November 28, 2019 Electrical Components KR EV Battery 2020: Momentum to rebuild OREA K ■ We expect Korean battery makers to benefit from competition for new EVs (between global OEMs and Tesla) and the strong EU EV market. ■ Korean EV battery makers should turn profitable in FY20-21F on the back of ~ 60% yoy EV battery sales growth in FY20-21F and margin expansion. OUTH ■ We also highlight Korean cathode and elecfoil producers on strong capacity expansion, with greater demand for key materials from Korean cell makers. S AVIGATING AVIGATING N Analyst(s) John PK PARK T (82) 2 6730 6125 E [email protected] IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE Powered by END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CGS-CIMB the EFA SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. Platform Navigating South Korea Industrial Goods and Services │ Electrical Components │ November 28, 2019 TABLE OF CONTENTS Key Charts .................................................................................................................................... 4 Questions on battery industry (EV/ESS) ................................................................................... 6 Korean EV battery makers at overcapacity? ........................................................................... 6 EV/ESS battery could turn profitable in 2020? ........................................................................ 8 ESS battery fires: can this be resolved? ................................................................................. 9 EV industry outlook .............................................................................................................. 10 EV sales growth to recover from 2H20 .................................................................................. 10 Tighter emission standards fueling electrification .................................................................. 12 New EV models by EU OEMs and Tesla ............................................................................... 15 Strong EU EV sales by subsidy and incentives ..................................................................... 19 EV battery outlook ................................................................................................................. 20 High quality battery sellers’ market for the next three years .................................................. 20 KR battery to benefit from strong EU market ......................................................................... 25 Decline in EV battery price to lead virtuous cycle of EV sales ............................................... 29 Improvement in battery technology to lift demand for EVs .................................................... 30 EV battery materials .............................................................................................................. 31 Cathodes are a crucial component of battery cells ................................................................ 31 Mid-term drivers of cost reduction could come from cathodes .............................................. 34 Anode development with silicon mix ...................................................................................... 37 Elecfoil supplies remain tight.................................................................................................. 38 KR EV battery material plays ............................................................................................... 39 Selective approach for cathode players ................................................................................. 41 Positive on Korean elecfoil players ........................................................................................ 43 Valuation and recommendation ........................................................................................... 44 Korean EV battery players’ P/Es at 2017 levels .................................................................... 44 Company section .................................................................................................................. 55 LG Chem ................................................................................................................................ 56 Samsung SDI ......................................................................................................................... 64 SKC ........................................................................................................................................ 72 Iljin Materials .......................................................................................................................... 85 Posco Chemical ..................................................................................................................... 97 2 INITIATION Sector Note Navigating South Korea │ Electrical Components │ November 28, 2019 South Korea Electrical Components Overweight KR EV Battery 2020: Momentum to rebuild Highlighted Companies ■ We expect Korean battery makers to benefit from competition for new EVs LG Chem (between global OEMs and Tesla) and the strong EU EV market. ADD, TP W380,000, W309,000 close ■ Korean EV battery makers should turn profitable in FY20-21F on the back of We see LGC as a key beneficiary of the fierce competition between EU OEMs ~ 60% yoy EV battery sales growth in FY20-21F and margin expansion and Tesla for new passenger EV models ■ We also highlight Korean cathode and elecfoil producers on strong capacity in FY20F/21F. The growing battery cell expansion, with greater demand for key materials from Korean cell makers. size of new passenger EVs will eventually lead to an EV battery earnings Upside potential from increasing battery cell size turnaround and justify LGC’s aggressive capacity expansion, in our view. New passenger EVs by global OEMs in 2020F would need larger battery cell sizes (more than 75kWh vs. our average 60kWh assumption previously) for increased driving ranges Samsung SDI of over 450km to compete against Tesla’s popular Models 3 and Y Long Range. Given an ADD, TP W320,000, W233,000 close increase in the pure EV segment and the larger battery cell size per unit, we expect We believe SDI has the potential to be a global EV battery demand to grow at a fast 53% CAGR in 2019-23F, outpacing the leader in the EV battery market, given its competiveness in high-technology mass EV/PHEV sales CAGR of 34% in 2019-23F. production after the early stages of the EV market. As a high-energy density Strong EU EV sales on supportive policies battery player, we expect SDI’s share The EU has set strict regulations on CO2 emissions for passenger cars at 95g/km in price performance to remain robust as its 2021 (and 81g/km by 2025). The global EV OEMs should be targeting the EU market, large-sized battery (EV/ESS) sales which will be focusing on meeting the emission targets to avoid hefty fines. The major EU increase in earnest from FY20F. OEMs (incl. Volkswagen) are targeting to have EVs form 20-30% of their new model line- SKC ups by 2025F in a bid to wrest the EV market leadership from Tesla. We expect the EU ADD, TP W62,000, W46,050 close EV/PHEV sales to grow at a 38% CAGR in 2020-21F, with subsidies and incentives. SKC is transforming into a battery material (elecfoil) player, as suggested Korean battery cell makers well positioned for 2020-21F by the acquisition of high tech elecfoil Given the increasing new models by EU OEMs and demand for high-energy density EV supplier KCFT. We expect a valuation re- batteries for new passenger EVs from 2020F, we expect Korean EV battery cell makers rating and multiple expansion for SKC (LG Chem (LGC) and Samsung SDI (SDI)) to be well positioned to deliver strong sales given the ~W2tr value of KCFT. on their order backlog. Only LGC, SDI and China’s Contemporary Amperex Technology (CATL) can produce high-quality batteries at competitive costs for the new EU OEM Summary Valuation Metrics models in 2020F, in our view. LGC should be a prime beneficiary of the EU EV battery P/E (x) Dec-19F Dec-20F Dec-21F growth, based on its leading position in EU battery capacity building (from 6GWh in 2018 LG Chem 37.46 16.59 13.27 to 55GWh by 2020F). Samsung SDI 30.05 16.47 13.35 SKC 28.61 12.06 9.82 Korean EV battery makers to turn profitable from 2020F We believe Korean EV battery makers should finally turn profitable in 2020-21F — the P/BV (x) Dec-19F Dec-20F Dec-21F first time in 10 years — given: 1) lower fixed costs on economies of scale (we forecast EV LG Chem 1.26 1.20 1.13 battery revenue growth of ~60% yoy in 2020-21); and 2) normalisation of new EU Samsung SDI 1.28 1.19 1.10 capacity production yield. SKC 1.09 1.02 0.94 Prefer Korean cathode and elecfoil producers in materials play Dividend Yield Dec-19F Dec-20F Dec-21F As the low-quality EV battery material market consolidates as a result of the slowdown of LG Chem 1.94% 1.94% 1.62% the Chinese EV battery market, we expect Korean battery material producers that supply Samsung SDI 0.43% 0.43% 0.43% the high-quality nickel cathodes and elecfoil to grow on strong capacity expansion. We SKC 2.17% 2.17% 2.17% highlight Posco Chemical (cathode and anode), Iljin Materials and SKC (elecfoil), to meet the higher demand for key EV battery materials. Insert Figure 1: Competition for new EVs between Tesla and OEMs lifting battery cell size Analyst(s) (kWh) 100 Battery cell size per unit (kWh) Model 3