[Bojo, Battery] Is a '10%' Operating Profit Margin for Battery a Wall?

Battery Big 3 Aggressively Expanding, Building Dozens of Factories
Can They Secure Double-Digit Operating Margins?
Stable Profitability Needed for Reinvestment Cycle

To Normalize Factories with Over 90% Yield,
Raw Materials Must Be Continuously Supplied Despite 2-3 Years of Partial Shipment Delays

Battery Big 3 Show Promising Performance and Market Outlook
Benefiting from Direct Subsidies like 'AMPC', Double-Digit Margins Possible Within 1-2 Years

Editor's Note'Bojo, Battery' is a series that takes a closer look at the battery industry, which has emerged as the center of next-generation advanced industries. It examines the agile movements, strategies, and conflicts among governments and companies worldwide vying to dominate the battery manufacturing ecosystem. We will also cover the technological competition to create safer and longer-lasting batteries. We aim to serve as an 'assistant' to readers and investors by enhancing and supporting their understanding of the battery industry. We will share battery stories that are easy to approach.

Can battery companies achieve double-digit operating profit margins? In the first quarter of this year, the three major battery companies recorded operating profit (loss) margins of 7.23% for LG Energy Solution, -10.42% for SK On (a battery subsidiary of SK Innovation), and 7.01% for Samsung SDI, respectively. Operating profit margin is the ratio of operating profit to sales revenue. It is an indicator used to gauge a company's profitability.

Battery companies are aggressively expanding in response to the explosive growth of the electric vehicle battery market. Although sales are growing by more than 30% annually, they have yet to surpass a 10% operating profit margin. Achieving a double-digit operating profit margin means securing stable profitability and entering a trajectory of consistent performance. Among the top 100 domestic companies, only 11 exceeded a 10% profit margin last year.

A double-digit operating profit margin is necessary for sustainability. The battery industry is a capital-intensive sector that requires annual facility investments amounting to trillions of won. Last year, capital expenditures (CAPEX) were 6.3 trillion won for LG Energy Solution and 2.5181 trillion won for Samsung SDI. SK On, as a non-listed company, is not obligated to disclose its capital expenditures, but the industry estimates that it invested more than 3 to 4 trillion won in facilities last year. To continue such massive investments, external financing is necessary, but reinvestment through internal profits is more stable.

The reason the three major battery companies have not yet achieved double-digit operating profit margins is that it takes significant time and money to improve battery yield (the ratio of completed good products to input quantity). The three companies are building numerous battery plants in North America and Europe. The securities industry expects it will take 2 to 3 years to raise the yield and utilization rate of these plants to over 90% of the targeted production scale.

Regarding utilization rates, it is expected that in the first year of plant operation, about 25-33% of the facilities will be operational; in the second year, 40-60%; in the third year, over 80%; and only in the fourth year will it exceed 90%. Yield increases more slowly than utilization rates. Yields are expected to be in the single digits in the first year, 30% in the second year, 70% in the third year, and over 90% in the fourth year (according to Samsung Securities estimates).

Even if facilities are operational, it is difficult to produce products that meet the quality standards required for delivery to customers at the same rate as the utilization. Battery yield varies with subtle changes in conditions such as humidity, temperature, and equipment layout. The fact that battery form factors and specifications differ by plant also makes it difficult to quickly increase yield. Therefore, to bring plants onto a normal operating track, battery companies must continuously input expensive materials and components such as lithium, nickel, and cobalt into battery production that cannot even be shipped. This ultimately negatively affects operating profit margins and becomes a financial burden. Since the completion of each company's plants has been increasing since 2020, this burden may grow further.

Despite these conditions, the profit margins of the three major domestic battery companies are gradually rising. Since the battery market began to attract serious industrial attention in 2020, the operating profit margins of the three companies have fluctuated but show an upward trend. LG Energy Solution posted profit margins of 4.3% in 2021 and 4.74% last year, reaching 7.23% in the first quarter of this year. Samsung SDI, which includes the electronic materials division and is therefore difficult to compare simply with other companies, has shown the best operating profit margins: 7.9% in 2021 and 9.0% last year. Although SK On continues to post losses, it has steadily reduced its deficit. Its operating loss margin was 22.5% in 2021 but decreased to 13% last year. In the first quarter of this year, it recorded -10.42%.

The securities industry expects the three major battery companies to soon achieve double-digit profit margins. LG Energy Solution is expected to raise its operating profit margin to 8.37% this year and record double-digit margins starting next year. Samsung SDI is projected to post 8.68% this year, 9.39% next year, and 9.48% in 2025, approaching double-digit profit margins (according to FnGuide consensus). In particular, the AMPC (Advanced Manufacturing Production Credit) system is expected to alleviate financial burdens.

AMPC is a key provision within the IRA that encourages relocating eco-friendly energy-related manufacturing facilities to the United States. Starting this year, battery modules produced and sold domestically in the U.S. will receive a subsidy of $45 per kWh (approximately 59,400 won). This subsidy is expected to be provided through a 'direct pay' method, which means companies receive direct payments rather than tax credits at the time of sale. Reflecting such benefits, it is estimated that SK On, currently posting losses, will turn a profit this year and record profit margins of 3.43% next year and 10.72% in 2025 (according to Meritz Securities).