Tesla

LG Chem Shares Jump Over 4% After Report of Tesla’s Interest in Battery Unit; Target Price KRW 800,000

LG Chem Ltd, which is the most diversified and vertically integrated chemical company, climbed over 4% on Tuesday following a media report that Tesla was interested to buy a stake in a battery unit the South Korean company wants to dispose off, Reuters reported.

“Tesla is said to be exploring taking up to a 10% stake in LG Energy Solution,” the Korea Times reported.

“While China’s CATL is also one of the top battery suppliers to Tesla, given Tesla’s deep partnership with Panasonic, Tesla’s equity purchase of LG Energy Solution would come and it’s no surprise to see that,” one of the Times’ sources added.

Following this announcement, the company which supplies batteries to Tesla, LG Chem shares ended 4.5% higher on Tuesday. The stock is up over 100% so far this year.

LG Chem stock forecast and analyst views

Morgan Stanley target price is W800,000 with a high of W1,000,000 under a bull scenario and W580,000 under the worst-case scenario.

The investment bank said “W800,000: base case value, sum of the parts valuation in view of LGC’s various business segments. We apply target EV/EBITDA multiples, based on average peer comparisons, to 2021e EBITDA. Peers have been selected considering similar product profile, customer bases, growth prospects and geographic operations to LG Chem’s.”

“Risk-reward now more attractive: Despite our constructive view on LGC’s EV battery business outlook, valuation was the primary reason for our prior downgrade. However, after a correction from the peak, we believe its valuation has turned more attractive,” said Young Suk Shin, equity analyst at Morgan Stanley.

“We believe the shares have reflected some of the key overhangs (Tesla Battery Day, split-off announcement, litigation) while another round of earnings estimate increases should also make its risk-reward profile even more appealing. Time to reengage: With P/B back to +1SD from average (since 2011), valuation is still not cheap; but as we expect robust battery earnings growth, we see room for further upside,” Suk Shin added.

Upside and Downside Risks

Upside: 1) Stronger-than-expected EV sales/penetration in the EU. 2) Stronger cylindrical battery sales in China. 3) Improving macro environment for chemical demand, highlighted by Morgan Stanley.

Downside: 1) Yield issues at the EV battery plant in Poland. 2) Intensified competition in the EV battery market. 3) Worsening macro environment for chemical demand.