LG Chem Ltd. suffered a broad sell-off on May 26, with more than 4 trillion won ($3.6 billion) of its market cap vanishing in a single trading day, after Credit Suisse (CS) downgraded its stock rating from “outperform” to “underperform” in a May 25 report.
CS has also almost halved LG Chem’s target price from 1.3 million won ($1,163.31) a share to 680,000 won ($608.50), about 20% less than the latest closing price at 832,000 won ($744.52). LG Chem’s shares are down by -6.73% from the previous close, marking their worst dip since -7.76% on Mar. 16.
The Swiss investment bank said that
LG Chem’s battery unit IPO provides a valid rationale to discount the company’s valuation. CS views that LG Chem’s stock ownership may be reduced to around 70% from the current 100% after listing LG Energy Solution.
“There is no reason to buy LG Chem stock at this point, when its battery affiliate’s IPO is just around the corner. LG Chem is likely to experience a large discount prior to the LG Energy Solution IPO,” said Credit Suisse analyst Min Hoon-sik.
He added: “LG Chem, pressured with many clients announcing they will make their own batteries, is projected to announce a facility expansion or an M&A in the third quarter of this year. The company is likely to sell some LG Energy Solution shares to fund these new initiatives,” said Min.
CS also noted that LG Chem’s May 25 announcement of a voluntary recall of its batteries used in energy storage systems (ESSs) is another factor affecting the company’s valuation. LG Chem’s batteries manufactured in Nanjing, China, from Apr. 2017 to Sep. 2018 are subject to the recall.
CS said that LG Chem will have to spend around 400 billion won ($358 million) on the recall, which will be reflected in its second-quarter financial statements. The bank noted the ESS battery recall as the major factor behind its conservative adjustment of the company’s operating margin in the battery segment.
“Taking all the latest factors into account, we have reduced our EPS (earnings per share) estimate on LG Chem by 3% for this year and by 21% for next year,” added Min.
The Swiss bank gave LG Chem a price-earnings ratio (PER) multiple of 22 times. CS said the value is calculated by discounting 30% from the Chinese rival Contemporary Amperex Technology’s (CATL) PER value, and factoring in another 30% discount to reflect the risks from the IPO and LG Energy Solution stock sellout.
Following the CS report, other global investment banks including JPMorgan and Morgan Stanley also dumped large volumes of LG Chem shares on May 26.
KOREAN ANALYSTS STILL UPBEATThe Swiss bank’s analysis is in stark contrast to the optimistic views domestic securities firms are maintaining on LG Chem.
While there have also been some speculation within Korea that LG Chem stocks may slump after listing LG Energy Solution, the financial industry’s current consensus is that LG Chem is likely to emerge the biggest winner from the IPO.
The Korean firms emphasize that LG Chem will remain the largest shareholder of LG Energy Solution.
The average target price forecast from domestic securities firms for LG Chem is around 1.3 million won ($1,163.31) per share, the same as the Swiss bank’s position prior to its recent report. The highest target price is 1.53 million won ($1,369.99) from Shinyoung Securities Co.
“Even after the IPO, LG Energy Solution’s growth, with the expansion of production capacities, is going to be reflected in LG Chem’s consolidated revenues. LG Chem will grow further by expanding its battery value chain, and its pharmaceutical and chemical units,” said Shinyoung Securities analyst Lee Ji-yeon.
Hi Investment & Securities highlights that the petrochemical industry is poised for another boom in the second half of 2021, likely leading to strong results for another one of LG Chem’s key businesses. The securities firm cited LG Chem as one of its “top picks,” considering it the industry’s most competitive company with a low-carbon agenda.
“LG Chem’s mid- and large-sized battery business will start to see a large amount of profit from this year. There is plenty of room for LG Chem’s valuation to go up, with large-scale orders and industry alliances expected moving forward,” said Hi Investment & Securities analyst Jeon Yoo-jin.
Write to Ji-yeon Sul and Yun-sang Ko at
sjy@hankyung.comDaniel Cho edited this article.
