LG Chem (051910 KS ) Raise TP on Higher EV Battery Premium

LG Chem (051910 KS ) Raise TP on higher EV battery premium

Chemicals Raise TP by 10% to W450,000 on higher EV battery premium Revise up EV battery valuation to W8.4tr: We are revising up our valuation of LG Results Comment Chem’s electric vehicle (EV) battery business to W8.4tr, applying an EV/EBITDA of 10x to our 2020F EBITDA. Our valuation is still roughly half the estimated value July 20, 2017 (W16tr) of Chinese battery maker CATL (unlisted). Below, we explain our rationale for the upward revision:

(Maintain) Buy First, automakers are accelerating their moves into the EV market, as: 1) mass adoption looks set to kick off with the launch of Tesla’s Model 3; 2) Europe’s Dieselgate scandal has stifled diesel car sales; and 3) EVs are increasingly Target Price (12M, W) 450,000 considered critical for automakers to grab hold of China (the world’s biggest auto market), which has announced a new energy vehicle (NEV) credit scheme. Share Price (07/19/17, W) 318,500 Second, despite the recent rise in metal prices, we expect EV production costs to Expected Return 41% decline over the medium term. Based on second-generation EVs currently available on the market, battery cells/packs account for 30% of total production costs, but other items, such as R&D spending, other powertrain costs, and other direct costs , OP (17F, Wbn) 2,898 also make up a significant portion. As part of its modular electric drive (MEB) Consensus OP (17F, Wbn) 2,730 project, Volkswagen plans to develop an integrated EV platform to lower total production costs by 30-40% from current levels. And once third-generation EPS Growth (17F, %) 56.7 batteries arrive on the scene around 2020 , energy density is likely to increase, Market EPS Growth (17F, %) 43.1 while lithium and cobalt requirements should decrease. P/E (17F, x) 11.7 Lastly, we expect LG Chem to maintain its competitive position. Aside from Market P/E (17F, x) 10.2 Panasonic, there are very few battery makers with the ability to serve m ajor global KOSPI 2,429.94 automakers. Chinese suppliers have only just begun to transition from lithium-iron- phosphate (LFP) to nickel-cobalt-manganese (NCM) batteries and are therefore still Market Cap (Wbn) 22,484 limited by lower energy densities. And given the importance of ongoing Shares Outstanding (mn) 78 development, we think industry leaders are better positioned due to their Free Float (%) 64.3 significant R& D experience, as illustrated by recent trends among cathode material Foreign Ownership (%) 37.8 suppliers. Beta (12M) 1.74 52-Week Low 219,500 2Q17 review: Consensus beat; Potential for metal cost pass-through 52-Week High 326,500 Consensus beat and bullish guidance: LG Chem reported 2Q17 operating profit of W726.9bn, beating the market consensus. Chemical earnings surprised to the (%) 1M 6M 12M upside on robust spreads of core products (ABS, etc.), while the battery business Absolute 14.2 17.7 23.0 returned to a profit thanks to strength in the small-sized segment. On its earnings Relative 11.4 0.4 2.1 call, LG Chem said that it expected core chemical cycles to improve in the medium term. Regarding EV batteries, management noted that European carmakers were 130 LG Chem KOSPI 120 stepping up their efforts in the green car segment . On the recent metal price gains 110 (cobalt, etc.), the company said it was currently in talks to pass on the increases; we 100 believe this underscores LG Chem’s strong leverage as a battery maker. 90 3Q17 OP to remain high at W710.8bn: We expect 3Q17 operating profit to remain 80 high at W710.8bn, supported by strong chemical spreads and favorable seasonality 70 7.16 11.16 3.17 7.17 in information & electronic materials (I&E) and batteries.

FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F Mirae Asset Daewoo Co., Ltd. Revenue (Wbn) 22,578 20,207 20,659 25,218 26,292 27,916

[Oil Refining/Chemicals/Renewables ] OP (Wbn) 1,311 1,824 1,992 2,898 2,986 3,488 OP margin (%) 5.8 9.0 9.6 11.5 11.4 12.5 Yeon -ju Park NP (Wbn) 868 1,153 1,281 2,127 2,273 2,671 +822 -3774 -1755 [email protected] EPS (W) 11,745 15,602 17,336 27,170 29,035 34,124 ROE (%) 7.3 9.2 9.5 14.2 13.4 14.0 Minkyung Kim P/E (x) 15.4 21.1 15.1 11.7 11.0 9.3 +822 -3774 -1732 P/B (x) 1.1 1.9 1.4 1.5 1.4 1.2 [email protected] Dividend yield (%) 2.2 1.4 1.9 1.6 1.6 1.6

Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

July 20, 2017 LG Chem

I. EV battery premium to expand

1. Tesla, Dieselgate fallout, and China to spur EV market growth

We expect LG Chem’s EV battery business to enjoy a higher valuation premium going forward. EV market growth is accelerating, and LG Chem is anticipated to maintain competitive advantages in the global battery market.

Although many automakers have been targeting the expansion of EV sales over the medium to long term, progress has been for the most part relatively slow. Recently, however, automakers have been stepping up their efforts, expanding investments in battery production capacity based on comprehensive road maps. In our view, the pickup in activity in the EV space is being driven by the following factors:

1) Tesla is nearing the launch of the Model 3. The new EV model is projected to have a range of at least 300km per charge with a price tag of US$35,000-40,000. The company said preorders have already reached 400,000 units. Tesla is targeting sales of 500,000 units in 2018, and plans to gradually expand annual sales volume to 1mn. Until recently, EVs have accounted for only a fraction of the global auto market, with annual sales volume of 40,000- 50,000 per model. However, if the Model 3 sells well, EVs should gain increasing prominence in the overall vehicle market going forward.

2) Dieselgate has stifled diesel car sales in Europe, with the percentage of diesel cars in total new car sales falling from 52.1% in 2015 to 49.9% in 2016. Amid continuing uncertainties over diesel vehicles, automakers’ new diesel model launches and retail sales have been depressed. Recently, Daimler, which is under investigation for emissions fraud, decided to recall 3mn diesel vehicles. This unfavorable environment appears to be propelling European automakers to shift to EVs.

3) China is strengthening its push to increase the number of EVs on its roads via various measures, including subsidies. In June, the country announced an NEV credit scheme, which requires EVs and plug-in hybrid EVs (PHEVs) to account for 8% of automakers’ sales by 2018, and 12% by 2020. The new scheme will also reward EVs with longer ranges. In light of the average range of current EVs, China’s EV sales volume is projected to increase from 400,000- 500,000 in 2017 to 800,000 in 2018 and to 1.2mn in 2020. Thus, EVs are increasingly considered critical for automakers to grab hold of China (the world’s biggest auto market).

Figure 2. Share of diesel cars in new car registrations in Figure 1. Tesla shares gained sharply on Model 3 expectations Europe

(US$) (%) 400 56 Diesel vehicles as a % of new European car registrations

55 350 54 300 53

250 52

51 200 50 150 49

100 48 1/15 7/15 1/16 7/16 1/17 7/17 2011 2012 2013 2014 2015 2016 Source: Bloomberg, Mirae Asset Daewoo Research Source: ACEA, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 July 20, 2017 LG Chem

2. EV market to expand despite rising metal prices

The uptrends in lithium and cobalt prices are the biggest causes for concern in the EV market. Lithium and cobalt mining is dominated by a small number of players, and the process of progressing from exploration to production takes several years. Accordingly, the recent surge in demand is sharply pushing up prices. However, we forecast a meaningful decline in EV production costs for the following reasons:

1) EV makers will likely achieve economies of scale in the near future, and the development of relevant technologies is progressing rapidly. For second-generation EVs currently available on the market, battery cells/packs account for 30% of total production costs; however, other items, such as R&D spending, other powertrain costs, and other direct costs, also make up a significant portion. As EVs account for only a niche part of the overall vehicle market, fixed costs still impose a heavy burden. Notably, as part of its MEB project, Volkswagen plans to develop an integrated EV platform to lower total production costs by 30-40% from current levels. Powertrain production costs are also likely to decline. For EV motors and inverters, production costs are anticipated to decrease via R&D and scale effects. In addition, EV manufacturers are making efforts to reduce required battery capacity by improving efficiency.

2) The development of third-generation batteries is now underway. In order to expand battery capacity, major battery makers, including LG Chem, have been increasing nickel content and reducing cobalt content in cathode materials, while mixing silicon with graphite for use in anode materials. The firm is slated to roll out third-generation batteries, in which NCM 811 cathode materials will be used, in 2020. The launch of next-generation batteries should lead to an over 20% increase in energy density and a nearly 50% decline in cobalt requirements.

Figure 4. Estimated cost breakdown for seco nd -generation Figure 3. Prices of lithium and cobalt EVs (RMB/tonne) (US$/tonne) SG&A Depreciation 200,000 Lithium (L) 70,000 4% 5% Cobalt (R) Battery cells 60,000 22% 150,000 R&D expenses 50,000 17% 40,000

100,000 Battery packs 30,000 7%

20,000 50,000 Other powertrain 10,000 Other direct 8% expenses 0 0 37% 12 13 14 15 16 17 Source: Bloomberg, Mirae Asset Daewoo Research Source: Industry data, Mirae Asset Daewoo Research

Figure 5. Volkswagen’s MEB project Figure 6. Development of third-generation batteries

Source: Company materials, Mirae Asset Daewoo Research Source: SNE Research, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 July 20, 2017 LG Chem

3. Battery market: Top-tier players’ advantages to remain intact

Despite lingering market concerns, we expect top-tier battery makers to benefit significantly during the initial phases of full-fledged EV market growth (for at least three to four years) in light of the following factors:

1) In the EV battery industry, the technological gap between top-tier and second-tier players remains significant. Notably, China-based BYD Auto and CATL still focus on low-end LFP batteries (for use in commercial EVs such as buses). BYD Auto has been supplying batteries exclusively for in-house produced cars, while CATL has yet to secure the technology necessary to manufacture high energy-density NCM batteries for major automakers. While global automakers may opt to use Chinese batteries in vehicles to be sold in China (in order to receive government subsidies), they are unlikely to do so for models that will eventually compete with the Tesla Model 3 in the US and Europe. With the bidding for third-generation EV projects well underway, we think top-tier players, including LG Chem, are highly likely to benefit.

In our view, automakers will also find it difficult to enter the battery cell manufacturing market, given their technological inferiority to top-tier battery makers and lack of scale. Indeed, automakers’ recent entries into the EV battery market are taking the form of investments in facilities that produce battery modules/packs, rather than battery cells.

2) Technological advances will be essential to industry growth. In particular, with regard to third-generation EVs, the growing importance of advanced anode and cathode material technologies is being highlighted. We thus believe that industry leaders are better positioned due to their vast R&D experience. Indeed, with regard to cathodes, advances in relevant technologies have driven up demand for high-quality materials (NCM 622 or higher), thus benefiting top-tier suppliers.

Table 1. EV battery shipments and key customers of global EV battery makers (2016) (MW) Shipments Country Battery type Anode materials Key models BYD Auto 7,892 China Prismatic LFP/LMFP/NCM BYD Qin, Tang, Denza, e6 Panasonic 7,331 Japan Cylindrical/prismatic NCA Tesla Model S, X CATL 6,621 China Prismatic LFP/NCM Yutong, BMW, FAW, BAIC Senova D50 OptimumNano 2,514 China Cylindrical, LFP Wuzhoulong, Kinglong, Haima AESC 1,564 Japan Pouch NCM Nissan LEAF, Renault Kangoo ZE LG Chem 1,914 Korea Pouch NCM GM Bolt, Renault Zoe, Volvo V60 Samsung SDI 1,159 Korea Prismatic NCM BMW i3, Volkswagen e-Golf Guoxuan High 1,935 China Cylindrical/prismatic LFP/NCM JAC IEV4 Tech Lishen 1,124 China Cylindrical /p rismatic LFP JAC IEV5 Total 43,200 Source: SNE Research, Mirae Asset Daewoo Research

Figure 7. Energy density by cathode material type Figure 8. Volkswagen’s battery cell road map

(Wh/kg) 300

250

200

150

100

0 NCM 111 NCM 622 NCM 811 LFP NCA

Source: Industry data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 4 July 20, 2017 LG Chem

4. EV battery premium to expand

We are revising up our valuation of LG Chem’s EV battery business to W8.4tr, applying an EV/EBITDA of 10x to our 2020F EBITDA.

The market cap of Chinese battery maker CATL (unlisted) is estimated at around W16tr, given that Foxconn acquired a 1.19% stake in the company for W162bn in April 2017. Although CATL has high growth potential, its technology remains inferior to that of LG Chem. In the medium term, we expect LG Chem’s global EV battery market share to rise to 20-30%.

Table 2. EV market forecasts and LG Chem’s earnings 2017F 2018F 2019F 2020F Passenger cars EV M/S US % 2.0 4.0 5.0 6.0 Europe % 1.2 3.0 4.0 6.0 China % 1.8 2.5 3.0 4.0 Other % 0.5 1.0 2.0 3.0 Total % 1.3 2.3 3.1 4.3 EV sales volume US ‘000 units 342 698 890 1,089 Europe ‘000 units 181 461 627 959 China ‘000 units 517 768 986 1,407 Other ‘000 units 176 363 747 1,155 Total ‘000 units 1,216 2,290 3,251 4,611 Avg. battery capacity kWh/unit 30.0 35.0 40.0 50.0 Battery market size US MWh 10,267 24,434 35,604 54,475 Europe MWh 5,423 16,132 25,074 47,954 China MWh 15,507 26,887 39,454 70,360 Other MWh 5,284 12,699 29,896 57,737 Total MWh 36,480 80,152 130,029 230,526 Battery demand US MWh 10,267 24,434 35,604 54,475 Europe MWh 5,423 16,132 25,074 47,954 China (passenger + commercial) MWh 37,739 57,059 73,890 110,552 Other MWh 5,284 12,699 29,896 57,737 Total MWh 58,712 110,324 164,465 270,718 Market size Battery price US$/kWh 170.0 130.0 120.0 110.0 Battery market size US US$mn 1,745 3,176 4,273 5,992 Europe US$mn 922 2,097 3,009 5,275 China US$mn 6,416 7,418 8,867 12,161 Other US$mn 898 1,651 3,588 6,351 Total US$mn 9,981 14,342 19,736 29,779 LG Chem earnings M/S US % 25 20 20 20 Europe % 30 30 30 30 China % 0 1 2 2 Other % 30 30 25 25 Total % 10 13 14 15 Revenue US US$mn 436 635 855 1,198 Europe US$mn 277 629 903 1,582 China US$mn 0 74 177 243 Other US$mn 269 495 897 1,588 Total US$mn 982 1,834 2,831 4,612 Operating profit Operating profit US$mn -20 37 170 369 OP margin % -2 2 6 8 Depreciation US$mn 220 250 400 500 EBITDA US$mn 200 287 570 869 Factoring in equity US$mn 200 281 550 839 stakes EV/EBITDA x 10 EV US$mn 8,392 Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 5 July 20, 2017 LG Chem

II. Chemical cycle picking up

1. Up cycles for ABS and PVC; PE market to be solid

We expect LG Chem to deliver solid chemical earnings over the next two to three years. The company produces a wide variety of downstream products, including ABS, PVC/caustic soda, and synthetic rubber. Of note, the ABS and PVC markets are recovering rapidly, aided by limited capacity additions, China’s environmental regulations, and solid demand. We expect the markets to continue to pick up in the absence of major capacity ramp-ups over the next two to three years.

For ethylene, although an ethane cracker is scheduled to come online in 2H17, incremental capacity will be only modest. In addition, capacity expansion at Chinese coal-to-chemical facilities has been delayed, limiting the market slowdown. Given that capacity additions will likely be relatively minor in 2018 and beyond, the ethylene cycle should gradually improve through 2021.

Figure 9. LG Chem’s chemical earnings breakdown Figure 10. ABS spread

(US$/tonne) (US$/tonne) Acrylic/SAP 2,500 ABS (L) 1,000 10% ABS-0.54SM-0.15BD-0.27AN (R)

NCC/PO 2,200 800 33%

1,900 600 ABS/EP 33% 1,600 400

1,300 200 Rubber/special PVC/caustic resins soda/plasticizer 10% 14% 1,000 0 05 07 09 11 13 15 17

Source: Mirae Asset Daewoo Research Source: Cischem, Mirae Asset Daewoo Research

Figure 11. ABS supply/demand Figure 12. HDPE spread and global utilization

('000 tonnes) (%) (US$/tonne) (%) 600 Demand additions (L) 95 800 HDPE spread (L) Utilization (R) 98 Capacity additions (L) Utilization rate (R)

400 90 600 94

200 85

400 90 0 80

-200 75 200 86 07 09 11 13 15 17 19 00 02 04 06 08 10 12 14 16 18 20

Source: Industry reports, Mirae Asset Daewoo Research Source: Industry reports, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 6 July 20, 2017 LG Chem

III. Raise TP to W450,000

1. Raise TP by 10% to W450,000 on higher EV battery premium

We reaffirm Buy on LG Chem and revise up our target price by 10% to W450,000. We expect the company to deliver solid chemical earnings over the next two to three years, backed by the ABS/PVC market recovery and the continued ethylene market boom. In addition, the EV battery premium will likely expand further.

LG Chem reported 2Q17 operating profit of W726.9bn, beating the market consensus modestly. The chemical and battery units delivered stronger-than-expected performances. Chemical earnings surprised to the upside on robust spreads of core products (ABS, PVC/ caustic soda, etc.) owing to tight supply. The battery business returned to a profit despite higher cobalt prices, aided by earnings improvements at the ESS and small-sized battery segments.

On its earnings call, LG Chem said that it expected chemical earnings to remain solid and battery earnings to remain in the black. Regarding the recent metal price gains (cobalt, lithium, etc.), the company said it was currently in talks to pass on the increases; we believe this underscores LG Chem’s strong leverage as a battery maker.

We expect 3Q17 operating profit to remain high at W710.8bn. PE spreads have been weakening modestly, and synthetic rubber earnings are likely to slow QoQ amid falling butadiene prices. However, with ABS spreads widening and PVC/caustic soda prices climbing, chemical earnings will likely remain robust. Earnings at the I&E and battery units should also improve on favorable seasonality.

Table 3. Target price calculation (Wbn, x, mn shares, W) Item Value Notes Net profit 2,218 12-month forward net profit estimate Target P/E 12x Applied premium in light of higher exposure to non-ethylene chain Value of non-EV battery businesses 26,619

Value of the EV battery unit 8,392 Applied an EV/EBITDA of 10x to 2020F EBITDA Fair market cap 35,011 No. of shares 78.3

Fair share price 447,137 Source: Mirae Asset Daewoo Research

Table 4. Quarterly and annual earnings (Wbn) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17F 4Q17F 2016 2017F 2018F

Total 4,874.1 5,219.2 5,054.3 5,511.7 6,486.7 6,382.1 6,193.4 6,156.0 20,659.3 25,218.2 26,292.4 Chemicals 3,512.0 3,652.8 3,524.7 3,757.6 4,495.3 4,318.6 4,133.5 4,126.7 14,447.1 17,074.2 17,599.8 Revenue I&E 627.2 649.5 640.6 738.6 726.0 747.3 631.3 563.6 2,655.9 2,668.2 2,547.4 Batteries 814.4 809.0 878.9 1,059.4 999.4 1,119.8 1,203.6 1,261.4 3,561.7 4,584.2 5,008.3 Total 457.7 612.5 460.0 461.7 796.9 726.9 710.8 663.2 1,991.9 2,897.8 2,986.5 Operating Chemicals 466.2 649.1 497.8 506.1 733.7 685.5 660.8 637.6 2,119.2 2,717.6 2,678.3 profit I&E -8.0 -14.5 -16.2 -16.2 29.3 23.4 31.7 15.1 -54.9 99.5 115.3 Batteries -0.3 -31.2 -16.2 -3.7 -10.4 7.5 13.8 19.6 -51.4 30.5 73.4 Pretax profit 423.1 500.1 378.6 358.1 698.3 730.4 690.8 643.6 1,659.8 2,763.1 2,914.0 Net profit 339.8 376.9 295.6 268.9 531.5 577.2 527.0 491.0 1,281.1 2,126.6 2,272.9 Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 7 July 20, 2017 LG Chem

LG Chem (051910 KS/Buy/TP: W450,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F Revenue 20,659 25,218 26,292 27,916 Current Assets 9,227 9,605 10,570 12,177 Cost of Sales 16,595 20,108 21,094 22,216 Cash and Cash Equivalents 1,474 2,498 3,106 4,174 Gross Profit 4,064 5,110 5,198 5,700 AR & Other Receivables 3,729 3,934 4,131 4,430 SG&A Expenses 2,072 2,212 2,212 2,212 Inventories 2,965 3,173 3,333 3,573 Operating Profit (Adj) 1,992 2,898 2,986 3,488 Other Current Assets 1,059 0 0 0 Operating Profit 1,992 2,898 2,986 3,488 Non-Current Assets 11,260 13,530 14,660 15,628 Non-Operating Profit -332 -135 -72 -63 Investments in Associates 261 291 306 328 Net Financial Income -37 -80 -73 -64 Property, Plant and Equipment 9,680 11,021 12,205 13,211 Net Gain from Inv in Associates -4 27 0 0 Intangible Assets 832 1,716 1,642 1,575 Pretax Profit 1,660 2,763 2,914 3,425 Total Assets 20,487 23,136 25,230 27,805 Income Tax 379 584 641 753 Current Liabilities 5,447 5,611 5,783 6,044 Profit from Continuing Operations 1,281 2,179 2,273 2,671 AP & Other Payables 1,723 1,748 1,836 1,969 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 2,213 2,175 2,175 2,175 Net Profit 1,281 2,179 2,273 2,671 Other Current Liabilities 1,511 1,688 1,772 1,900 Controlling Interests 1,281 2,127 2,273 2,671 Non-Current Liabilities 989 1,319 1,337 1,363 Non-Controlling Interests 0 52 0 0 Long-Term Financial Liabilities 678 972 972 972 Total Comprehensive Profit 1,275 2,055 2,273 2,671 Other Non-Current Liabilities 311 347 365 391 Controlling Interests 1,278 2,015 2,229 2,620 Total Liabilities 6,436 6,930 7,120 7,407 Non-Controlling Interests -3 40 44 51 Controlling Interests 13,937 16,048 17,952 20,240 EBITDA 3,329 4,384 4,676 5,349 Capital Stock 370 391 391 391 FCF (Free Cash Flow) 1,118 886 996 1,481 Capital Surplus 1,158 2,274 2,274 2,274 EBITDA Margin (%) 16.1 17.4 17.8 19.2 Retained Earnings 12,463 13,885 15,789 18,077 Operating Profit Margin (%) 9.6 11.5 11.4 12.5 Non-Controlling Interests 114 158 158 158 Net Profit Margin (%) 6.2 8.4 8.6 9.6 Stockholders' Equity 14,051 16,206 18,110 20,398

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F Cash Flows from Op Activities 2,517 3,272 3,796 4,281 P/E (x) 15.1 11.7 11.0 9.3 Net Profit 1,281 2,179 2,273 2,671 P/CF (x) 6.2 5.9 5.4 4.7 Non-Cash Income and Expense 1,805 2,023 2,364 2,639 P/B (x) 1.4 1.5 1.4 1.2 Depreciation 1,282 1,404 1,615 1,795 EV/EBITDA (x) 5.8 5.7 5.2 4.4 Amortization 54 82 74 67 EPS (W) 17,336 27,170 29,035 34,124 Others 469 537 675 777 CFPS (W) 41,765 53,683 59,232 67,834 Chg in Working Capital -382 -512 -167 -252 BPS (W) 188,807 209,538 233,871 263,096 Chg in AR & Other Receivables -13 -256 -188 -284 DPS (W) 5,000 5,000 5,000 5,000 Chg in Inventories -352 -144 -159 -241 Payout ratio (%) 25.7 15.8 15.2 12.9 Chg in AP & Other Payables 349 57 88 133 Dividend Yield (%) 1.9 1.6 1.6 1.6 Income Tax Paid -554 -528 -641 -753 Revenue Growth (%) 2.2 22.1 4.3 6.2 Cash Flows from Inv Activities -1,737 -1,581 -2,805 -2,807 EBITDA Growth (%) 8.1 31.7 6.7 14.4 Chg in PP&E -1,381 -2,382 -2,800 -2,800 Operating Profit Growth (%) 9.2 45.5 3.0 16.8 Chg in Intangible Assets -74 -10 0 0 EPS Growth (%) 11.1 56.7 6.9 17.5 Chg in Financial Assets 196 744 -5 -7 Accounts Receivable Turnover (x) 6.1 6.9 6.8 6.8 Others -478 67 0 0 Inventory Turnover (x) 7.8 8.2 8.1 8.1 Cash Flows from Fin Activities -1,007 -602 -368 -383 Accounts Payable Turnover (x) 11.5 11.6 11.8 11.7 Chg in Financial Liabilities 232 256 0 0 ROA (%) 6.6 10.0 9.4 10.1 Chg in Equity 0 1,139 0 0 ROE (%) 9.5 14.2 13.4 14.0 Dividends Paid -346 -331 -368 -383 ROIC (%) 11.2 14.6 13.4 14.6 Others -893 -1,666 0 0 Liability to Equity Ratio (%) 45.8 42.8 39.3 36.3 Increase (Decrease) in Cash -231 1,024 608 1,068 Current Ratio (%) 169.4 171.2 182.8 201.5 Beginning Balance 1,705 1,474 2,498 3,106 Net Debt to Equity Ratio (%) 4.7 4.0 0.2 -5.0 Ending Balance 1,474 2,498 3,106 4,174 Interest Coverage Ratio (x) 25.9 25.9 26.4 30.9 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 8 July 20, 2017 LG Chem

APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price (W) LG Chem LG Chem(051910) 07/19/2017 Buy 450,000 500,000 07/05/2017 Buy 410,000 400,000 09/11/2016 Buy 370,000 06/01/2016 Buy 400,000 300,000 03/22/2016 Buy 420,000 200,000 10/18/2015 Buy 400,000 07/01/2015 Buy 360,000 100,000

0 Jul 15 Jul 16 Jul 17

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price ( ─), Target price (▬), Not covered ( ■), Buy ( ▲), Trading Buy ( ■), Hold ( ●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Equity Ratings Distribution Buy Trading Buy Hold Sell 69.67% 17.06% 13.27% 0.00% * Based on recommendations in the last 12-months (as of June 30, 2017)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subj ect company and do not own 1% or more of the subject company's shares outstanding.

Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report is published by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Mirae Asset Daewoo and its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of

Mirae Asset Daewoo Research 9 July 20, 2017 LG Chem

the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo.

Distribution United Kingdom: This report is being distributed by Mirae Asset Securities (UK) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Mirae Asset Securities (USA) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Mirae Asset Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Mirae Asset Securities (USA) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Mirae Asset Securities (HK) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Mirae Asset Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Mirae Asset Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.

Mirae Asset Daewoo Research 10 July 20, 2017 LG Chem

Mirae Asset Daewoo International Network

Mirae Asset Daewoo Co., Ltd. (Seoul) Mirae Asset Securities (HK) Ltd. Mirae Asset Securities (UK) Ltd. Global Equity Sales Team Suites 1109-1114, 11th Floor 41st Floor, Tower 42 Mirae Asset Center 1 Building Two International Finance Centre 25 Old Broad Street, 26 Eulji-ro 5-gil, Jung-gu, Seoul 04539 8 Finance Street, Central London EC2N 1HQ Korea Hong Kong United Kingdom China Tel: 82-2-3774-2124 Tel: 852-2845-6332 Tel: 44-20-7982-8000

Mirae Asset Securities (USA) Inc. Mirae Asset Wealth Management (USA) Inc. Mirae Asset Wealth Management (Brazil) CCTVM 810 Seventh Avenue, 37th Floor 555 S. Flower Street, Suite 4410, Rua Funchal, 418, 18th Floor, E-Tower Building New York, NY 10019 Los Angeles, California 90071 Vila Olimpia USA USA Sao Paulo - SP 04551-060 Brasil Tel: 1-212-407-1000 Tel: 1-213-262-3807 Tel: 55-11-2789-2100

PT. Mirae Asset Sekuritas Indonesia Mirae Asset Securities (Singapore) Pte. Ltd. Mirae Asset Securities (Vietnam) LLC Equity Tower Building Lt. 50 6 Battery Road, #11-01 7F, Saigon Royal Building Sudirman Central Business District Singapore 049909 91 Pasteur St. Jl. Jend. Sudirman, Kav. 52 -53 Jakarta Selatan Republic of Singapore District 1, Ben Nghe Ward, Ho Chi Minh City 12190 Vietnam Indonesia Tel: 62-21-515-3281 Tel: 65-6671-9845 Tel: 84-8-3911-0633 (ext.110) Mirae Asset Securities Mongolia UTsK LLC Mirae Asset Investment Advisory (Beijing) Co., Ltd Beijing Representative Office #406, Blue Sky Tower, Peace Avenue 17 2401B, 24th Floor, East Tower, Twin Towers 2401A, 24th Floor, East Tower, Twin Towers 1 Khoroo, Sukhbaatar District B12 Jianguomenwai Avenue, Chaoyang District B12 Jianguomenwai Avenue, Chaoyang District Ulaanbaatar 14240 Beijing 100022 Beijing 100022 Mongolia China China

Tel: 976-7011-0806 Tel: 86-10-6567-9699 Tel: 86-10-6567-9699 (ext. 3300) Shanghai Representative Office Ho Chi Minh Representative Office 38T31, 38F, Shanghai World Financial Center 7F, Saigon Royal Building 100 Century Avenue, Pudong New Area 91 Pasteur St. Shanghai 200120 District 1, Ben Nghe Ward, Ho Chi Minh City China Vietnam

Tel: 86-21-5013-6392 Tel: 84-8-3910-7715

Mirae Asset Daewoo Research 11