Competitiveness of Cathode Materials Shines in 2Q22
The authors are analysts of Shinhan Investment Corp. They can be reached at jinmyung.lee93@shinhan.com and cgh815@shinhan.com, respectively. -- Ed.
Competitiveness of cathode materials shines in 2Q22
LG Chem’s cathode materials business is estimated to have recorded sales of KRW1.02tr (+112% QoQ) and operating profit of KRW233.8bn (+248% QoQ) for 2Q22, accounting for 50% of sales (vs. 31% in 1Q22) and 70% of operating profit (vs. 44% in 1Q22) of advanced materials. The remarkable growth was attributable to: 1) ASP hikes; 2) growth in sales volume; 3) input of cheap metals; and 4) increase in the portion of high-nickel cathode materials.
With cathode materials earnings far exceeding those of peers, concerns have been raised whether they can be sustained going forward. We believe earnings will continue upward thanks to the expanding share of high value-added high-nickel products and the vertically integrated value chain. LG Chem is capable of sourcing metals (nickel, cobalt, lithium, etc.) and precursors at stable and competitive prices through partnerships.
Solid growth momentum kicking in for advanced materials
LG Chem’s cathode materials business had been undervalued compared to rivals due to its conservative capex strategy and lower sales contribution from non-affiliate clients. However, the company guidance on capacity expansion (260,000 tons by 2026) is highly likely to be revised up considering the growing portion of in-house production and long-term supply contract with General Motors. In the mid/long-term, LG Chem plans to increase the share of non-affiliate sales to over 20% and that of internalized production up to 40% (currently 30%). The portion of high-nickel products (NCMA, etc.) is projected to jump from current mid-20% to 80% levels in 2023, driving long-term improvement in profitability.
Cathode materials sales are expected to grow at a CAGR of 30% to KRW12tr in 2026 (vs. KRW4.2tr in 2022F). Growth momentum should strengthen further going forward in light of additional capacity expansion, cost competitiveness, and the rising share of high-margin products.
Retain BUY and raise target price by 12% to KRW840,000
We raise our target price for LG Chem by 12% to KRW840,000, reflecting upward revision of our earnings forecast for advanced materials and target multiple. The company should continue to enjoy a re-rating of shares despite sluggish chemicals market conditions, as it stands out from competitors with a solid mainstay business backed by high value-added products (POE, etc.) and competitiveness in cathode materials.