[Stocks to Watch This Week] Can't Wait for EVs Alone... Samsung SDI Makes Money with ESS

ESS in Focus as Power Grids Shift Away from China and Data Centers Secure Their Own Power
Expected to Account for 82% of Operating Profit Next Year... Reliance on Tax Credits Remains a Risk

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Samsung SDI, which had struggled amid weak electric vehicle demand, is seeking a breakthrough in the North American energy storage system (ESS) market. Some forecasts suggest that ESS revenue will exceed automotive battery revenue for the first time in the fourth quarter of this year. Analysts say ESS will drive an earnings recovery, as demand from U.S. power grids to reduce reliance on China combines with demand from AI data centers seeking to secure their own power supplies.

The stock has swung sharply this year. At the end of April, it recovered to the KRW 700,000 range, where it had traded during the battery industry's boom in 2021. But the rally later faded, and the stock continued to fluctuate between KRW 300,000 and KRW 500,000. The decline accelerated this month in particular. The share price fell from KRW 545,000 on the 4th to KRW 415,000 on the 9th, a 23.9% drop in three trading days.

Jeong Wonseok, a researcher at iM Securities, said, "The share price correction caused by policy uncertainty should be used as an opportunity to increase exposure to battery cell makers with strong earnings growth potential." He raised his investment rating on the secondary battery sector from "Neutral" to "Overweight" and named Samsung SDI his top pick.

ESS instead of electric vehicles...Expanding U.S. production and orders

Yonhap News Agency

ESS facilities store electricity and supply it when needed. They help offset the intermittent power generation of solar and wind energy and ease the burden on the grid when electricity demand peaks.

Lee Jinmyeong, a researcher at Shinhan Securities, said, "ESS operating profit next year will be KRW 1.28 trillion, accounting for 82% of the company's total." He estimated total operating profit at KRW 1.5739 trillion, up 154% from this year. By contrast, he forecast an operating loss of about KRW 100 billion for electric vehicle batteries.

This forecast factors in the U.S. Advanced Manufacturing Production Credit (AMPC), a program that provides tax credits for batteries and other advanced manufactured products made and sold in the United States, subject to certain requirements.

According to iM Securities, Samsung SDI has set a target of securing more than 120 GWh (gigawatt-hours) in new ESS orders this year and has secured more than 60 GWh so far. The existing production lines of its U.S. joint venture, StarPlus Energy (SPE), have already secured orders for output scheduled through 2028. iM Securities forecasts ESS revenue of about KRW 1.9 trillion in the fourth quarter of this year.

U.S. production capacity is also set to expand. According to Shinhan Securities, Samsung SDI's ESS production capacity in the United States is expected to rise from 19 GWh at the end of this year to 32 GWh at the end of next year. SPE's lithium iron phosphate (LFP) battery line for ESS began mass production last month, with delivery of finished products scheduled for next month.

Jeong said, "As shipments increase, the easing of fixed-cost burdens from higher utilization and the benefits of AMPC from increased U.S. production will work together," adding that profitability is expected to improve.

Data center demand adds to the shift away from China in power grids

Efforts by the United States to exclude China from its battery supply chain are also creating an opportunity for Samsung SDI. Kim Hyunsu, a researcher at Hana Securities, said, "Orders are being concentrated among Korean companies with production facilities in the United States because subsidy and tariff policies require a shift away from China." He added, "This shift is an enduring trend regardless of political affiliation, so continued benefits are expected."

Some analysts also say ESS demand could rise if the Democratic Party, which won last week's U.S. midterm elections, tightens regulations on data centers. As operators take on greater responsibility for the power, water, and environmental burdens of their projects, demand may grow for facilities with their own power generation and storage systems.

Jeong said, "BTM (Behind the Meter) generation, which supplies the power needed while awaiting grid connections, is expected to emerge as a practical alternative." He added, "Given constraints on gas turbine supply and the need to reduce operating costs, the use of combined gas-fired generation, solar power, and ESS is likely to expand." BTM refers to supplying power through generation and storage facilities located on a business's premises.

iM Securities estimates that if the annual growth rate of demand for grid-scale ESS rises to 5% from its previous assumption of 3%, total demand will remain close to its original forecast even if North American data center ESS demand in 2030 is 30% lower than expected.

Separate tax credits from one-off effects

Samsung SDI's reliance on U.S. tax credits warrants attention. Shinhan Securities estimates the company's AMPC for next year at about KRW 1.14 trillion, equivalent to 72% of its forecast operating profit for the year.

One-off gains should also be separated out when comparing quarterly results. In the third quarter of this year, operating profit came to KRW 407.8 billion, including compensation from clients and other items. That exceeded all fourth-quarter forecasts from Hana Securities, Shinhan Securities, Yuanta Securities, and iM Securities, which ranged from KRW 114 billion to KRW 266.6 billion.

Lee Anna, a researcher at Yuanta Securities, said of the fourth-quarter results, "Even after one-off effects such as the compensation received in the third quarter disappear, operating profit excluding those effects is expected to increase substantially from the third quarter."

Analysts have widely differing expectations for the scale of the recovery. Forecasts for next year's operating profit range from KRW 1.3143 trillion to KRW 1.734 trillion. Price targets in reports published this month are KRW 667,000 from Hana Securities, KRW 800,000 from Shinhan Securities, and KRW 913,000 from Yuanta Securities. Ultimately, the key questions are whether the secured ESS orders will translate into actual shipments and higher utilization, and whether profitability can improve excluding tax credits.

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