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The author is an analyst at NH Investment & Securities. He can be reached at [email protected]. — Ed.
Once seasonality and overcrowding clears and strong EV demand in the U.S. is confirmed, LGES shares should rally in February and March.
The problem of demand must be solved together with demand
We maintain a Buy rating and W610,000 TP on LG Energy Solution (LGES). Due to recent concerns about slowing demand for Tesla’s EVs and excessive volume (shares issued on January 27, 2022; 7.92 million shares (3.38% of the total) will expire one year after listing) stock prices are falling. We expect stock prices to rise in February-March. Earnings momentum is likely to be limited in 1Q23 due to the non-seasonal nature of EVs. Growth in new EV orders driven by US IRA implementation is expected to be confirmed after mid-1Q23. The recent correction in share prices has been heavily influenced by demand issues, and healthy demand will need to be ensured for share prices to recover.
4Q22: Inventory Adjustments and One-Time Expenses
On a consolidated basis, LGES’ 2Q22 sales should meet market forecasts of W8.4tn (+88% yy, +9% qq), while OP is up 36% at W342.8bn (+353% yy, – It is expected that consensus will not be reached. 34% qq). Our forecast primarily includes: 1) inventory adjustments for auto and small-sized batteries; 2) one-time expenses (promotional payments, provisioning for bad debts). Looking at major buyers, Tesla and Volkswagen are expected to adjust inventory and usage. Compared to Tesla’s 2022 sales target of over 1.4 million vehicles, we forecast actual annual sales of 1.32 million units. For the Volkswagen Group, a 2022 target of 700,000 units has been set, but as of the third quarter, total sales were just 366,000 units, so this figure will be difficult to achieve. Failure to meet sales targets is believed to be the reason for adjustments in utilization levels and inventory. Despite the target shortage, a clear upward trend remains.
In 2Q23, LGES is forecast to confirm sales of W8.1tn (+87% yy, -3% qq) and OP 487.4bn (+88% yy, +42% qq). As a result, sales are expected to decline slightly. EV seasonality is weak. Purchases of full-size electric vehicles in the US are expected to begin in 1Q23, but demand will need to be confirmed through order volume and order numbers. Demand should also increase as GM plans to launch a new model each quarter (Silverado in Q23, Blazer in Q2, Equinox in Q3, Celestiq in Q4).
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