"All the batteries are the same. No.""Tesla Value Chain" Races LG Ensol and L&F
Korea Economy, May 17, 2022 16:57
"Earning Surprise," which is 23% higher than L&F's consensus
Tesla's Electric Vehicle Production Boosts Performance
L&F, a producer of secondary battery anode materials, and LG Energy Solution, a cell manufacturer, are showing strong performance thanks to surprise performance (earning surprise). Despite unfavorable factors such as rising interest rates and soaring raw material prices, earnings estimates are rising steeply due to increased production by Tesla, a major customer. The valuation of the two companies (the level of stock price compared to performance) is the highest among major Chinese and European companies as well as secondary battery-related stocks in Korea. Nevertheless, the market is paying attention to the rapid growth and differentiated technology of these companies rather than the burden of valuation.
L&F is trading at 237,000 won as of 1:45 p.m. on the 17th, up 2.46%. The company's stock price jumped 37.27% from March 15 to the 16th. During the same period, LG Energy Solution also increased by 11.40%. During this period, the KOSPI fell only 0.95%.
Solid performance is supporting the rise in stock prices. L&F recorded 553.6 billion won and 53 billion won in sales and operating profit in the first quarter, respectively. Operating profit succeeded in turning into a surplus compared to the same period last year and exceeded consensus (average estimate of securities firms) by 23.5%. The operating profit ratio is 9.6%, the highest ever. Earlier, LG Energy Solution also made a surprise performance that its operating profit exceeded the consensus by 58.0% in the first quarter.
Compared to other secondary battery-related stocks, it is evaluated that its performance improvement is outstanding. Earlier, POSCO Chemical and SK I Technology announced their operating profit for the first quarter, which is below the consensus. Among major secondary battery companies, LG Energy Solution, L&F, and SK Innovation (208,000 + 1.46%) have exceeded 20% of earnings surprise rates in the first quarter. Considering that SK Innovation recorded an operating loss of 273.4 billion won in the battery business, in fact, only two companies recorded a large earning surprise.
Tesla is behind LG Energy Solution and L&F's surprise performance.
The secondary battery cathode material made by L&F is supplied to Tesla through LG Energy Solution. Tesla's vehicle production is expected to increase 61 percent year-on-year to 1.5 million vehicles this year.
Although Tesla's plant in Shanghai has been temporarily suspended, analysts say its impact on domestic companies' performance is limited. Kim Jung-hwan, a researcher at Korea Investment & Securities, said, "LG Energy Solution is estimated to supply cylindrical batteries to Tesla's Berlin and Texas plants, so the profits of domestic related companies will also increase significantly."
Among secondary battery-related stocks, which are representative growth stocks, L&F and EcoProbim are given high valuation. LG & F and LG Energy Solution's 12-month leading share price ratio (PER) is 53.8 times and 85.4 times, respectively. The burden of valuation is higher than other anode material manufacturers EcoProBM (46.4 times) and cell manufacturers Samsung SDI (23.3 times).
Nevertheless, the stock market considers two companies belonging to Tesla's value chain as promising stocks. Kang Dong-jin, a researcher at Hyundai Motor Securities, said, "If all secondary battery-related stocks have shown a good trend, who their customers are will be more important now," adding, "The growth of cell and material companies in Tesla's value chain with a discriminatory business structure and high productivity will be highlighted."
Analysts say that L&F, a cathode material company, is more promising than LG Energy Solution, a cell company. First of all, it is highly likely that Tesla directly supplies NCMA (nickel, cobalt, manganese, and aluminum) cathode materials to its own 4680 batteries. Discussions with three to four customers are also becoming visible, including the establishment of joint venture (JV) with Redwood, a battery recycling company. On the other hand, LG Energy Solutions still has a burden of overhangs (potential sales volume). In July, about 9.96 million shares will be released for six months.
Stock market eyes toward L&F are also rising. Eleven securities firms that released L&F reports on the 16th and 17th raised their target prices at once. Meritz Securities Co. (430,000 won) offered the highest target price. Korea Investment & Securities raised its operating profit forecasts for L&F this year and next year by 140% and 57%, respectively.
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