SK Innovation, Stagnant for a While, Rises 46% in One Month

Reflecting Expectations for Recovery in the Refining Sector and Growth in the 2nd Battery Sector

[Asia Economy Reporter Minji Lee] SK Innovation, which had shown a prolonged sluggish stock performance, is experiencing a sharp rise. This appears to reflect expectations for a recovery in the refining sector next year and the secondary battery business.

According to the Korea Exchange on the 27th, SK Innovation was trading at 179,000 KRW as of 1:17 PM, up 2.29% from the previous session. The stock price has surged about 46% compared to early this month (122,500 KRW).

The sharp rise in stock price was led by foreigners and institutions. Since the beginning of this month, foreigners and institutions have purchased stocks worth 90.7 billion KRW and 160.6 billion KRW, respectively. In particular, institutions made large-scale purchases of SK Innovation, buying the most shares excluding exchange-traded funds (ETFs).

This year, SK Innovation's stock price rise was driven more by expectations for growth in the secondary battery business than its core refining sector. The stock price, which had fallen to 55,100 KRW during the COVID-19 pandemic, surged 258% to 197,500 KRW in August. With key growth drivers identified as Bio, Secondary Battery, Internet, and Games (BBIG), SK Innovation, along with secondary battery-related stocks such as Samsung SDI and LG Chem, led the stock market. However, a patent infringement lawsuit with LG Chem and poor earnings performance weighed on the stock, causing it to decline about 11% from its intraday high and continue a sluggish trend.

Currently, expectations for earnings recovery next year are driving the stock price increase. The core refining sector is expected to recover as demand for gasoline and jet fuel becomes visible due to the COVID-19 vaccine effect. The Singapore complex refining margin, which excludes crude oil prices from gasoline petroleum product prices, is expected to recover to the breakeven point of around 4 dollars.

Researcher Kyuwon Hwang of Yuanta Securities said, “This year, the refining sector suffered from a sharp drop in demand due to COVID-19, with global consumption decreasing by about 8% from 100 million barrels. Although the breakeven point for Singapore refining margins is 4 dollars, it plunged to 0.5 dollars, showing poor profitability.”

The growth rate of the secondary battery sector is also expected to accelerate. Although the order backlog was expected to expand, the litigation risk with LG Chem is anticipated to decrease. SK Innovation's battery order backlog this year is estimated at 50 trillion KRW, reaching about one-third of LG Chem, the global number one company. Production capacity has also expanded from 4.7 GW last year to 30 GW this year.

The order backlog is expected to increase to up to 70 trillion KRW next year, as large additional orders are anticipated from European OEM companies. Production capacity is expected to grow to 60 GW by 2022. Researcher Kyuwon Hwang said, “Sales volume is expected to settle in the world’s top 4 next year, surpassing Samsung SDI from last year’s top 10. The provision amount for litigation risk with LG Chem could also decrease from the initially estimated 2 trillion KRW to 1 trillion KRW.”

The securities industry is also raising its outlook. Operating profit next year is estimated at 749.3 billion KRW, a significant improvement compared to this year’s operating loss of 2.451 trillion KRW. Shinhan Investment Corp. raised its target price by about 25% to 200,000 KRW. Researcher Jinmyung Lee of Shinhan Investment said, “Due to the recovery in the refining industry following the COVID-19 vaccine launch, SK Innovation is expected to generate 749.3 billion KRW in profit. With the expansion of the electric vehicle market, battery and separator capacity expansions will continue, and expectations for the secondary battery business will gradually become more prominent.”