"LG Energy Solution Delivers Solid Q3 Results, but Optimism Remains Elusive" [Click e-Stock]

Despite Reduced U.S. Tax Credits, Over 200 Billion Won in Profit
ESS Growth Potential Confirmed... Solid Performance
EV End-Market Demand Remains Weak... "Difficult to Be Optimistic"

LG Energy Solution delivered solid results in the third quarter of this year, leading to assessments that the company has confirmed a short-term earnings bottom. Nevertheless, analysts note that sluggish electric vehicle battery shipments are likely to persist for an extended period, making it difficult for investor sentiment to turn positive.

On October 14, Meritz Securities stated that, given these circumstances, it is still too early to increase investment allocations in domestic secondary battery companies, including LG Energy Solution.

In the third quarter of this year, LG Energy Solution announced preliminary results of 5.6999 trillion won in revenue and 601.3 billion won in operating profit. Compared to the same period last year, revenue decreased by 17.1%, while operating profit increased by 34.1%. The operating profit figure reflects a 365.5 billion won benefit from the Advanced Manufacturing Production Credit (AMPC) under the U.S. Inflation Reduction Act (IRA). Even excluding the AMPC, the company posted an operating profit in the 200 billion won range. The results are viewed as solid, meeting market expectations amid concerns over tariffs on Chinese batteries and optimism about increased energy storage system (ESS) shipments.

This year, the quarterly AMPC amounts have shown a downward trend: 457.7 billion won in the first quarter, 490.8 billion won in the second quarter, and 365.5 billion won in the third quarter. The AMPC reflected in this quarter is estimated to correspond to 7-8 gigawatt-hours (GWh) of battery shipments.

Roh Wooho, a researcher at Meritz Securities, explained, "The unique surge in demand from each client in the first half of this year, which occurred just before the discontinuation of the U.S. IRA 30D eco-friendly vehicle purchase subsidy, has now dissipated. Instead, concerns over a decline in electric vehicle (EV) demand in the North American market due to the subsidy’s removal have become a reality. On the other hand, the operating leverage effect in the ESS segment continues to expand each quarter."

By business segment, large-sized batteries are estimated at 3.96 trillion won and small-sized batteries at 1.74 trillion won. The cylindrical small battery segment is estimated at 1.57 trillion won, with quarterly shipments increasing due to rising penetration rates at Tesla’s Gigafactories in China and Germany and for the Model Y.

Sales in the large battery segment reached 3.12 trillion won, and the company analyzed that the negative lagging effect (the profit and loss difference between the timing of raw material purchases and product sales) was limited due to the recent stabilization of mineral prices. However, concerns remain about overcapacity, as low operating rates caused by weaker-than-expected demand at the customer end appear likely to persist.

ESS segment sales are estimated at 839.8 billion won. As the operating rate at the Holland, Michigan plant in the United States rises, the company is experiencing operating leverage effects, and performance improvement is expected to continue for the time being.

Meritz Securities explained that while the company is benefiting in the short term from U.S.-China tariff tensions and has confirmed a short-term earnings bottom, and the growth potential of the ESS business is clear, it still maintains a pessimistic outlook overall. Researcher Roh advised, "The ongoing sluggishness in electric vehicle battery shipments to North America and Europe is likely to persist and will continue to lower market expectations. Unless there is a clear change in operating rates at production facilities based on end-user demand, it is difficult to offer an optimistic recommendation to increase investment allocations in domestic secondary battery companies, including LG Energy Solution."

On the 10th, LG Energy Solution headquarters on Yeouidaero, Yeongdeungpo-gu, Seoul. Photo by Kang Jinhyung aymsdream@