"What Happened While We Weren't Looking?"... LG Energy Solution's Operating Profit Jumps 567% [Heavy Industry ON]

LG Energy Solution posts KRW 756 billion operating profit, 2.5 times market consensus
Samsung SDI expected to remain profitable
SK On expected to post a loss in the KRW 200 billion range

The third-quarter results of South Korea's three battery makers are expected to diverge. LG Energy Solution posted operating profit more than twice market expectations, while Samsung SDI is also expected to remain profitable. SK On, by contrast, is forecast to swing back into the red after turning a profit in the second quarter. Analysts say differences in the companies' results reflect factors such as the expansion of energy storage system (ESS) businesses, factory utilization rates, and changes in customer order volumes amid a slow recovery in the electric vehicle market. However, nonrecurring and policy-related factors, including the Advanced Manufacturing Production Credit (AMPC) and customer compensation payments, are also having a significant impact on each company's results, making underlying profitability excluding these factors a key determinant of future performance.

LG Energy Solution and U.S. General Motors (GM) joint venture plant

According to preliminary third-quarter results LG Energy Solution disclosed on October 8, revenue was 9.6434 trillion won and operating profit was 756 billion won. Revenue rose 59.0% and operating profit increased 25.7% from a year earlier. Compared with the previous quarter, they were up 27.6% and 567.3%, respectively. Operating profit included 416.9 billion won in AMPC benefits under the U.S. Inflation Reduction Act (IRA). Excluding this, revenue was 9.2265 trillion won and operating profit was 339.1 billion won, for an operating margin of 3.7%.

These figures were well above market expectations. The market consensus before the results announcement was 308.1 billion won, making actual operating profit about 2.5 times that figure. On October 1, Samsung Securities forecast LG Energy Solution's third-quarter operating profit at 351.7 billion won and its AMPC benefits at 375 billion won. Actual AMPC benefits were only 41.9 billion won higher than forecast, yet operating profit exceeded the estimate by more than 400 billion won. This suggests that the increase in AMPC benefits alone cannot explain the strong results.

The expansion of battery sales for electric vehicles in Europe and the ramp-up of ESS production in North America are cited as factors behind the strong performance. Before the results announcement, Samsung Securities forecast that third-quarter automotive battery shipments would rise 20% from the previous quarter, citing increased sales to European customers and the restart of a joint venture plant with U.S. General Motors (GM) as key factors. It also projected that ESS sales volume would increase 46%, supported by higher utilization at a new plant in North America.

Analysts say higher factory utilization as a result of increased volumes, along with a reduced fixed-cost burden, also contributed to improved profitability. The securities industry also believes that one-off gains, including compensation from some electric vehicle customers for failing to meet minimum purchase volumes, were reflected in the third-quarter results.

Samsung SDI is also expected to remain profitable in the third quarter. DB Securities estimated the company's third-quarter revenue at 4.095 trillion won and operating profit at 191.8 billion won. Korea Investment & Securities estimated operating profit at 153.7 billion won. Estimates from securities firms range from 150 billion to 190 billion won.

However, a substantial portion of the profit is believed to depend on AMPC benefits and one-off factors. DB Securities' estimate includes 107.5 billion won in AMPC benefits and about 180 billion won in compensation related to the dissolution of its joint venture with GM. A simple calculation suggests that, excluding AMPC benefits and the compensation, the company would have posted a loss of about 95 billion won. By business, DB Securities forecast that the small-battery business would reach break-even for the first time in about two years, supported by a higher share of high-value-added products such as battery backup units (BBUs) and tabless batteries, while ESS revenue would rise 36% from the previous quarter.

SK On, by contrast, could return to a loss after turning a profit in the second quarter. DB Securities forecast that SK Innovation's battery business, which includes SK On's results, would post third-quarter revenue of 1.764 trillion won and an operating loss of 221 billion won, including AMPC benefits. The business recorded operating profit of 822 billion won in the second quarter, buoyed by one-off factors such as customer compensation, but is expected to swing back to a loss in just one quarter.

Eugene Investment & Securities also forecast third-quarter battery business revenue of 2.523 trillion won and an operating loss of 276 billion won. Although revenue estimates vary by securities firm, they agree that the business will post an operating loss in the 200-billion-won range.

Weak demand in the pouch-type battery market for electric vehicles and the resulting decline in utilization are cited as profitability headwinds. LS Securities said that, given the decline in utilization resulting from contraction in the pouch-type battery market, underlying profitability improvements may be limited, particularly since the second-quarter results included one-off factors such as customer compensation.

Securities firms believe that, for the time being, the share of each company's business accounted for by ESS and utilization rates at North American plants will be key factors shaping their results. The key question is how much underlying profitability will improve after excluding AMPC benefits and one-off compensation payments.

This content was produced with the assistance of AI translation services.