[Click eStock] "LG Chem, Additional Momentum Beyond Batteries Is Crucial... Target Price Down 9%"

Korea Investment & Securities Report

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Korea Investment & Securities maintained its buy rating on LG Chem on the 8th but adjusted the target price down by 9% to 1.06 million KRW. This decision was based on the view that short-term expectations have lowered due to battery safety issues, necessitating growth in other business divisions.

Recent investor sentiment toward LG Chem is more concerned about the safety issues of electric vehicle batteries than its mid-to-long-term growth potential. On the 20th of last month, the stock fell 15% following GM's expansion of the recall for the Bolt EV. GM had initially decided on an $800 million recall in July, but with the inclusion of models from 2019 onward this time, replacement costs are estimated to rise to as much as $1.8 billion. LG Chem had already reflected a provision of 91 billion KRW in Q2 earnings for the first recall. Although the cost-sharing ratio between GM and LG has not yet been finalized, assuming the same ratio, an additional 113.8 billion KRW would be added. Choi Go-woon, a researcher at Korea Investment & Securities, said, “Looking at the recall costs alone, it is not enough to damage the current profit momentum, but the repeated electric vehicle fire incidents have increased uncertainty as it will be difficult to avoid such risks in the future.”

For the stock price to turn upward, a pause is necessary as battery growth had been ahead until the beginning of the year. The target EBITDA valuation for the battery division was also lowered from 23 times to 20 times, resulting in a reduced target price. However, since the electric vehicle market is still in its early stages, the challenges that need initial verification are difficult, but the long-term growth potential remains unchanged. Researcher Choi explained, “Safety is a very sensitive issue, so there is certainly a high entry barrier regarding technological capability.”

Until various uncertainties are resolved, the situation is expected to be a long-term battle, making additional momentum beyond batteries important. Researcher Choi said, “LG Chem remains an attractive growth stock due to its diversified portfolio, including advanced materials accompanying battery growth and the chemical core business undergoing structural improvement toward high value-added areas,” adding, “This is why the current price adjustment is not seen as a trend decline.”