Korean EV battery makers' shares tumble on Morgan Stanley downgrade

Shares of South Korea’s three leading electric-vehicle (EV) battery makers LG Chem Ltd, SK Innovation Co. and Samsung SDI Co. fell 5% on August 14, after Morgan Stanley downgraded all three company's shares, which had rallied by double to triple digits year to date on expectations of strong results.

The US securities firm said that the current momentum may ride on global stimuli measures but the fundamentals have not changed, adding that EV battery market's valuations should be approached from a sector-oriented context.

“EV growth is on autopilot but stocks are at bull levels already,” Morgan Stanley said in its recent research note, noting less room for the already bullish companies to gain further.

It downgraded LG Chem from overweight to equal weight, SK Innovation from equal weight to underweight, and Samsung SDI from overweight to underweight.

Morgan Stanley's downgrade marks an abrupt turn from just a week ago, when the three rechargeable battery makers were the local market’s top picks, emerging as Korea’s leading shares. The three companies’ shares had repeatedly posted fresh record highs on expectations of higher demand from automakers once the global economy recovers from the coronavirus impact.

The report is also in stark contrast to Korea’s securities industry, which remains eager for additional growth in the EV battery sector.

TESLA SET TO BE GAME CHANGER -- ALL EYES ON BATTERY DAY

"The Tesla Battery Day could be a game changer, and based on what we know so far, there is a growing risk of Tesla becoming a new battery competitor armed with superior technology," said Adam Jonas, Morgan Stanley's US auto analyst referring to Tesla's highly anticipated September 22 event.

The upcoming entry of Tesla in the battery market may limit the scope for margin improvements, but such concerns appear to be overlooked by the financial markets and investors who are in a wait-and-see mode.

Such concerns are valid given Tesla’s recent moves, which include acquiring Maxwell, known for its patented dry battery electrode technology, along with Hibar Systems’ battery manufacturing process. Further, the US-based energy giant's appointment of Jeff Dahn, a leading battery researcher with numerous battery-related patents under his sleeve, and the supply of battery formation equipment to Tesla’s Fremont plant all point to Tesla's likelihood of looming large on battery landscape.

The research house said that investors may revisit the Korean stocks at more attractive prices after they price in potential secular risks from the Tesla Battery Day.

Morgan Stanley estimates that share prices of the three Korean EV makers have priced in more than the projected 40% revenue growth,  which exceeds EV penetration forecasts of 24% by 2030. Currently, the EV battery makers are trading at all-time highs, or about 30 times their forecast price-earnings ratios.

However, Morgan Stanley lifted the target prices for both LG Chem and SK Innovation to 750,000 won and 150,000 won from 660,000 won and 130,000 won, respectively. Samsung SDI's target price was cut slightly to 400,000 won from 420,000 won.

On August 14, LG Chem, the fifth-largest cap on the main KOSPI closed at 700,000 won, the first time for a 5%-drop since March 19 when the coronavirus struck the stock market. Samsung SDI ended down 5.73% at 444,000 won and SK Innovation finished down 5.49% at 172,000 won.

KOREAN SECURITIES STILL OPTIMISTIC

Meanwhile, Korea's securities industry remains optimistic towards domestic battery makers’ growth given abundant market liquidity alongside increased sales of European EVs and improved profitability.

“Domestic battery makers’ main market Europe is showing strong growth in EV sales and LG Chem posted a surplus in its battery business,” said Junghoon Chang, an analyst at Samsung Securities, on August 12.

Chang also suggested that a different model be used for EV battery makers' valuations.

“Generally 12-months returns are used in valuation metrics but battery makers secure about two years' supply from clients, meaning assessments should be based on 24-months returns,” Chang said.

Write to Ji-Yeon Sul at sjy@hankyung.com