[IPO Spotlight] 'Highest Valuation' LG Energy Solution, Biggest Challenge Is Electric Vehicle Fires

[Asia Economy Reporter Park So-yeon] Among the companies preparing for IPOs this year, the one attracting the most market attention is undoubtedly LG Energy Solution. LG Energy Solution, which was spun off from LG Chem's battery division, is increasing in value alongside the rapid growth of the electric vehicle market. The value of LG Energy Solution is estimated between 50 trillion and 80 trillion KRW, with some expecting it to reach up to 100 trillion KRW. The public offering amount is expected to reach 10 to 15 trillion KRW. It is projected to become the 2nd or 3rd largest company by market capitalization after listing. LG Energy Solution has presented a blueprint to achieve sales of 30 trillion KRW by 2024. Last year's sales were approximately 13 trillion KRW. To meet this target, annual average sales growth of about 33% is required.

◇ Plan to list within the year under KB Securities' lead ‥ Risks from consecutive electric vehicle fires

LG Energy Solution has selected seven securities firms as lead underwriters for its IPO: KB Securities, Shinhan Investment Corp., Daishin Securities, Morgan Stanley, Citigroup Global Markets Securities, Goldman Sachs, and Bank of America Merrill Lynch. Among them, KB Securities is the lead domestic underwriter, and Morgan Stanley is the lead foreign underwriter.

Although it is the highest-valued company in the market this year, the problem lies in the series of electric vehicle fires. Fires have repeatedly occurred in electric vehicles equipped with LG Energy Solution batteries, increasing investor concerns. There is a possibility that large-scale provisions may need to be set due to recall liabilities for electric vehicles.

Provisions are liabilities set based on past experience to estimate amounts expected to be incurred in the future due to product exchanges and refunds. The financial investment industry is concerned that performance deterioration caused by provision expenses ahead of this year's IPO could dampen enthusiasm.

The problematic Kona Electric is reported to have experienced 15 fires, including 11 domestic and 4 overseas, since its launch in 2018. A total of 160,000 Kona EVs have been sold domestically and internationally, with about 33,000 units sold domestically. The recall target is expected to be about 25,000 units manufactured between September 2017 and March 2020. The cost is estimated to exceed 1 trillion KRW. Hyundai Motor and LG Energy Solution are currently negotiating cost-sharing for the recall expenses.

Hwang Seong-hyun, a researcher at Eugene Investment & Securities, said, "Uncertainty regarding Kona fire incidents still exists," adding, "Assuming a battery pack cost of 10 million KRW per vehicle (based on 64kWh cell capacity), the recall scale is estimated at about 1 trillion KRW." Jang Seung-se, Executive Vice President of LG Energy Solution's Corporate Strategy, said in a conference call last month, "Proactive recalls have been conducted for some residential energy storage system products and Kona electric vehicle fires," adding, "A certain scale of provisions has been set. Although fires occurred during reproduction experiments and clear causes have not been identified, additional provisions to be set will be limited."

On the 15th, an electric bus equipped with LG Energy Solution batteries caught fire and was completely destroyed while operating in Changwon, Gyeongnam. Additionally, issues related to the electric vehicle Bolt by US automaker GM are also a concern. GM proactively initiated a recall after news emerged that the US National Highway Traffic Safety Administration (NHTSA) had begun investigating Bolt electric vehicle fire incidents. The exact cause of the fires is still under investigation.

◇ What kind of company is the 'highest-valued' LG Energy Solution?

LG Energy Solution was established last year through a physical division of LG Chem's battery division. It operates not only in automotive batteries but also in large-capacity energy storage system (ESS) batteries and small batteries.

Research on secondary batteries began at Lucky Metal in 1992, and in 1998, the company established Korea's first mass production system for lithium-ion batteries. In 2000, it started developing the world's first lithium-ion battery for electric vehicles, and in 2009, it was selected as the world's first supplier of lithium-ion-based mass-produced batteries for electric vehicles (GM Volt).

LG Energy Solution is recognized for having the world's best technology with the largest number of patents and over 30 years of know-how. It holds 23,610 patents. With over 2,500 R&D personnel, LG Energy Solution has invested more than 2 trillion KRW in R&D over the past decade. The company possesses overwhelmingly superior technology in all areas, including cathode and anode materials that determine battery performance, separators which are key to battery safety, and patented processes capable of producing ultra-small 2mm batteries.

In 2007, it mass-produced the world's first battery applying NCM 523 (50% nickel, 20% cobalt, 30% manganese) cathode material; in 2014, the world's first cylindrical battery applying NCM 811 cathode material; in 2016, the world's first battery applying NCM 622 cathode material; and in 2019, the world's first silicon anode battery enabling 80% charge in 20 minutes. In 2021, it plans to mass-produce the world's first battery applying NCMA (aluminum-added) cathode material.

LG Energy Solution plans to more than double its electric vehicle battery production capacity from 120GWh at the end of last year to 260GWh by 2023. The industry expects that at least 5 trillion KRW in investments will be needed annually through 2023. According to the Financial Supervisory Service's electronic disclosure, LG Energy Solution started with assets totaling 10.2552 trillion KRW. This amount corresponds to 35.3% of LG Chem's total assets of 29 trillion KRW as of the end of June last year. Although LG Chem's total assets are more than twice those of LG Energy Solution, LG Energy Solution actually has more current assets. According to the division balance sheet presented by LG Chem, the current assets of the surviving company LG Chem after the split are 4.5988 trillion KRW, while LG Energy Solution's current assets are 4.6163 trillion KRW. In particular, among current assets, 78% (1.7989 trillion KRW) of the 'cash and cash equivalents' of 2.3023 trillion KRW, which can be immediately spent, was allocated to LG Energy Solution. Liabilities were divided with LG Chem assuming 7.9127 trillion KRW and LG Energy Solution 4.297 trillion KRW. Among these, current liabilities are 4.4305 trillion KRW for LG Chem and 1.9738 trillion KRW for LG Energy Solution, while non-current liabilities are 3.4821 trillion KRW for LG Chem and 2.3233 trillion KRW for LG Energy Solution. The order backlog is known to be about 160 trillion KRW as of the end of last year.

◇ Global battery market outlook

The explosive growth of the global electric vehicle market is expected as the Biden administration in the US, emphasizing climate change response, aligns with Europe's eco-friendly policy drive. The three major Korean battery companies (LG, Samsung, SK) hold a 34.7% share of the global electric vehicle battery market (based on 2020 data from SNE Research). The battery market is supplied over 90% by East Asian companies from Korea, China, and Japan. The demand for electric vehicle batteries in 2026 is projected to increase by 526.7% compared to 2016, reaching 93.9 billion USD (approximately 111 trillion KRW). Although Korean, Chinese, and Japanese battery companies maintain a solid market share, they are expected to face competition from automakers in the future. Tesla is building its own lithium-ion battery design and mass production system through the 'Roadrunner' project. German automaker BMW continues large-scale investments exceeding 200 million euros for in-house battery development and established a 'Battery Cell Competence Center' research and development facility in Munich last year. Japanese automaker Toyota is also developing its own batteries with an investment of 1.5 trillion yen (approximately 17 trillion KRW) at a research institute near Mount Fuji.