[Reporter Reading Securities Report] CK Solution, Can It Overcome the Cold Wave in Secondary Batteries?

Order backlog of 294 billion KRW in Q3 this year... "Low possibility of performance decline"
Recent sluggishness in the secondary battery sector is a 'burden'

CK Solution, a specialized company in secondary battery dry rooms, has submitted a securities registration statement for listing on the KOSPI market. Given the ongoing sluggishness in the secondary battery sector and the weak stock prices, it appears crucial to convince investors of the company's growth potential.

CK Solution was established in 2004. It is a specialized company in dry room systems for the secondary battery industry. A dry room is a key facility in the manufacturing process of secondary batteries, referring to technology that maintains air moisture content below 1% during the production of lithium-ion batteries, which are vulnerable to moisture. The company has expanded its customer base globally, including the three major domestic secondary battery companies, as well as clients in North America, Europe, and East Asia.

Last year, on a consolidated basis, sales and operating profit were KRW 215.3 billion and KRW 17.7 billion, respectively. Although sales decreased by 20.1% compared to the previous year, operating profit turned positive. In the first half of this year, sales and operating profit were KRW 131.5 billion and KRW 14.5 billion, respectively, representing increases of 24.44% and 100.65% year-over-year. By business division, secondary batteries accounted for the largest share of sales at 95.86%, followed by FED (2.60%) and bio (0.26%).

The outlook for future performance is also positive. As of the end of the third quarter this year, the order backlog stands at KRW 294 billion, which exceeds last year’s sales. Through the securities registration statement, the company stated, "Due to the continuous growth of the secondary battery market, the possibility of a sharp decline in performance is considered low."

NH Investment & Securities, the lead underwriter, used the price-to-earnings ratio (PER) to calculate CK Solution’s desired public offering price. Based on the latest four quarters (LTM) net profit of KRW 21.952 billion as of the end of the first half of 2024, they applied an average PER of 12.72x from comparable companies?KNSOL (15.81x), SFA (12.27x), and Cowintech (10.08x)?to arrive at a per-share valuation of KRW 22,192. Applying a discount rate of 18.89% to 29.26%, the desired public offering price was calculated to be between KRW 15,700 and KRW 18,000 per share.

Based on the desired offering price, CK Solution plans to raise between KRW 49.3765 billion and KRW 56.610 billion. At the lower end of the offering price, KRW 12 billion will be allocated for facility funds, including the construction of the Asan manufacturing plant. This will be used to produce dehumidification-related equipment necessary for dry room and clean room processes. Additionally, KRW 22.4 billion will be invested as operating funds for secondary battery dry room and related facility construction projects ordered in the North American region. Furthermore, KRW 13.3 billion is planned to be used for debt repayment.

A concern is the potential slowdown in the secondary battery market. According to SNE Research, electric vehicle sales this year are expected to reach approximately 16.41 million units, representing a 16.6% growth rate compared to the previous year. However, this is a 16.9 percentage point decrease from last year’s growth rate of 33.5%. The main factors hindering growth in the electric vehicle market include a decrease in waiting demand due to the completion of initial purchases by early adopters interested in EVs, lack of charging infrastructure, high inflation, and a contraction in real economy and consumer sentiment caused by high interest rates.

Through the securities registration statement, the company explained, "The growth of the secondary battery market may be restrained due to safety issues related to electric vehicle fires and the impact of subsidy policies in various countries," adding, "In such cases, CK Solution’s business could be negatively affected."