US Battery Production And EV Applications Will Drive Future Success

Key Takeaways

• Expanding U.S. prismatic battery production and new applications for cylindrical batteries could boost Samsung SDI's market position and revenue growth.
  
• Strategic increases in production efficiency and the ESS market's expansion may enhance Samsung SDI's profitability and diversification.
  
• Aggressive CapEx and slowing demand pose financial risks, as volatility from tariffs and underperforming segments impact revenue, margins, and future cash flows.

Catalysts

Manufactures and sells batteries in South Korea, Europe, China, North America, Southeast Asia, and internationally.

• The expansion of prismatic battery production capabilities in the U.S., including operations at the Stellantis joint venture and breaking ground for a GM joint venture, are expected to strengthen Samsung SDI's market position, potentially leading to increased future revenue from EV battery sales.
  
• The initiation of mass production for 46-phi cylindrical batteries and expansion into new applications like EV projects and robots could lead to revenue growth and diversification of product sales, positively impacting net margins through higher utilization rates.
  
• The rapid growth of the ESS market, driven by renewable energy expansion and rising power demand from AI, positions Samsung SDI to achieve continual revenue growth and improved profitability in the ESS segment.
  
• Samsung SDI's strategic plans for increasing production efficiency and capacity, particularly in small batteries and semiconductor materials, could lead to reductions in fixed costs and enhanced economies of scale, thereby potentially improving net margins.
  
• The development and future mass production of all solid-state batteries by 2027, coupled with their application in emerging markets like robots and UAM, hold the potential to diversify revenue streams and sustain long-term earnings growth.

Samsung SDI Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Samsung SDI's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.3% today to 8.0% in 3 years time.
• Analysts expect earnings to reach ₩1944.0 billion (and earnings per share of ₩29010.69) by about May 2028, up from ₩1650.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩2925.6 billion in earnings, and the most bearish expecting ₩976.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, up from 7.1x today. This future PE is greater than the current PE for the KR Electronic industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 2.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.76%, as per the Simply Wall St company report.

Samsung SDI Future Earnings Per Share Growth

Risks

• Slowing market demand has led to a significant decrease in revenue (down 15% Q-o-Q and 34% Y-o-Y) and a substantial operating loss, which negatively impacts earnings and profitability.
  
• Increased volatility associated with tariffs, particularly from U.S. policy uncertainties, could further pressure costs through increased raw material expenses and potentially reduced demand, affecting both revenue and net margins.
  
• The continued underperformance of the Battery business, with a decrease in revenue due to destocking and seasonality effects, alongside low utilization rates, suggests ongoing challenges in improving revenue and margins.
  
• Samsung SDI's aggressive CapEx approach, including investments in markets with low utilization, contrasts with historical conservatism and might strain financials if market demand projections do not materialize as expected, impacting future cash flows and earnings.
  
• Fluctuations in EV demand, especially in North America due to tariffs and in Europe due to regulatory changes, could lead to demand volatility and uncertainty, influencing the stability of revenue streams and profitability.

Valuation

• The analysts have a consensus price target of ₩254808.726 for Samsung SDI 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 ₩480000.0, and the most bearish reporting a price target of just ₩127000.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩24321.7 billion, earnings will come to ₩1944.0 billion, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of ₩176000.0, the analyst price target of ₩254808.73 is 30.9% 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.