The author is an analyst of NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com. — Ed.
LGES should enjoy a share price rebound from February~March, once off-seasonality and overhang concerns dissipate and strong EV demand is confirmed in the US.
Demand concerns must be resolved with demand
We maintain a Buy rating and TP of W610,000 on LG Energy Solution (LGES). Recently, the firm’s share price has looked bearish due to worries over slowing EV-related demand from Tesla and overhang concerns (stock listed on Jan 27, 2022; 7.92mn shares (3.38% of total) to be unlocked one year from listing). We expect a share price rebound from February~March. In 1Q23, earnings momentum will likely be limited due to off-seasonality for EVs. New EV order growth stemming from the implementation of the US IRA is expected to be confirmed after mid-1Q23. As demand concerns have been a large factor in the recent share price corrections, confirmation of healthy demand will be necessary for the share price to rebound.
4Q22 preview: Inventory adjustments and one-off costs
On a consolidated basis, LGES’s 4Q22 sales should meet the market prediction at W8.4tn (+88% y-y, +9% q-q), while OP is forecast to miss consensus by 36% at W342.8bn (+353% y-y, -34% q-q). Our forecasts mainly reflect: 1) inventory adjustments for auto and small-sized batteries; and 2) one-off costs (incentive pay, bad debt provisioning). Looking at major customers, inventory and utilization rate adjustments are expected at Tesla and Volkswagen. In contrast to Tesla’s 2022 EV sales target of over 1.4mn units, we forecast the actual annual sales figure at 1.32mn units. At Volkswagen Group, the 2022 target was set at 700,000 units, but that figure will be difficult to achieve, given that cumulative sales as of 3Q22 totaled only 366,000 units. Failures to meet sales targets are presumed to be the reasons behind utilization rate and inventory adjustments. Despite the target shortfalls, however, clear growth trends remain intact.
In 1Q23, LGES is forecast to secure sales of W8.1tn (+87% y-y, -3% q-q) and OP of W487.4bn (+88% y-y, +42% q-q), with sales to decline slightly q-q due to weak seasonality for EVs. Full-fledged EV purchasing in the US is expected to kick off from as early as 1Q23, but it will be necessary to confirm solid demand through order volume and order backlog figures. Demand from GM, which plans to release new models each quarter (Silverado in 1Q23, Blazer in 2Q23, Equinox in 3Q23, and Celestiq in 4Q23), should increase as well.
