Falling US EV Subsidies Will Trigger Margin Strain

Key Takeaways

• Uncertainty from subsidy expirations, tariffs, and policy shifts threatens revenue growth, margin expansion, and capital investment effectiveness in key markets.
  
• Intensifying competition and cost pressures could erode pricing power, profitability, and long-term returns, particularly amid ongoing global supply chain realignment.
  
• Strong ESS demand, innovative battery technologies, and strategic supply chain moves position LG Energy Solution for stable growth and reduced earnings volatility amid evolving electrification trends.

Catalysts

Provides energy solutions worldwide.

• The early expiration of U.S. EV consumer subsidies after September 2025, combined with intensifying tariffs and shifting eligibility criteria for battery supply chains, will likely lead to a significant slowdown in North American electric vehicle demand, directly curbing LG Energy Solution's future revenue growth from its largest market.
  
• Heightened policy volatility and the risk of abrupt changes in government support for electrification-both in the U.S. and abroad-create long-term uncertainty and threaten the expansion plans underpinning the company's high capital expenditures, increasing the likelihood that planned gigafactory utilization and resulting operating leverage will fall short, compressing net margins.
  
• Global supply chain realignment to comply with prohibited foreign entity requirements introduces ongoing cost and complexity, but the loosened raw material sourcing requirements after subsidy removal may also expose the company to greater price competition from low-cost Asian rivals, leading to downward pressure on average selling prices and future earnings.
  
• Accelerating competition from Chinese battery manufacturers-especially in Europe's growing mid
• and low-end EV segments-intensifies the risk of price erosion and share loss for LG Energy Solution in key overseas markets, likely resulting in weaker revenue growth and deteriorating profitability in the years ahead.
  
• The need for relentless investment in capacity, rapid product transitions, and new technology development-against a backdrop of volatile demand, evolving customer requirements, and falling global average selling prices-threatens to persistently undermine LG Energy Solution's free cash flow generation and ultimately pressure its return on invested capital over the long term.

LG Energy Solution Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on LG Energy Solution compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming LG Energy Solution's revenue will grow by 5.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -4.5% today to 6.1% in 3 years time.
• The bearish analysts expect earnings to reach ₩1844.0 billion (and earnings per share of ₩7868.64) by about August 2028, up from ₩-1164.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 45.4x on those 2028 earnings, up from -76.1x today. This future PE is greater than the current PE for the KR Electrical industry at 24.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.35%, as per the Simply Wall St company report.

LG Energy Solution Future Earnings Per Share Growth

Risks

• The accelerating adoption of electric vehicles, alongside growing consumer willingness to pay for advanced features such as AI and autonomous driving, could reignite long-term demand, supporting sustained revenue growth for LG Energy Solution.
  
• The rapid expansion of ESS (energy storage system) demand in North America, supported by ongoing data center buildout and robust policy support like ITC tax credits, is expected to more than offset short-term EV demand declines, providing a strong tailwind for both revenue and margins.
  
• LG Energy Solution's unique position as the only company producing LFP batteries for ESS within North America, combined with a sizable and growing ESS order book above 50 gigawatt hours, underpins long-term market share gains, higher capacity utilization, and earnings stability.
  
• Continuous investment in innovative battery technologies, such as LMR chemistry, dry electrode processes, and new form factors, positions LG Energy Solution to enhance product competitiveness, secure new customers, and protect longer-term gross margin expansion.
  
• Strategic supply chain localization, proactive reallocation of production capacity, and diversification of product portfolio across EV, ESS, and new mobility segments reduce earnings volatility, boost operational efficiency, and enable the company to capture upside as global electrification trends accelerate.

Valuation

• The assumed bearish price target for LG Energy Solution is ₩273678.08, which represents two standard deviations below the consensus price target of ₩421835.87. This valuation is based on what can be assumed as the expectations of LG Energy Solution's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩531000.0, and the most bearish reporting a price target of just ₩237000.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩30411.2 billion, earnings will come to ₩1844.0 billion, and it would be trading on a PE ratio of 45.4x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of ₩378500.0, the bearish analyst price target of ₩273678.08 is 38.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.