Debt Remaining at 15 Trillion Won Even After Pouring All Cash... LG Chem's Debt Burden Hits Record High

Net Borrowing Increases by 3 Trillion Won in 3 Months
"Increase in Borrowing Inevitable Due to New Business Investments"

LG Chem's net borrowings have reached an all-time high. This means that even after repaying debts with the company's cash holdings, the remaining debt is the largest ever. The significant increase is largely due to raising funds to expand research and development (R&D) investments despite poor performance. The company states that this is a choice to secure a leading position in new business markets, but there are concerns that financial burdens will only increase in a situation lacking sufficient cash cows.

According to the Financial Supervisory Service's electronic disclosure system on the 28th, LG Chem's net borrowings in the first quarter amounted to KRW 15.4199 trillion, an increase of about KRW 3 trillion compared to KRW 12.8432 trillion at the end of last year. It doubled from KRW 7 trillion at the end of 2020 over three years, and this year it has increased by about KRW 1 trillion per month.

The increase in net borrowings is due to the growing scale of R&D investments while the current business portfolio's cash-generating ability is declining. In other words, expenses exceed income. In the first quarter, LG Chem spent KRW 524.439 billion on R&D, a 14.8% increase compared to KRW 456.841 billion in the same period last year. As a percentage of sales, this expanded from 3.2% to 4.5% during the same period.

In particular, KRW 2.9075 trillion was invested solely in the battery sector. Compared to KRW 1.8104 trillion invested in the first quarter of last year, this represents an increase of over KRW 1 trillion. Although the battery business is experiencing poor performance due to the electric vehicle chasm (temporary demand stagnation), investments continue because the mid-to-long-term outlook remains positive.

This is also influenced by last year's designation of eco-friendly, battery, and new drug sectors as the three major new growth engines. Shin Hak-cheol, Vice Chairman of LG Chem, stated at the shareholders' meeting in March, "More than 70% of total investments are focused on the three new growth engines, and we are steadily increasing investments."

Expected aerial view of LG Chem's Tennessee cathode material plant.
Photo by LG Chem
Image source: Yonhap News

On the other hand, sales in the same quarter decreased by 18.7% compared to the same period last year, and operating profit plummeted by 67.1%.

A company official explained, "We need to invest in new businesses, but due to the sluggishness of existing industries, cash-generating ability has declined, leading to an increase in net borrowings. Inflation has also raised the cost of investments themselves."

LG Chem's total debt rose by about KRW 2 trillion to KRW 38.9368 trillion from KRW 36.5285 trillion at the end of last year.

As financial burdens increase, LG Chem has pursued capital liquidity through various channels. In March, it secured KRW 1 trillion through the issuance of won-denominated bonds and also sold non-core assets such as IT films and diagnostic businesses. In particular, the petrochemical sector, which has been in prolonged stagnation, plans to reduce costs through the establishment of joint ventures (JVs).

However, the possibility of business restructuring occurring in the short term is low. Therefore, it is expected that financial burdens will continue for a considerable period. Sujin Ahn, a researcher at NICE Credit Rating, diagnosed, "The scale of net borrowings in the petrochemical sector has increased significantly. Portfolio shifts and new facility investment requirements will act as burdens on cash flow."