SK Innovation takes charge after EV battery settlement with LG Chem

The demand for electric vehicles (EVs) is growing rapidly, as is the EV battery industry, which has been dominated by a few large players. In 2020, the Chinese CATL (300750.SZ), South Korea’s LG Chem (051910.KS) and Japan’s Panasonic (6752.T) had a combined electric vehicle battery market share of 68%, according to estimates by Goldman Sachs.

This dominant trio is set to have a potentially powerful new competitor in the form of South Korean SK Innovation (096770.KS), which is part of the billionaire Chey Tae-won’s SK Group, the country’s third largest conglomerate. After agreeing to pay 2,000 billion won ($ 1.8 billion) regulation to LG Chem for the alleged theft of its intellectual property, SK Innovation is now putting the pedal to the metal in the battery sector for electric vehicles. The market saw the deal as a clear victory for SK Innovation, whose shares gained 12% on the first day of listing after it was announced.

The United States International Trade Commission (ITC) had ruled in favor of LG Chem on February 10, which means that SK Innovation has not been licensed to produce batteries for electric vehicles in the United States. The settlement came on the 11th hour of a 60-day window during which the Biden administration could overturn the ITC decision. By setting up shop, SK Innovation is now free to produce electric vehicle batteries in the United States, and it saves the Biden administration from having to step in to advance its electric vehicle program. SK Innovation to complete construction of $ 2.6 billion plant in Georgia that will supply up to 310,000 EV batteries per year at Ford Motor Co. and Volkswagen AG. Here are some other things you should know:

SK Innovation has deep pockets and really wants to expand into EV batteries.

This intellectual property fight was a battle of titans. SK Innovation and LG Chem are subsidiaries of two of South Korea’s largest chaebols, SK Holdings and LG. The SK group of companies is a sprawling industrial conglomerate employing more than 70,000 people in more than 90 companies. Now it is aggressively growing in EV batteries.

In addition to EV batteries, SK Innovation, which lost $ 1.3 billion in 2020 and is not expected to make a profit until 2022, manufactures separators, which prevent batteries from exploding during the charging process. It also owns Korea’s largest oil refinery. The company’s single-digit share in the EV battery business is well below the shares of around 25% of LG Chem and CATL each. He seemed like he was ready to do almost anything to grow taller. According to LG Chem’s complaint to the ITC decision, SK Innovation hired 80 LG Chem employees to gain access to its rival’s trade secrets. The ITC concluded that SK Innovation destroyed documents, allegedly to cover up the alleged theft. And now he is paying LG Chem a heavy settlement. SK Innovation must see this as a valid table stake to enter the US market for electric vehicle batteries.

What is the case with the bull?

In 2020, SK Innovation delivered 10 gigawatt hours of electric vehicle batteries to automakers, up 195% from 2019. Its plant in the state of Georgia will complement existing plants in South Korea and China, as well. than those planned in Hungary and Poland. In total, its manufacturing capacity will reach 125 gigawatt hours (including joint ventures) by 2025. By comparison, CATL had 87 gigawatt hours of capacity in 2020, which is expected to reach 414 gigawatt hours in 2025.

SK Innovation counts Volkswagen and Ford in the United States, Daimler in Europe and Hyundai / Kia in Asia as flagship suppliers. Strong deliveries of the Hyundai Kona EV in Europe and the Kia Niro EV have spurred growth, and there may be more to come. Relations between LG Chem and Hyundai / Kia deteriorated when the top-selling Kona EV had to be recalled after vehicle fires were blamed on LG Chem’s batteries, and rumor has it that the loss of LG Chem could be the gain of SK Innovation.

The BNEF predicts that global sales of electric cars will grow from 1.7 million units, or 2.6% of cars sold, in 2020, to 26 million units, or 28% of all cars sold, by 2030. Goldman Sachs analyst Nikhil Bhandari, who has a “buy” rating on SK Innovation, believes he can maintain an 8-10% market share by 2030, but believes the stock only takes into account 3 to 5% market share. Bhandari estimates that the company will make a profit in 2022. Its price target, given the regulations, is 350,000 W, offering shareholders a possible return of 30%.

What are the risks ?

SK Innovation has an unusual business setup and corporate governance that is far from exceptional. Net debt to equity is high, at 52.4%, and its leverage will likely increase as it expands its manufacturing capacity. Asset sales could help reduce leverage. Options include a recent announcement sale of its stake in two Peruvian gas fields for 1.25 trillion won, the potential Initial Public Offering of its activity as a separator, or a possible to sell of its subsidiary SK Lubricants, among others.

Another threat to the company’s history is the trend towards internalization of batteries, as seen with Tesla and, more recently, Volkswagen. On its Power Day in mid-March, Volkswagen announced that it was building an impressive 240 gigawatt hours of electric vehicle battery installations across Europe. Some of that will be in-house and some through joint venture partners Northvolt AB, with whom it recently placed a $ 14 billion order for electric vehicle batteries, and solid-state battery maker QuantumScape, although ‘it does not exclude buying from existing partners such as SK Innovation. .

The big question is whether the prices will remain rational as players develop their abilities. Otherwise, companies like SK Innovation could find themselves in a wall.

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