Business to Turn to the Black This Quarter
The author is an analyst of NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com. -- Ed.
With the LiPF6 price stabilizing rapidly, a valuation discount on Dongwha Enterprise could be removed if its earnings normalize in 2H22. Earnings growth should become visible once a turn to profit in 2Q22 is confirmed.
Raise TP by 7% to W120,000
Adhering to a Buy rating, we raise our TP on Dongwha Enterprise by 7% to W120,000. We switch the base year for calculation of the value of its timber business (EV/EBITDA basis) from 2022 to 2023 (+24% in value). For the electrolytes domain, we boost 2024F EBITDA by 28% to reflect the recent start of operations at the firm’s US plant. Considering Dongwha Electrolyte’s market cap (W520bn), we see a 2024F EV/EBITDA of 8.8x for its electrolyte business (versus the average for domestic rechargeable battery material players of 13~14x). Meanwhile, we see a value of the firm’s wood business at a 2023F EV/EBITDA 6.1x, matching the normal cycle level in the past. Valuations are moving to normalize, given anticipated 2H22 earnings normalization thanks to downward stabilization of raw material prices for electrolytes, customer diversification following US capacity expansion, and upward revisions to mid/long-term earnings projections.
Electrolyte industry normalization in progress
Dongwha Enterprise announced 1Q22 consolidated sales of W283bn (+35% y-y, +4% q-q) and OP of W28.6bn (+13% y-y, +117% q-q), meeting the market projections. Electrolyte sales came in at W36.1bn (+149% y-y, +19% q-q). Operating losses totaled W0.5bn, in line with our estimate. Although sales growth was driven by higher sales (despite off-seasonality) of electrolytes for small-sized batteries, operating losses continued on both higher costs stemming from LiPF6 price hikes and increased fixed costs in relation to the company’s new plant in Hungary (quarterly costs of W1.2bn).
For 2Q22, we now estimate sales of W305.2bn (+31% y-y, +8% q-q) and OP of W36.1bn (-1% y-y, +26% q-q), with earnings for both Dongwha Enterprise’s wood business and its electrolytes domain likely to exceed our previous estimates. Of note, our earnings estimates for the firm’s wood business reflect both the ramp-up of its new plant in northern Vietnam and ongoing ASP hikes. We expect the company’s electrolytes business to turn to the black (y-y) this quarter, estimating sales of W38.8bn (+97% y-y, +7% q-q) and OP of W0.2bn.
The LiPF6 price for Chinese domestic consumption fell 48% from 590 yuan/kg in early March to currently around 305 yuan/kg. China’s LiPF6 export price is sustaining at 280 yuan/kg. The price spread between China’s domestic consumption and exports has narrowed sharply from 127% in March to 9% as of now. Presently, Korea’s electrolyte makers are expected to show OPM of 7~8% assuming an average LiPF6 price of 200~230 yuan/kg. Dongwha Enterprise’s profitability should improve significantly if: 1) the LiPF6 price drops by about a further 20%; or 2) the electrolyte price ups during the June price negotiations.