Banks throw cold water on Korea's battery makers

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Banks throw cold water on Korea's battery makers

A screen capture of Morgan Stanley report on battery makers [SCREEN CAPTURE]

A screen capture of Morgan Stanley report on battery makers [SCREEN CAPTURE]

Global investment banks are warning that Korean battery maker shares are overvalued.
 
Batteries were expected to be the next stout pillar for Korea's economy, following semiconductors, but local battery makers are being tested by intense competition and a trend among automakers to do their own battery making.
 
U.S. investment bank Morgan Stanley said in a May 30 report that "for batteries, we see relatively limited upside because of a meaningful competitive push from new entrants." It lowered its investment recommendation for Samsung SDI from neutral to underweight, which means the bank thinks the security will underperform in the future.
 
The report also lowered its price target for shares of Samsung's battery-making unit to 550,000 won ($494) from 570,000 won.
 
The report triggered falls in Samsung SDI shares on the local stock market. On Monday, Samsung SDI's price slid by nearly 4 percent to close at 615,000 won. On Tuesday, the price slightly recovered, but only by 0.2 percent or 1,000 won, to close at 616,000 won.
 
On Wednesday, Samsung SDI shares closed at 611,000 won, down 0.81 percent from the previous trading day.
 
On May 25, Credit Suisse released a report on LG Chem changing its outlook for the stock to "underperform" from "outperform," meaning the stock will not keep up with the market average. The Zurich-based investment bank slashed its target price for the chemical company from 1.3 million won to 680,000 won.
 
LG Chem's fully owned battery-making subsidiary is LG Energy Solution.
 
LG Chem shares slumped 6.7 percent on May 26 to 832,000 won and haven't recovered since.
 
On Wednesday the company's shares closed at 807,000 won, down 2.18 percent from the previous trading day.
 
Credit Suisse said LG Chem's optimal price-to-earnings ratio was 22, which is roughly half of the 45 it set for China's Contemporary Amperex Technology (CATL), the world's largest battery maker. A lower P/E ratio signifies a less attractive investment.
 
Korean battery makers are facing fierce competition from Chinese and Japanese battery makers in the global battery market.
 
Korean electric vehicle battery makers are losing ground fast to Chinese competitors. 
 
According to data from SNE Research, CATL controlled 32.5 percent of global market in the January-to-April period. Korea's three electric car battery makers -- LG Energy Solution, Samsung SDI, and SK Innovation -- had a total of 32 percent combined.
 
In the first four months of 2020, CATL had a 21 percent share, while the Korean battery makers had 35.1 percent combined.
 
The other threat to battery makers is automakers making batteries on their own.
 
Volkswagen pledged to build six battery cell factories in Europe by 2030 to produce 240 gigawatt hours (GWh) capacity per year through joint ventures earlier this year. This will reduce the carmaker's dependence on supplies from Korean battery makers like LG Energy Solution and SK Innovation. 


Automakers have been trying to reduce their dependence on Korean battery makers largely due to price. Batteries account for roughly 30 to 40 percent of an electric vehicle's production cost so it makes sense for automakers to look for more price competitive batteries.

 
LG's cylindrical type batteries used in Teslas are 20 percent more expensive than CATL's.
 
Tesla started using CATL batteries last year. Even Hyundai Motor is planning on expanding its use of Chinese batteries in electric autos.
 
Some local analysts, however, disagree with the global investment banks.
 
"It is not likely the new entrants and automaker's efforts to internalize battery production will actually become threats to operations of Korean battery makers within the next five years," said Kim Hyun-soo, an analyst at Hana Financial Investment.
 
"I agree that Korean battery makers are suffering from low profitability but I don't think there are grounds to downgrade investment opinions on them," said Yeom Seung-hwan, a manager at eBest Investment & Securities.
 
 
BY KIM JEE-HEE, KIM YOUNG-MIN   [kim.jeehee@joongang.co.kr]
 
 
 
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