Dust over Tesla settles; Morgan Stanley upgrades LG Chem to ‘overweight’

South Korea’s LG Chem Ltd. is an attractive stock with 27% upside potential on removal of uncertainty over its battery business spin-off and Tesla Inc.’s Battery Day, according to US securities firm Morgan Stanley.

In its research note dated Sept. 23, Morgan Stanley upgraded LG Chem to overweight from equal weight and raised its target price for the stock to 800,000 won from 750,000 won. On the stock exchange, LG Chem was trading 1.6% lower at 620,000 won on Thursday afternoon.

“It’s been a challenging few weeks for LG Chem investors. A confluence of news and announcements caused a correction. However, we view overhangs and issues as mostly priced in now,” Morgan Stanley said in the research report. “LG’s battery business fundamentals remain largely unscathed and healthy, and chemicals present upside.”

Last month, the US brokerage house cut its views on South Korean electric-vehicle batter makers, saying their share prices overshot above their fair values. It also raised concerns that Tesla’s expected entry into the battery market may limit the scope for margin improvements for battery suppliers such as LG.

But in its latest report, Morgan Stanley said the Tesla-related overhang is over and it’s again time for investors to buy into LG Chem.

“While (Tesla’s) Battery Day announcement may raise concerns over potential competition, we still believe there are many execution risks remaining, even for Tesla, to achieve its ambitious targets. Meanwhile, further opportunity remains for LG Chem within Tesla’s upcoming capacity requirements,” it said.

At its annual Battery Day on Sept. 22, Tesla Chief Executive Elon Musk said the company will make next-generation batteries for its electric cars in-house to cut costs. Analysts said the Tesla move is aimed at alleviating the expected short supply from other makers, rather than cut ties with suppliers, as the US company plans to aggressively raise its EV production volumes.

RECENT CORRECTION EXCESSIVE

Morgan Stanley said LG Chem’s share valuation has become appealing following an over 20% correction from its peak, partly caused by its announcement in mid-September to split off its lucrative battery business as a subsidiary.

“LG Chem has corrected more sharply in response to the sooner-than-expected split-off announcement,” it said.

Morgan Stanley also noted LG Chem’s upside potential as a chemicals company even after it spins off its battery division. “The company’s chemicals business should remain a source of upside risks to overall earnings,” it said.

Reflecting its positive views on LG Chem, Morgan Stanley raised the company’s third-quarter operating profit estimate to 759 billion won ($648 million) on a consolidated basis, above the market consensus of 680 billion won.

Write to Jae-Yeon Ko at yeon@hankyung.com