LG Energy IPO fever lifts Korea’s battery stocks

LG Energy Solution Ltd., the world’s No. 2 battery maker, attracted a record $9.65 trillion demand for South Korea’s largest-ever initial public offering from institutional investors, raising hopes for a box-office success of the listing.

LG Energy’s market capitalization is expected to reach 100 trillion won ($84.3 billion), pushing up stocks of its parent LG Chem Ltd. and competitors such as SK Innovation Co. and Samsung SDI Co., as investors believed they were undervalued.

Foreigners and local institutional investors snapped up LG Chem and SK Innovation to manage risks of inability to buy enough LG Energy shares on the Kospi debut scheduled for Jan. 27. Only about 10% of LG Energy stocks are expected to be available for trade after the listing since 60% of the investors who participated in the institutional subscription have already agreed to a lock-up clause, promising not to sell the stock post-IPO for a certain period of time, according to sources.

In 2021, LG Chem’s stock lost ground, ending at the lowest close of the year, on concerns that the separation of its battery subsidiary LG Energy would hurt shareholder value.

LG Chem, however, rebounded from the beginning of 2022 on a continuous buying spree of foreign investors. LG Chem soared 26% in the first 12 days of the year.

COMPETITORS RALLY

Investors sought other alternatives to LG Energy after the surge in LG Chem’s stock. SK Innovation was their top pick.

“Fund managers may face difficulty in tracking benchmark returns if they cannot buy such a large-cap,” said Midas Asset Management Co.’s Co-CEO Shin Jin-ho. “They are buying LG Chem as well as SK Innovation that is most undervalued among battery-related stocks in case they cannot buy LG Energy.”

SK Innovation advanced 10.9% during the period on strong demand from both foreign and local institutional investors. Samsung SDI rose 0.6%.

The more LG Energy’s stock rise after the IPO, the more undervalued its competitors look, financial market sources said.

“Some expected LG Energy’s market capitalization would rise to 100 trillion won from 70 trillion won at the listing,” said Growth Hill Asset Management Co.’s CEO Kim Tae-hong.

“SK On’s battery production capacity will be half of LG Energy Solution in 2025. So, SK On’s value should be around 50 trillion won in theory, but its total market capitalization was merely 24 trillion won,” Kim stressed, indicating the stock of SK Innovation, the parent of the battery subsidiary SK On, has room for further gains.

TURNAROUND IN BATTERY BUSINESS

SK Innovation was another share sold off last year along with LG Chem due to worries about a split-off of a core business. Its stock lost 8.8% on July 1, 2021, when the company said it considered the separation, and had stayed sluggish since then.

But sentiment improved as presidential candidates for the March 9 election both at the ruling and main opposition parties pledged measures to protect shareholders from practices of a listing after a split-off. SK Innovation expects SK On’s IPO after 2023.

Its battery business is expected to turn black. “It is expected to see not only growth in the battery unit’s sales but also a turnaround through the economy of scale,” said Hi Investment & Securities analyst Jeon Yoo-jin. “That would become a key factor to justify its valuation that had been alienated.”

SK Innovation’s main energy business improved further as refining margins continued to recover from the COVID-19 pandemic-caused economic slowdown. SK Innovation was forecast to post an operating profit of 2.4 trillion won last year, compared to a 2.7 trillion won loss in 2020. Its 12-month forward price-to-earnings ratio is just 13.99 times as its stock prices remained weak despite healthy earnings forecasts.

Write to Jae-Yeon Ko at yeon@hankyung.com
Jongwoo Cheon edited this article.