The author is an analyst of KB Securities. He can be reached at wchun@kbfg.com. — Ed.
Order intake slowdown considered positive
ㅡ On Jan 18, SK innovation stock retreated 9.4% MoM, underperforming the KOSPI, which gained 0.2% MoM. The bearish performance seems to be attributable to SK on’s withdrawal from its JV deal with Ford and Koc Holdings (Turkey), as well as an increase in funding costs and concerns over a slowdown in EV sales.
ㅡ News of orders won by battery manufacturers no longer has the impact it had in 2021/early 2022. Order intake continues to grow rapidly, but backlog growth does not reach 60% anymore. Also, in addition to the SK on withdrawal, LG Energy Solution is reconsidering its KRW1.7tn investment in Arizona. Such developments, coupled with the detrimental impact of high interest rates on the money market, are raising concerns about the secondary battery sector.
ㅡ However, the situation could turn favorable for battery companies; LG Energy Solution won relatively large orders from its U.S. JV with Honda (August 2022) and signed a vendor deal with Toyota (October 2022) to buttress top-line growth and expand its client base. Meanwhile, SK on plans on building a U.S. JV with Hyundai Motor.
ㅡ We believe SK on scrapped its plans to invest in Turkey because of low investment returns, not a lack of funds. It would have been financially capable considering it raised KRW2.8tn from pre-IPO/SK innovation capital increases and investment redistribution; also, SK on would have had a 40% stake (KRW1.2tn-1.6tn) in the JV.
Expected jump in demand to promote seller’s market
ㅡ The order intake slowdown is also attributable to battery manufacturers having already accumulated orders lasting until 2030. Recently, SK on announced an order backlog on par with that of LG Energy Solution. It has maximized capex plans, indicating any future investment decisions will prioritize profitability. In the past two years, LG Energy Solution, which has larger market share and cash reserves, has focused on adding clients and lucrative investments:
(1) Most new deals with OEMs have been first deals. The deal with Honda has been confirmed while deals with Toyota/Ford are in discussion.
(2) LG Energy Solution is considering pursuing the JV in Turkey. It should get a better deal, as Ford and Koc Holdings do not have any other option.
(3) U.S. investments are focused on capacity increases; bolstered growth potential (33% CAGR until 2030) and IRA tax credits are expected.
ㅡ U.S. demand for secondary batteries should jump (64GWh in 2021→453GWh in 2025); SK on and LG Energy Solution’s combined end-2024 output capacity target is 350GWh (77% of demand).
Vendor contracts to become more favorable
ㅡ The battery market is becoming a seller’s market, thus battery manufacturers should gain a stronger advantage in future orders.
ㅡ Korean battery manufacturers are focusing on U.S. investments. This should direct new European orders to Korean companies pursuing high margins or European/Chinese companies.
ㅡ Long-term profitability should improve, as battery companies should reflect rising costs (e.g., metal prices, FX rates, utilities, labor) in selling prices to sustain profit/increase order margins.
