LG Chem to spin off battery business in December

The LG Twin Tower in Yeouido, western Seoul. [YONHAP]

LG Chem’s battery business will be spun off from the company in December.

According to SNE Research, LG Chem was the largest electric vehicle (EV) battery maker in the world during the first half of 2020 with a 24.6 percent market share.

The spinoff was approved by the board of directors Thursday and will be put up to a final vote at a shareholders meeting on Oct. 30. The plan is for the battery unit to become a new corporation tentatively named LG Energy Solution on Dec. 1.

It will be a wholly-owned subsidiary of LG Chem.

In a Thursday statement, the company said it does not have immediate plans to list it on the stock market.

“Nothing is decided on the matter for now, but we are going to review various options,” it said.

Rumors of such a spinoff have circulated for some time among investors and industry analysts.

Petrochemicals generate more than half of LG Chem’s revenue, but EV batteries are the business with the most potential. Last year, batteries were the company’s second largest revenue source, comprising 29 percent.

Local analysts and the company have claimed that this year would be the turning point when EV batteries started making profits. In the April-June period, the battery unit reported its largest operating profit of 155.5 billion won ($132.6 million) after losing money for nearly two decades. LG’s EV battery business first saw profits in the fourth quarter of 2018 but went back into the red afterwards.

Carmakers like Volkswagen and General Motors are trying to make EVs an integral part of their business. Market estimates differ according to research firms and analysts, but the general assessment is that EVs will make up around 20 to 30 percent of vehicle sales by 2030.

“The battery industry is experiencing rapid growth, and the EV battery business has just started to make big profits. We decided this is the optimal time for a spinoff,” LG Chem said in a statement Thursday.

“The entity is expected to generate 13 trillion won in revenue this year. Our goal is to hit 30 trillion won in annual revenue by 2024.”

Local analysts generally approved of the spinoff.

“A lot of LG Chem’s capital expenditure [capex] in recent years was concentrated on batteries. But the battery market is expected to rapidly grow in the next three to four years, which means even more capex will be needed,” said Kim Hyun-tae, BNK Securities analyst.

“At a time where other business units need investment as well, continuing the capex focus on batteries alone creates a burden for the company in terms of financing and regarding fairness among business units. It’s better that the battery unit is spun off as a separate corporation to attract and execute funding.”

However, LG Chem’s stock price plummeted 6.11 percent from the previous session on Thursday as investors worried that LG Chem’s value may fall after the spinning off of its business with the most potential.

“We believe the value of the spun-off battery business is the key variable,” said Mirae Asset Daewoo Analyst Park Yeon-ju, adding LG Chem is likely to maintain control of the battery business after the spinoff and a potential initial public offering.

“If the post-spinoff value of the battery business is higher than the current value reflected in the market, LG Chem’s shares should rise to reflect this in advance.”

BY SONG KYOUNG-SON [song.kyoungson@joongang.co.kr]