We Will Strengthen Our Competitive Edge With Next-Generation Battery Technologies In North America

Key Takeaways

• LG Energy Solution's strategic position in North America and first-mover advantage may drive revenue growth through increased local ESS production and strong market demand.
  
• Advancements in next-generation battery technologies and efficient cost management could enhance competitive standing and boost margins, enhancing long-term earnings potential.
  
• Challenging market conditions and geopolitical uncertainties have led to revenue declines and financial setbacks, raising concerns about future earnings stability and market competitiveness.

Catalysts

Provides energy solutions worldwide.

• LG Energy Solution is poised to benefit from the growth of the global battery market, expected to expand by mid
• to high 20% in capacity by 2025, particularly in North America where it has a first-mover advantage. This is likely to impact revenue growth positively.
  
• The company is actively enhancing its cost structure by utilizing existing idle lines and converting some production capacities to new chemistries, which could improve net margins as it reduces unnecessary new capital expenditures.
  
• LG Energy Solution plans to capitalize on increasing demand for local ESS production in North America, driven by energy security needs and tariffs on Chinese-made ESS batteries, which could boost earnings through strategic market positioning.
  
• The company's efforts in developing next-generation battery technologies, like dry electrode technology and sulfide-based solid state batteries, are expected to strengthen its competitive edge in the market, potentially increasing future earnings.
  
• With targeted investment plans and capacity expansion in strategic locations such as North America, LG Energy Solution aims to enhance operational efficiency and financial stability, which could substantially improve its earnings performance as market demand recovers.

LG Energy Solution Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LG Energy Solution's revenue will grow by 14.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.3% today to 8.6% in 3 years time.
• Analysts expect earnings to reach ₩3512.9 billion (and earnings per share of ₩15167.9) by about January 2028, up from ₩-362.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₩1637.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.8x on those 2028 earnings, up from -228.1x today. This future PE is greater than the current PE for the KR Electrical industry at 21.0x.
• Analysts expect the number of shares outstanding to decline by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.41%, as per the Simply Wall St company report.

LG Energy Solution Future Earnings Per Share Growth

Risks

• The battery industry's challenging environment in 2024 led to a 24% year-on-year decline in annual revenue, primarily driven by a negative EV market growth in Europe and price declines in key materials like lithium and nickel. This suggests potential volatility in future revenue streams.
  
• The decrease in operating profit by 73% year-on-year, with an operating profit margin of only 2.2%, was impacted by increased fixed costs from new production sites and demand slowdown in Europe, affecting net margins negatively.
  
• The company's net loss of ₩411 billion indicates significant financial setbacks, exacerbated by fixed cost burdens and deteriorated product mix, raising risks about future earnings stability.
  
• An over 20% decline in EV battery volume in North America and postponed ESS projects have contributed to revenue decline and operating losses, indicating potential ongoing risks to achieving projected revenue goals.
  
• Geopolitical and policy uncertainties, particularly related to U.S. policy changes and trade dynamics, pose risks that could affect demand and lead to cautious business forecasting, with potential adverse effects on future revenue and market competitiveness.

Valuation

• The analysts have a consensus price target of ₩439775.86 for LG Energy Solution based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩560000.0, and the most bearish reporting a price target of just ₩241500.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩40804.1 billion, earnings will come to ₩3512.9 billion, and it would be trading on a PE ratio of 36.8x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of ₩353500.0, the analyst's price target of ₩439775.86 is 19.6% higher.
  
• 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.