Aggressive Investment and Leading Technology Ahead of Others 'Samsung SDI' [This Week's Market Watch]

Price Drop from 800,000 KRW Last Year to 300,000 KRW in January
Monthly Increase Nears 30%... "Aggressive Investment Highlights Technical Excellence"

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Last year, secondary battery-related stocks experienced a rollercoaster ride between heaven and hell. Stock prices soared sharply due to expectations for the advent of the electric vehicle era. However, this trend did not last long. As the global electric vehicle market stalled, stock prices also underwent significant corrections.

Samsung SDI was no exception. After its intraday stock price surpassed 800,000 KRW in March last year, it continued to weaken, falling to the mid-340,000 KRW range in January this year. However, it has recently started to rebound. This is because the company plans to shift from conservative to aggressive investments and is expected to improve its performance. Additionally, forecasts that Samsung SDI will introduce products in the solid-state battery field faster than competitors have influenced the stock price, which is now eyeing a recovery above 500,000 KRW.

◇Stock Price Plummeted Due to Global Electric Vehicle Demand Slowdown Last Year= Samsung SDI is a specialist in secondary batteries. It operates the Energy Solutions business division, which produces and sells lithium-ion secondary batteries for small, medium, and large applications, and the Electronic Materials business division, which produces and sells semiconductor and display materials. Based on last year's performance, the Energy Solutions division accounted for 90% of total sales.

Samsung SDI recorded consolidated sales of 22.7083 trillion KRW and operating profit of 1.6334 trillion KRW last year. Sales increased by 12.84% year-on-year, but operating profit decreased by 9.66%. Specifically, sales and operating profit in the Energy Solutions division rose by 16.2% and 7.1% year-on-year to 20.4061 trillion KRW and 1.3424 trillion KRW, respectively. Sales and operating profit in the Electronic Materials division were 2.3022 trillion KRW and 291 billion KRW, down 10.0% and 4.75%, respectively.

In particular, sales and operating profit in the fourth quarter of last year were 5.5648 trillion KRW and 311.9 billion KRW, respectively, down 6.7% and 36.5% year-on-year. Choi Boyoung, a researcher at Kyobo Securities, explained, "The operating profit fell short of market expectations due to delayed demand recovery and increased market inventory in the small battery segment, resulting in decreased sales and profitability."

Following the poor fourth-quarter performance, securities firms began to downgrade Samsung SDI's stock price consecutively. Among the reports issued from January to last month, no securities firm raised Samsung SDI's target price. Kyobo Securities lowered it from 650,000 KRW to 500,000 KRW, Daol Investment & Securities from 620,000 KRW to 550,000 KRW, and Mirae Asset Securities from 650,000 KRW to 520,000 KRW.

Performance in the first half of this year is also expected to be weak. According to FnGuide, securities firms forecast Samsung SDI's first-quarter sales and operating profit this year at 5.2148 trillion KRW and 244.8 billion KRW, respectively, down 2.62% and 34.80% year-on-year. Lee Yongwook, a researcher at Hanwha Investment & Securities, said, "A decline in profits is inevitable in the first quarter. Battery prices are expected to fall until the second quarter, with the steepest drop in the first quarter, which will worsen profitability."

Jung Jaehun, a researcher at DB Financial Investment, also predicted, "Profitability will decline due to continued weakness in the Energy Solutions division. With the average selling price (ASP) of batteries expected to continue falling in the first quarter and overall battery shipments, including medium and large electric vehicles (EVs), sluggish, both scale and profitability will deteriorate compared to the previous quarter."

◇Successful Rebound with Faster Technology Than Others= According to FnGuide, securities firms forecast Samsung SDI's sales and operating profit this year at 23.8665 trillion KRW and 1.7487 trillion KRW, respectively, up 5.10% and 7.06% year-on-year. However, these figures represent decreases of 9.31% and 26.34%, respectively, compared to the sales of 28.4362 trillion KRW and operating profit of 2.6821 trillion KRW predicted three months ago. Researcher Lee Yongwook explained, "Due to battery price declines, profitability is expected to remain weak until the second quarter, but it is expected to normalize from the third quarter."

However, the mood began to change this month. As of the 25th, Samsung SDI's stock price rose 28% compared to the end of last month. The turning point was the 'InterBattery 2024' held from the 6th to the 8th. Samsung SDI unveiled its roadmap for the 'solid-state battery,' known as the dream battery. Vice President Ko Jooyoung of Samsung SDI said, "At the end of last year, we supplied the first prototype samples to three OEMs (automobile manufacturers) and are currently conducting evaluation work. We plan to start sample supply this year and aim for mass production in 2027."

This pace is faster than competitors. LG Energy Solution plans to mass-produce solid-state batteries by 2030. Securities firms positively evaluated this announcement. Researcher Lee Yongwook said, "Samsung SDI and Toyota are leading companies targeting mass production of sulfide-based solid-state batteries in 2027 and 2028, respectively. Although it will take some time to become widespread, there is definite initial demand in the luxury segment."

Additionally, news of mass production of the next-generation '46mm cylindrical battery' also had an impact. The 46mm cylindrical battery offers improved energy density and output per volume compared to the existing 2170 cylindrical battery (21mm diameter, 70mm height). Samsung SDI CEO Choi Yoonho also said at 'InterBattery 2024,' "We can sufficiently mass-produce the 46mm battery by early next year," adding, "The specific timing will be adjusted according to customers."

◇Aggressive Investments Different from the Past Lead to Higher Target Prices in Securities Firms= Furthermore, aggressive investments unlike in the past are having a positive effect. Samsung SDI has been considered conservative in investments compared to other battery companies. Securities firms expect Samsung SDI's capital expenditure (CAPEX) this year to reach 5 to 6 trillion KRW, surpassing last year's 4.3 trillion KRW. Additionally, a standalone factory in the United States is also being prepared.

Researcher Juminwoo of NH Investment & Securities said, "Samsung SDI has been undervalued compared to competitors due to maintaining CAPEX around 2 trillion KRW from 2018 to 2022 and conservative capacity (CAPA) management." He added, "Since 2023, the company has been executing CAPEX exceeding EBITDA, showing an aggressive approach."

Researcher Kim Hyunsoo of Hana Securities also emphasized, "Conservative investments have been the logic behind Samsung SDI's valuation discount, but the discount rate is expected to gradually shrink from 2024."

In particular, securities firms expect this approach to help overcome the long-standing undervaluation. Among five securities firms that issued reports on Samsung SDI up to the 25th of this month, two raised their target prices. This is a complete turnaround from January. Researcher Jung Yongjin of Shinhan Investment Corp. said, "The biggest reason for undervaluation within the sector was a passive attitude toward the secondary battery industry. Recent developments such as European expansion, joint venture (JV) establishment, and new technology disclosures over the past year show a different picture from the past."