Short Sellers Targeting Secondary Battery Stocks... Retreat as Prices Rise

Increase in Short Selling Amid Electric Vehicle Demand Slump Due to Economic Recession
Tesla's Q4 Earnings Surprise Reverses Sentiment

Short-selling forces are concentrating their firepower on secondary battery stocks, but the stock prices are rising instead, drawing significant attention to the background. Short selling involves borrowing stocks that are not owned and placing sell orders when a price decline is expected. If the stock price rises, short sellers incur losses. Although secondary battery stocks have already risen significantly, contrary to the expectations of short sellers, prices have risen further. To cover their losses, short sellers appear to be engaging in a 'short squeeze'?where investors who shorted stocks expecting a price drop buy shares to prevent further losses as prices rise?pushing prices even higher.

According to the Korea Exchange on the 3rd, as of the 24th of last month, the stock with the largest short-selling balance in the KOSPI was LG Energy Solution (752.7 billion KRW), and in the KOSDAQ market, it was EcoPro BM (476.5 billion KRW). In the KOSDAQ market, following EcoPro BM, the stocks with the largest short-selling balances were L&F (294.5 billion KRW), HLB (95.6 billion KRW), and EcoPro (80.9 billion KRW). The top four are all related to secondary battery stocks.

The concentration of short sellers on secondary battery stocks is due to the prevailing outlook that global economic recession will lead to weak demand for electric vehicles. In fact, Tesla's new car deliveries produced in China in December last year were 55,796 units, down 44% from the previous month (November) and 21% from the same period last year.

However, the mood reversed after Tesla posted an 'earnings surprise' in the fourth quarter that exceeded market expectations. Tesla's stock price plummeted about 65% last year but has risen more than 25% this year alone. However, at the 'Tesla Day' event held on the 1st (local time), the stock closed at $202.77 on the Nasdaq, down 1.43% from the previous trading day, as the event ended without specific announcements about the much-anticipated 'half-price electric car.'

Domestic secondary battery-related stocks are also consecutively hitting new highs. On the 2nd, EcoPro BM recorded an intraday high of 171,200 KRW, setting a new record high once again. EcoPro also reached a new intraday high of 309,000 KRW. L&F hit a record high of 285,000 KRW on the 28th and closed at 250,500 KRW on the same day. LG Energy Solution recorded its lowest price of 421,000 KRW (intraday) on January 4th this year but has steadily risen since, closing at 535,000 KRW, up 2.29%, on the day.

As short sellers faced a headwind due to the recovery of investor sentiment in secondary battery stocks, they appear to have reluctantly engaged in a 'short squeeze' to cover losses, further driving up stock prices. When a short squeeze occurs, the stock price of the affected company inevitably rises more steeply. In fact, at the end of January, EcoPro BM's short-selling balance decreased by about 7% in one month to 507.6 billion KRW.

Brokerages expect the upward trend in secondary battery-related stocks to continue for the time being. This is based on expectations that a full-scale rebound will occur once the detailed enforcement decree of the U.S. Inflation Reduction Act (IRA) is finalized at the end of this month.

Cholhee Cho, a researcher at Korea Investment & Securities, said, "Recently, large-scale supply contracts, such as L&F's supply contract for cathode materials to Tesla, have been signed, and the momentum for orders due to the IRA in the U.S. will also be highlighted."

Anna Ian, a researcher at Yuanta Securities, said, "Although the recent sharp rise in secondary battery stock prices has raised concerns in the market, the confirmation of the IRA will increase expectations for orders in the U.S., enhancing valuation attractiveness."