They want EV battery stock not chemical company shares

LG Twin Tower in Yeouido, western Seoul [YONHAP]

LG Energy Solution is listing late this month in what is forecast to be a record-setting IPO that could leave the company as the second largest in Korea, after Samsung Electronics.

Many people are unhappy about it.

Shareholders of LG Chem, LG Energy Solution's parent company, are feeling left out, as after the IPO they will still just be owners of a traditional chemical company rather than shareholders in a high-flying EV battery maker, which includes Tesla as one of its clients.

If the battery subsidiary had been spun off, LG Chem shareholders would have received shares in LG Energy Solution, directly owned stock in a growth company and benefited from any revaluation of that stock by the market.

As it is, they will not get any benefit from the jump in the price of LG Energy Solution. They will just get a portion of the earnings of the consolidated subsidiary, which will be valued by the market as those of a chemical company.

Since peaking in January 2021, shortly after LG Energy Solution was formed, LG Chem's stock price has declined steadily, now down about a third from the all-time high. The frustration among individual investors is such that even presidential candidates have said that company carve-out should be more closely examined.

The company defends the decision to take LG Energy Solution public, saying that it has a number of solid business lines, which generate more profit than the battery business.

Shareholders of LG Chem will still own the chemical company, which itself will have a very large stake — about 85 percent — in a battery company flush from a public offering, it adds.

Leftover businesses

In addition to batteries, LG Chem has three primary businesses: petrochemicals, life sciences and advanced materials.

Under the petrochemical division, which accounts for around 50 percent of company revenue, LG Chem manufactures acrylonitrile butadiene styrene (ABS), a plastic known for heat resistance. It is used in toys, home appliances and IT devices.

In life sciences, it develops and sells pharmaceuticals, like Zemiglo, a diabetes drug. Under the advanced materials division, LG Chem produces EV battery cell materials: cathode active materials and separators. Cathode active materials typically account for 40 percent of a lithium-ion battery's production cost, and the separator 15 percent.

Most of these EV battery materials are supplied to LG Energy Solution. LG Chem says revenue generated from sales of EV battery materials is not big, but it expects sales to glow along with the growth of LG Energy Solution.

LG Chem plans to produce 260,000 tons of cathode active materials by 2026 from 40,000 tons in 2020.

LG Chem "is operating well" a year after the split of the battery division and is "making far more money than LG Energy Solution," said Sohn Jun-il, a spokesperson for LG Chem. He added that the pressure is now off LG Chem to heavily invest in EV battery cell research and development.

Diverging views

Yuanta Securities slashed the target price on LG Chem by 25 percent to 780,000 won ($650) in a report released on Dec. 29. It says the price could drop to as low as 550,000 won following the listing of its battery subsidiary.

It closed at 690,000 won on Thursday.

Hwang Kyu-won, who wrote the report, cited reduced ownership in LG Energy Solution and the downward trend in petrochemical prices.

"Retail prices of petrochemical products are not expected to rise as much as the price of naphtha, a core material for petrochemical products, because fewer factories are operating due to lockdowns and trade volumes have been reduced due to the pandemic," said a chemical industry source.

The price of naphtha, a crude oil derivative, is forecast to increase as the global crude oil price is projected to rise this year as post-pandemic demand outstrips supply.

The source added that China's construction of new plants for basic petrol chemicals could also hit the domestic petrochemical business as China, a major importer, will buy less from Korea.

Samsung Securities cut the target price on LG Chem by 26 percent to 830,000 won in a report released on Jan. 3.

LG Chem's "business structure itself based on eco-friendly materials and batteries is meaningful even following the LG Energy Solution's IPO," said Lee An-na, an analyst at eBest Investment Securities. It "will become a core global player of the PLA market, which is growing 26 percent annually."

PLA is a versatile commercial biodegradable thermoplastic commonly used for the manufacturing of biodegradable medical devices, like screws and pins.

In September, LG Chem and Chicago-based Archer Daniels Midland (AMD) agreed to establish a joint venture to build a PLA manufacturing plant.

Lee Dong-wook, an analyst at Kiwoom Securities, said LG Chem is "excessively undervalued compared to its rivals" that produce cathode active materials, like Posco Chemical, whose share rose as much as 50 percent last year, and EcoProBM, whose share jumped as much as 230 percent apiece.

Lee said LG Chem revenue generated from battery materials was around 1.7 trillion won in 2021, and that revenue will grow more than 40 percent annually to 8 trillion won in 2026.

Public response

Following the split-off of LG Energy Solution, other companies have made similar decisions.

SK Innovation split its EV battery business off as SK On, and plans to take it public, and it split its petroleum exploration company off as SK Earthon in October last year.

The board of Mando, Korea's second-largest auto parts maker, approved the split off of its autonomous driving business as Mando Mobility Solutions in July last year.

The carving out of promising business divisions has met with anger by retail investors, who have posted on the Blue House petition site. For a recent petition, about 1,100 people pushed the "agree" button.

"Can't we pass a law that bans carving out a business?" said a 50-something retiree who started investing last year on the petition site.

Presidential candidates Yoon Suk-yeol and Lee Jae-myung said they will take measures to prevent harm to investors from a company's split off of a promising business. Lee said he will push for a regulation that prevents the simultaneous listing of a parent company and a subsidiary that has been split from the parent company. Yoon, of the main opposition party, said he will make sure existing shareholders are offered shares in the newly split company.

The Financial Services Commission and Korea Exchange are reviewing a plan to strengthen regulations for split off companies that wish to go public.

Experts are questioning the morality of the business decisions.

Though the split and listing of the subsidiary is legal, "it's difficult to say it's moral," said professor Lee Jeong-hwan of the College of Economics and Finance at Hanyang University. "If the split subsidiary is wholly owned by the mother company and continues to stay that way, it wouldn't be that problematic. But if it goes public and has new shareholders, value of the existing equity will be diluted."

Lee added that the split of a promising division and its listing is "easy money for a company."

LG Chem says its decision was inevitable for it to aggressively expand the battery business.

"The split was intended to raise trillions of won through the IPO because LG Chem hopes to expand the battery business by aggressively increasing production of batteries," said Choi Sang-kyu, a spokesperson for LG Chem. "If we had not chosen the split-IPO, we would have been left with the issuance of new shares or corporate bonds to raise proceeds, which would have totaled as much as a trillion won."

LG Energy Solution is scheduled to go public on Jan. 27 following the two-day subscription period for retail investors from Jan. 18. The estimated market cap for the company is 100 trillion won, according to Yoon Hyuk-jin, an analyst at SK Securities.

"Though there will be a lot of volatility following the IPO, its moderate market cap will be 100 trillion won," said Yoon.

It would be the second largest company in Korea after Samsung Electronics.

Yoon added, "LG Energy Solution estimates 2021 operating profit at 1 trillion won on 17.8 trillion won revenue. Its annual revenue is projected to grow 24 percent a year on average through 2025."

Hwang from Yuanta Securities estimates LG Chem's operating profit to slide 32 percent in 2022.

BYJINMIN-JI[jin.minji@joongang.co.kr]