[Click eStock] "LG Energy Solution to Miss 2Q Operating Profit Estimates... Recovery Expected from 3Q"

[Asia Economy Reporter Myunghwan Lee] Korea Investment & Securities announced on the 6th that it maintains a buy rating on LG Energy Solution but lowers the target price by 8.8% from the previous 570,000 KRW to 520,000 KRW.

Korea Investment & Securities estimates the company's Q2 sales this year at 4.7 trillion KRW and operating profit at 188.1 billion KRW. The operating profit is expected to fall short of the market consensus of 221.7 billion KRW by 15.1%. The operating margin is forecasted to be 4.0%.

The reason operating profit fell short of market expectations is due to an increased cost ratio in Q2. The significantly increased production costs in Q2 are expected to be passed on to selling prices only in Q3. The prolonged lockdown in Shanghai, China delayed the resumption of deliveries to Tesla more than initially anticipated, which also had an impact. However, from Q3, selling prices are expected to rise sharply while the increase in production costs will be limited, resulting in an operating margin of 5.7%, up 1.7 percentage points from the previous quarter.

Korea Investment & Securities analyzes that the weakening purchasing power due to economic slowdown will only appear in 2024-25. The firm lowered the assumption for pure electric vehicle secondary battery capacity in 2025 from 65 kWh to 60 kWh. Although the estimated electric vehicle sales volume for 2025 remains at 25 million units, secondary battery demand is expected to decrease by 7.5% due to weakened consumer purchasing power. However, sales forecasts for 2022-23 were revised upward, citing sufficient electric vehicle waiting demand due to supply disruptions and the fact that cost increases will lead to price hikes.

Nevertheless, Korea Investment & Securities maintained LG Energy Solution as its top pick within the secondary battery sector. Researcher Cheolhee Jo of Korea Investment & Securities stated, "Among the three domestic secondary battery companies, LG Energy Solution is the most aggressively targeting the U.S. and European markets, so additional joint venture (JV) announcements and new plant expansion momentum are expected in the second half of the year," adding, "The industry is also expected to improve as the Shanghai lockdown is lifted and semiconductor chip supply shortages ease."

He also forecasted that the stock price will recover after the release of approximately 200 million shares from lock-up scheduled for the 27th. Researcher Jo said, "Once the short-term supply-demand issue caused by the six-month lock-up expiration on July 27 passes, the stock price will rise along with the recovery of the industry."