Samsung SDI (006400 ) Underlying growth potential remains intact Technology Raise TP by 11%; Near-term earnings weakness fully priced in Company Report We raise our target price on Samsung SDI by 11% to W390,000 (from W350,000). Our May 4, 2020 target price reflects the sum of the company’s operating value (W22.9tr) and its equity stake value (W6.8tr). We believe the COVID-19 outbreak is actually accelerating the transition to electric vehicles (EVs) and renewable energy. Tesla (TSLA US/CP: US$701.32), in contrast to the (Maintain) Buy weak performance of traditional OEMs, reported consensus-beating sales volume and profitability for 1Q20. As Tesla expands its market share, we believe traditional OEMs Target Price (12M, W) ▲ 390,000 will have no choice but to maintain their EV expansion strategies . Meanwhile, the transition to renewable energy, such as solar and wind power, is also speeding up. We Share Price (04/29/20, W) 286,000 expect spending on renewable energy to continue to grow even af ter the pandemic is over, fueled by: 1) a decline in the levelized cost of energy (LCOE); and 2) ongoing policy Expected Return 36% support across many countries. EV battery customer base to become more diversified OP (20F, Wbn) 627 We expect Samsung SDI to meaningfully expand its EV batter y customer base in 2H20. Consensus OP (20F, Wbn) 712 Jaguar is expected to release its new XJ EV in 2H20. The EV model, which has a range of 470km, is likely to be equipped with Samsung SDI’s cylindrical batteries. Assuming the EPS Growth (20F, %) 9.5 Jaguar XJ EV’s annual sales at 20,000 units, we estimat e Samsung SDI’s cylindrical Market EPS Growth (20F, %) 33.0 battery revenue from Jaguar at around W250bn (based on 90kWh/unit). P/E (20F, x) 51.6 Market P/E (20F, x) 12.6 Meanwhile, Tesla’s capacity expansion is gathering steam. The company’s Gigafactory KOSPI 1,947.56 Shanghai is capable of producing 4,000 units per week and is expected to begin making the Model 3 Long Range (two versions) and the Model Y in 2H20. As the factory Market Cap (Wbn) 19,667 produces more models, the EV maker is likely to diversify its battery supply chain, and Shares Outstanding (mn) 70 we think Samsung SDI could eventually supply NCA cylindrical batteries. Tesla will also Free Float (%) 73.5 need to tap battery suppliers for its upcoming plants in Germany, Brazil, and the US. Foreign Ownership (%) 42.2 Beta (12M) 1.31 Pandemic to spur growth of renewable energy market; ESS to swing to profit 52-Week Low 183,000 in 2Q20 52-Week High 343,500 According to a recent report by the International Energy Agency (IEA), the share of renewable energy has actually increased following coronavirus lockdowns in major (%) 1M 6M 12M countries. The cost of renewable electricity generation is also continuing to decline, Absolute 15.3 25.4 22.2 driven by: 1) increasing capex; 2) advances in electricity generation technologies; and 3) Relative 1.7 34.8 39.1 improving battery density and falling battery prices. We expect spending on renewable energy to continue to grow even after the pandemic is over. 160 Samsung SDI KOSPI 140 We anticipate Samsung SDI’s ESS division to swing to an operating profit in 2Q20. 120 Looking further to 2H20, we expect the ESS division to deliver stable profits, helped by: 100 1) growing sales of electricity-use ESS to Europe and the US; and 2) a gradual pickup in 80 domestic ESS demand. 60 4.19 8.19 12.19 4.20 Mirae Asset Daewoo Co., Ltd. [ Display/Batteries ] FY (Dec.) 12/16 12/17 12/18 12/19 12/20F 12/21F Revenue (Wbn) 5,201 6,347 9,158 10,097 10,906 14,526 Chuljoong Kim +822 -3774 -1464 OP (Wbn) -926 117 715 462 627 1,141 [email protected] OP Margin (%) -17.8 1.8 7.8 4.6 5.7 7.9 NP (Wbn) 219 657 701 357 390 942 EPS (W) 3,117 9,338 9,962 5,066 5,546 13,385 ROE (%) 2.0 6.0 6.0 2.9 3.1 7.1 P/E (x) 35.0 21.9 22.0 46.6 51.6 21.4 P/B (x) 0.7 1.2 1.3 1.3 1.5 1.4 Dividend Yield (%) 0.9 0.5 0.5 0.4 0.3 0.3 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 May 4, 2020 Samsung SDI COVID-19 to accelerate structural change Raise TP by 11%; Near-term earnings weakness fully priced in We raise our target price on Samsung SDI by 11% to W390,000 (from W350,000). Our target price reflects the sum of the company’s operating value (W22.9tr) and its equity stake value (W6.8tr). We believe the COVID-19 outbreak is actually accelerating the transition to EVs and renewable energy. Tesla, in contrast to the weak performance of traditional OEMs, reported consensus-beating sales volume and profitability for 1Q20. As Tesla expands its market share, we believe traditional OEMs will have no choice but to maintain their EV expansion strategies. Meanwhile, the transition to renewable energy is also speeding up. We expect spending on renewable energy to continue to grow even after the pandemic is over, fueled by: 1) a decline in LCOE due to improving battery performance and falling battery prices; and 2) ongoing policy support across many countries. Against this backdrop, we believe Samsung SDI’s revenue mix will change markedly, with the revenue contribution of its mid/large-sized battery unit likely to expand from 33% in 2019 to 43% in 2020 and 52% in 2021. We expect the unit to swing to a profit in 2020 and record an operating profit of W373bn in 2021, accounting for 33% of the company’s total operating profit. Shares of Tesla and global battery suppliers, including CATL (300750 CH/CP: RMB144.38), have recently been re-rated to the highest P/B levels since 2019, fueled by growing expectations for market expansion. However, for domestic battery suppliers such as Samsung SDI a marked re-rating (on a P/B basis) has yet to materialize despite short-term share rebounds. However, we think domestic battery suppliers are still undervalued against their global peers and will gradually narrow their valuation gaps amid revenue mix changes. Table 1. Samsung SDI: Valuation table (Wbn, %, ‘000 shares) Operating value EBITDA Applied EV/EBITDA EV Note IT batteries 647 6 3,881 Global peer avg. EV/EBITDA EV batteries 799 16 12,777 Avg. EV/EBITDA of CATL, BYD, LG Chem, and Guoxuan ESS 234 9 2,105 2021F EV/EBITDA of 9.0x EM 523 8 4,184 Global peer avg. EV/EBITDA Total operating value (A) 22,946 Investment asset value (Samsung Display) 30% discount to avg. 2020F multiple of LGD, Innolux, Samsung Display 9,833 5.6 5,859 AUO, and BOE Investment asset value (listed) Hotel Shilla 3,344 30.0 2 0.1% stake S1 3,287 30.0 253 11.0% stake Samsung Engineering 2,254 30.0 185 11.7% stake SHI 2,700 30.0 8 0.4% stake Investment asset value (unlisted) Valuation gains/losses on investment securities 660 30.0 462 Total investment asset value (B) 6,769 Net borrowings (C) 3,026 Based on estimate for end-2020 Equity value (A) + (B) - (C) + (D) 26,689 No. of shares outstanding 68,765 Value per share 388,120 Source: Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 May 4, 2020 Samsung SDI 1Q20 review Strength of EV battery business vs. small-sized battery weakness For 1Q20, Samsung SDI reported revenue of W2.4tr (-15% QoQ, +4% YoY) and operating profit of W54bn (+167.9% QoQ, -54.6% YoY), with the latter figure slightly beating our forecast (W49bn). The EV battery business recorded better-than-expected results. We estimate revenue and OP margin from EV batteries at W718bm (-17.7% QoQ, +70.3% YoY) and -3%, respectively. Despite the QoQ decline in revenue arising from unfavorable seasonality, OP margin was better than our forecast. The small-sized battery unit remained weak, hurt by lackluster demand stemming from the COVID-19 pandemic. We estimate operating profit and OP margin from small-sized battery products at W835bn (-18.2% QoQ, -26.5% YoY) and 3.5%, respectively. The electronic materials (EM) unit delivered solid results despite the COVID-19 outbreak, aided by: 1) temporary polarized film supply shortages stemming from the pandemic; and 2) robust revenue growth in semiconductor materials. However, we estimate that the OLED materials segment recorded weaker-than-expected results, due to: 1) soft demand; and 2) the beginning of the off-peak season. Table 2. Samsung SDI: 1Q20 review (Wbn, W, %) 1Q20P Growth 1Q19 4Q19 Mirae Asset Preliminary Consensus YoY QoQ Daewoo Revenue 2,304 2,821 2,397 2,305 2,272 4.1 -15.0 Operating profit 119 20 54 49 49 -54.6 167.9 OP margin (%) 5.2 0.7 2.2 2.1 2.2 -56.4 215.3 Pretax profit 70 -23 -10 -42 23 TTR RR Net profit 50 -51 -10 -29 10 TTR RR Notes: All figures are based on consolidated K-IFRS; net profit is attributable to controlling interests. Source: Company data, WISEfn, Mirae Asset Daewoo Research estimates Table 3.