Will LG Energy’s IPO overcharge?

The world’s second-largest electric-vehicle battery maker, LG Chem-owned LG Energy, is hoping a separate listing will give the business a little more spark.

Given the incredible investor interest in EVs right now, the company’s mammoth IPO will probably unlock substantial value for its parent company, and also help finance the enormous capital expenditures needed to keep up with rising demand. New investors may benefit too—as long as the company can avoid further missteps like the Chevy Bolt battery recall.

The South Korean battery company said after the local market close Tuesday that it will raise nearly $11 billion in what would be the country’s biggest-ever IPO. At the high end of the price range, LG Energy will be valued at around $60 billion, making it the third most valuable Korean listed company. Shares in its parent, LG Chem, which will still own around 80% of the company after the IPO, jumped 5.6% Wednesday.

Growth in the electric-vehicle sector is the big draw of the deal. McKinsey expects battery-cell production capacity to more than triple by 2025. Indeed, LG is looking to ramp up its capacity everywhere from China to the U.S., using money raised from the IPO.

LG Energy had around 23% of the battery market for passenger vehicles globally in the first 10 months this year, behind the 28% controlled by China’s Contemporary Amperex Technology (CATL) according to SNE Research. CATL has benefited from explosive growth in EV sales in China: Sales of new-energy cars, including plug-in hybrids, have nearly tripled year-over-year in the first 10 months of 2021, according to the China Passenger Car Association. LG has partnerships with General Motors and Stellantis, owner of Fiat Chrysler.

But taking a ride with the stock won’t be cheap. At the high end of the price range, the company’s enterprise value would equal 33 times its earnings before interest, taxes, depreciation and amortization. The bankers on the deal believe this is still below the industry average, but mostly because they have used only two companies for comparison in the IPO filings. One is CATL, which trades at an EV to Ebitda multiple of more than 80. The Chinese battery maker now has a market value of $234 billion. Its shares have more than quintupled in value since the end of 2019.

Nonetheless, while the LG Energy IPO will probably do well given the frenzy in all things EV, there are clear risks down the road. Competition is rising. Apart from CATL, other Chinese battery makers such as BYD and Guoxuan have also experienced strong growth this year. Ensuring safety is another key: LG Energy, together with affiliate LG Electronics, needs to compensate GM for the recent recall of Chevy Bolt, to the tune of $1.9 billion.

Investors don’t want to be left behind in the brave new all-electric future. But the ride may not come cheap.

Write to Jacky Wong at jacky.wong@wsj.com