New Plant Utilization And Expanded Cathode Business Will Strengthen Future Operations

Key Takeaways

• Improved profitability in Petrochemical division due to higher spreads, new plant utilization, and expanded shipments boosts future operating profit.
  
• Strategic diversification with non-captive customer expansion in cathode business and focus on premium products aims to boost revenue and net margins.
  
• Increased costs across divisions, geopolitical risks, and economic uncertainties present challenges to LG Chem's profitability, prompting a conservative investment approach to capex.

Catalysts

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

• LG Chem's Petrochemical division expects improved profitability due to higher spreads from falling raw material prices, new plant utilization, and expanded shipments to North America, positively impacting future operating profit.
  
• The Advanced Materials division is developing high-voltage mid-nickel and LFP battery tech, targeting mass production in 2026 and 2027, potentially enhancing revenue from new market segments.
  
• LG Chem is focusing on non-captive customer expansion for the cathode business, targeting over 30% by 2028. This strategic diversification could boost revenue and earnings as dependence on single customers diminishes.
  
• The Energy Solutions segment anticipates sustained volume growth driven by expanding supply for EVs and energy storage systems despite potential short-term inventory adjustments, aimed at maintaining top-line growth.
  
• The company plans to enhance its portfolio by restructuring lower-margin segments and concentrating on premium products, potentially increasing net margins through an optimized product mix and expanded market presence.

LG Chem Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LG Chem's revenue will grow by 17.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.4% today to 3.2% in 3 years time.
• Analysts expect earnings to reach ₩2535.6 billion (and earnings per share of ₩78497.82) by about December 2027, up from ₩-212.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩7481.0 billion in earnings, and the most bearish expecting ₩1562.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.8x on those 2027 earnings, up from -96.8x today. This future PE is lower than the current PE for the KR Chemicals industry at 22.3x.
• Analysts expect the number of shares outstanding to decline by 25.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.97%, as per the Simply Wall St company report.

LG Chem Future Earnings Per Share Growth

Risks

• The Petrochemical business showed an operating loss in Q3 due to increased raw material costs and currency depreciation, suggesting potential volatility in margins if raw material prices do not stabilize. This could impact future earnings negatively.
  
• The Advanced Materials division experienced a decrease in both shipment volume and average selling price (ASP) of battery materials, with an expected further decline in sales and profitability due to inventory adjustments and off-peak seasons. This could lead to reduced revenue in the coming periods.
  
• The Life Sciences division is incurring increased R&D costs for future projects, which is limiting profitability despite strong product shipments. Continued high R&D expenses could constrain earnings growth.
  
• Geopolitical risks and a slowdown in global economic recovery present significant uncertainties, which might challenge revenue and profitability across all business areas in the near future.
  
• LG Chem has decided to adopt a conservative investment approach due to market volatility and macroeconomic uncertainties, reducing its CapEx plans. This caution reflects potential constraints on growth and could impact future earnings negatively if market conditions do not improve.

Valuation

• The analysts have a consensus price target of ₩462206.9 for LG Chem 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 ₩660000.0, and the most bearish reporting a price target of just ₩380000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₩79915.0 billion, earnings will come to ₩2535.6 billion, and it would be trading on a PE ratio of 7.8x, assuming you use a discount rate of 10.0%.
• Given the current share price of ₩262500.0, the analyst's price target of ₩462206.9 is 43.2% 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.