KIS: SK Group's Credit Rating Hinges on Battery Profitability Recovery

On August 28, Korea Investors Service (KIS) assessed that the short- and mid-term credit direction of SK Group, which is currently pursuing intensive rebalancing, depends on whether the battery division can recover profitability. KIS also pointed out that, amid sluggish performance in the petrochemical and battery businesses, more than 76% of the group's total EBITDA (earnings before interest, taxes, depreciation, and amortization) is generated by the semiconductor division, indicating a severe concentration of earnings, which poses a challenge for managing the group's credit rating.

In a report analyzing credit-related issues of major domestic conglomerates released on August 28, KIS stated, "The short- and mid-term credit direction of SK Group will depend on whether the battery division can recover profitability, the level of profit generation in the semiconductor division, and the ability to control financial burdens through diversified resource acquisition such as rationalizing non-core businesses."

First, KIS noted, "Despite unfavorable conditions in the petrochemical sector and poor performance in the battery division, SK Group’s operating profit in 2024 increased significantly, driven by improved profitability in the semiconductor division, thanks to growth in the artificial intelligence (AI) memory market and a leading competitive position. At the end of 2024, the group’s total net debt (76 trillion won) decreased by 8.3 trillion won compared to the end of the previous year," highlighting the group's gradually easing debt burden.

Regarding the restructuring of the business portfolio centered on SK Innovation, KIS evaluated, "This will help alleviate the financial burden of major affiliates in the oil, chemical, and energy sectors, and at the same time, secure investment capacity in the short and mid-term, which will have a positive impact on mitigating credit risk to a certain extent." However, KIS pointed out that, despite the easing of the group's financial burden, the fact that 76.3% of total EBITDA is generated by the semiconductor division indicates that the group’s ability to diversify its earnings base across affiliates has not been sufficiently demonstrated, which remains a burden for credit management.

KIS further stated, "With the enforcement of the Commercial Act amendment aimed at strengthening the fiduciary duty of directors, there is a growing possibility that financial interconnectedness among affiliates without business relevance or equity relationships will weaken. Considering that, apart from SK Hynix, the profit-generating capacity of the group as a whole has significantly declined, relying solely on the cash generation and financial strength concentrated in specific divisions may be insufficient to control credit risk across the entire group."

Additionally, regarding the potential impact of policy changes such as tariffs under the Donald Trump administration on SK Group’s business stability and performance, KIS noted, "The group’s memory semiconductor and battery businesses are particularly exposed to the effects of U.S. tariff policies."

For semiconductors, they are not included in the Korea-U.S. tariff agreement, and President Trump has mentioned plans to impose tariffs of up to 100% on imported semiconductors. KIS explained, "Until the final announcement, policy uncertainty remains high. There is a growing possibility of demand slowdown in downstream set industries due to tariff imposition, and it is difficult to rule out the risk of lower utilization rates or diminished price competitiveness at production bases in China, such as the Wuxi (DRAM) and Dalian (NAND) plants, due to U.S. tariffs on Chinese imports."

Furthermore, KIS stated, "The battery business is likely to be significantly affected by changes in U.S. policy. While the fact that a significant portion of SK On’s battery cell production capacity is located in the key U.S. market is somewhat positive in terms of avoiding tariff burdens, there is a high likelihood that negative impacts will arise from reduced electric vehicle production by automakers exposed to tariff burdens, as well as from increased prices of imported raw materials and rising cost burdens, which could delay the recovery of operating performance compared to expectations."

In particular, KIS highlighted the business outlook for the petrochemical and battery divisions and the credit direction of related affiliates in this report. For SK Geocentric (AA-), the credit outlook was revised to 'negative' in June, and it is expected that downward pressure on the rating will be difficult to ease. SK On (A+/Stable) saw some recovery in profitability in the first half of this year, but with the termination of U.S. electric vehicle subsidies as of September 30, a negative business environment appears inevitable. However, KIS expects that the planned merger with SK Enmove (AA/Under Negative Review) and capital increase could partially support the maintenance of its rating.

SK Innovation (AA/Stable) currently meets the criteria for a downgrade due to reduced operating cash flow from declining profitability in the first half of the year and investment burdens. KIS stated, "On an annual basis, we expect key indicators to continue to meet downgrade criteria due to sluggish performance in the refining and chemical divisions. However, in the mid-term, there is potential for profitability improvement and asset securitization, so we will monitor whether financial stability is maintained through internally generated resources and asset sales."

KIS pointed out, "Given the oversupply and limited margin improvement potential in the petrochemical business, policy uncertainty in the battery business, and actual financial burdens considering hybrid securities and total return swap contracts, there is little room for the group’s overall credit risk to ease in the short term."

KIS added, "To defend the group’s credit rating, it is necessary to offset earnings volatility with the enhanced operating cash generation of the semiconductor division, and in the mid-term, to improve financial stability through the recovery of operating performance in the refining, chemical, and battery divisions, as well as the implementation of additional self-rescue measures."