[Into the Stock] LG Chem's Short Selling Surges 638% in One Day

LG Chem Drops to 4th in Market Cap
Impact of Foreign Securities Firms' Reports
Short Selling Increases by Over 600%

[Asia Economy Reporter Junho Hwang] On the 26th, LG Chem emerged as the top stock sold by foreigners and institutions. This is analyzed as a result of a report from a foreign securities firm suggesting the need to apply a high holding company discount rate and dilution of equity value due to the listing of LG Energy Solution. Accordingly, LG Chem's stock price plummeted, and its market capitalization ranking fell from 3rd to 4th place. The volume and value of short-selling transactions increased by more than 600% compared to the previous day. It appears that the judgment that LG Chem's stock price may continue to fall is leading to short-selling transactions.

Situation: LG Chem falls to 4th place in market capitalization in one day

On the 26th, LG Chem lost its 3rd place in market capitalization to NAVER. The stock price fell as foreigners switched to net selling. On that day, foreigners net sold LG Chem shares worth 190.096 billion KRW. Previously, foreigners had net bought 12.097 billion KRW over two trading days but suddenly turned to selling. Institutions also conducted net sales worth 120.865 billion KRW that day. After net buying 27.557 billion KRW over the previous three trading days, they switched to net selling. As a result, LG Chem closed at 832,000 KRW, down 6.73% (60,000 KRW) from the previous trading day. Market capitalization evaporated by 4.2355 trillion KRW.

As of 10:36 AM on the 27th, LG Chem's stock price is trading at 792,000 KRW, down 4.81%. The impact from the previous day continues. NAVER also fell 2.20% to 355,000 KRW but has not been able to close the gap created the previous day.

Reason: Not new but a different outlook

LG Chem's Yeosu CNT Plant 2

The sharp drop in LG Chem's stock price is largely attributed to a report released on the 26th by the European investment bank Credit Suisse (CS). The report recommended selling (Underperform) LG Chem for two reasons. The target price was lowered from 1.3 million KRW to 680,000 KRW.

First, it raised the view that LG Chem could become a neglected company after LG Energy Solution's listing. CS cited equity dilution from LG Energy Solution's initial public offering (IPO), a 30% discount rate applied to holding companies, and deteriorating profitability in chemicals and batteries as reasons. CS analyst Min Hoon-sik said, "Among the stocks we cover, this is the least preferred stock," adding, "With LG Energy Solution's listing imminent, there is no reason to buy the parent company (LG Chem), which could be heavily discounted."

Although not a new point, the impact was significant. LG Energy Solution spun off from LG Chem last year and is scheduled to be listed this year. Since the split, there has been controversy over the possibility of a discount on the parent company's stock price. This phenomenon refers to the general undervaluation of the parent company's corporate value in the market when both the parent (holding company) and its business subsidiaries are listed simultaneously. CS estimated LG Chem's discount rate at about 30%.

CS also factored in the negative news of LG Energy Solution's recall of batteries for energy storage systems (ESS). On the 25th, LG Energy Solution announced it would replace ESS batteries produced on the dedicated ESS battery line at its Nanjing plant in China from April 2017 to September 2018. LG Energy Solution estimated the cost for battery replacement and additional measures at about 400 billion KRW. This cost is expected to be reflected as a provision in the first half of the year.

Analyst Min said, "Following the ESS and electric vehicle (EV) fire incidents in 2019 and 2020, LG Chem is expected to present another battery fire case," adding, "This creates a negative surprise."

Outlook: Short-selling increases by more than 600%

LG Chem Life Sciences Division Photo

Following the release of this report, the volume and value of short-selling transactions exploded. This indicates a significant increase in investment based on the view that LG Chem's stock price will fall in the short term. The number of short-selling transactions surged from 11,363 on the 25th to 70,354 the previous day. Short sales accounted for 10.03% of total trading volume. The transaction value also surged by more than 638% compared to the previous day, increasing from 10.1 billion KRW to 64.9 billion KRW.

However, domestic securities firms are maintaining their respective target prices while monitoring the situation. The highest target price suggested by domestic securities firms is 1.53 million KRW, and the average target price suggested since April is 1.3 million KRW.

On the same day, Noh Woo-ho, a researcher at Meritz Securities Research Center who released an analysis report on LG Chem, said, "The stock price premium of LG Chem, which is based on solid profit strength, is justified," maintaining a target price of 1.2 million KRW. However, he added, "The battery business value to be applied to LG Chem immediately after LG Energy Solution's listing in the second half of this year is about 46 trillion KRW (applying a 50% holding company discount rate)," and "The appropriate stock price reflecting this could be revised to 780,000 to 800,000 KRW."