Falling EV Subsidies And Tariffs Will Hurt Battery Margins

Key Takeaways

• Declining electric vehicle demand and global trade barriers are squeezing LG Chem's battery materials business, reducing revenue, profitability, and competitiveness.
  
• Oversupply, rising competition from Asia, shifting regulations, and costly ESG compliance threaten margins, revenue stability, and long-term innovation prospects.
  
• Strategic expansion into high-margin materials, localization for key markets, diversified customers, sustainability focus, and bioscience innovation position LG Chem for resilient growth and improved profitability.

Catalysts

Engages in the petrochemicals, energy, advanced materials, and life science businesses in Korea, China, Asia/Oceania, the United States, Europe, and internationally.

• The reduction and eventual phaseout of electric vehicle subsidies in the United States, combined with the lifting of fuel efficiency regulations and imposition of higher tariffs on vehicles, are leading to a broad contraction in EV demand. This will result in significantly lower shipment volumes and declining revenues for LG Chem's battery materials business over the next several years, with profitability expected to worsen through 2025.
  
• Ongoing global trade protectionism, especially U.S. tariffs targeting Korean chemical and battery material exports, continues to depress demand and raise input costs. Even as political uncertainty around reciprocal tariffs subsides, the new level of import costs will likely compress operating margins and erode competitiveness in key export markets.
  
• The chemical and petrochemical businesses remain exposed to oversupply and rising competition from aggressive capacity expansions in Asia, particularly China. Despite restructuring initiatives, persistent excess capacity and delayed impact from Chinese restructuring threaten industry margins and revenue stability over the medium to long term.
  
• Intensifying competition in battery technology, rapid advances in alternative chemistries such as solid-state and LFP (lithium iron phosphate), and customer inventory reductions ahead of regulatory shifts increase the risk of technological obsolescence and loss of key contracts, undermining both revenue growth and net profit.
  
• Heightened ESG scrutiny and regulatory pressure on emissions and supply chain sourcing-illustrated by stricter PFE and AMPC requirements reducing permissible Chinese content-force LG Chem into costly supply chain shifts and compliance initiatives, raising capital needs and pressuring both earnings and free cash flow in the coming years.

LG Chem Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on LG Chem compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming LG Chem's revenue will decrease by 0.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -3.5% today to 3.4% in 3 years time.
• The bearish analysts expect earnings to reach ₩1693.9 billion (and earnings per share of ₩11442.04) by about August 2028, up from ₩-1724.2 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 17.2x on those 2028 earnings, up from -12.9x today. This future PE is greater than the current PE for the KR Chemicals industry at 12.3x.
• 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 10.13%, as per the Simply Wall St company report.

LG Chem Future Earnings Per Share Growth

Risks

• LG Chem is actively expanding its high-value, high-margin product offerings in battery materials, engineering materials, and specialty chemicals, which are supported by global electrification and renewable energy trends and are likely to drive both revenue growth and higher net margins in the long term.
  
• The company is investing in new U.S.-based cathode materials production, improving its competitiveness and cost structure as local content becomes more important for North American electric vehicle supply chains, which should lead to increased market share and improve operating margins.
  
• Substantial diversification of the customer portfolio and ramp-up of mass production for new products, including shipments to Toyota and other major automakers starting in 2026, are expected to fuel a significant turnaround in sales volumes and earnings following current weakness in the EV market.
  
• LG Chem's proactive restructuring of its upstream petrochemical operations, alignment with Korean government support policies, and shift toward specialty, eco-friendly, and sustainable materials are likely to stabilize revenues and enhance profitability despite cyclical commodity market headwinds.
  
• Accelerating innovation in bioscience and life sciences with focus on oncology, promising clinical candidates, and strategic partnerships (including out-licensing and targeted M&A) create new growth streams that can drive higher revenue and elevate profit margins, particularly as the company recycles proceeds from non-core asset disposals into growth areas.

Valuation

• The assumed bearish price target for LG Chem is ₩280000.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of LG Chem'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 ₩500000.0, and the most bearish reporting a price target of just ₩280000.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩49964.3 billion, earnings will come to ₩1693.9 billion, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of ₩283500.0, the bearish analyst price target of ₩280000.0 is 1.2% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.