LG’s battery business made South Korea’s largest initial public offering last week, fueled by the frantic interest of millions of ordinary Koreans, convinced that tensions between the United States and China will push global carmakers to its technology.
“This is the biggest news on the stock market. I really don’t want to miss an opportunity like this, “said Bae Sung-hoon, an office worker who has subscribed to an LG Energy Solution IPO. “Shares will rise as electric vehicle batteries are one of the most promising industries in the country.
The $ 10.8 billion share sale valued the company at approximately $ 70 billion, behind only Samsung and SK Hynix in South Korea. A record 4.4 million retail investors put Won114tn ($ 96 billion) in bids, eventually taking home a quarter of the shares sold.
But the list is only a prelude to the upcoming real battle, as LGES seeks to challenge the dominance of Chinese battery giant Contemporary Amperex Technology worth $ 200 billion – ambition, bankers and industry experts say the Korean group can simply achieve.
“LGES is already a leader in the technology industry, although it lags behind CATL in terms of volume,” said an investment banker close to the deal. “The success of the IPO shows that investors are positive about LGES ‘growth prospects, as the funding gives credence to its growth plans.
James Lim, an analyst at California-based hedge fund Dalton Investments, is among those who see the company taking advantage of the “intensifying technology war” between the United States and China, which he says will give non-Chinese battery makers an advantage over US and European customers.
“This will help LGES increase its global market share, while CATL may find it more difficult to expand abroad,” he said.
Still, challenges remain before South Korea’s battery champion can close the gap, and some investors are wondering if the company can overcome quality problems to beat competition in terms of market share and profitability.
Electric vehicle sales are projected by Deloitte to increase more than 12 times this decade to 31.1 million years, representing almost a third of all new vehicles by 2030. LGES controls about 20% of the global market. EV batteries against 32% of CATL, according to SNE Research.
LGES ranks among the worst performing in the industry in terms of profitability, recording losses in both 2019 and 2020. Last year, it reported an operating margin of 5.9%, less than half of the 12, 5% of CATL, according to SK Securities.
“CATL is a very profitable company because of its cost advantages,” said Lee Chai-woon, chairman of Life Asset Management, referring to cheaper labor costs in China, easier access to raw materials and generous government subsidies for local producers. batteries. “Despite the benefits of LGES funding, it will not be easy to increase profitability amid increasing competition.”
What LGES has is the support of the wider LG Group, one of the largest conglomerates in South Korea, which owns the battery manufacturer through its subsidiary LG Chem. LGES, which has offshore plants in Poland, the United States and China, plans to invest about 8.85 tonnes of Won in these plants by 2025, almost doubling capacity.
“The IPO is absolutely critical to stimulating growth and will give a competitive advantage to increase over others,” said Neil Beveridge, an analyst at Bernstein.
LGES, which has joint ventures with General Motors, Stellantis and Hyundai Motor, is now focused on expanding in the United States. SK Securities estimates that by 2025, nearly half of all electric vehicles made in the United States will be able to use the company’s batteries.
As China’s subsidy rules benefit local companies, Beijing’s industrial policy also encourages South Korean companies to diversify from the world’s largest electric car market.
“CATL is strongly focused on China and is struggling to become global, while LGES is doing well in global markets outside of China,” said Choi Jun Chul, head of VIP Research and Management.
And while China produces 70 percent of the world’s lithium-ion batteries, Beijing will cut subsidies to Chinese manufacturers next year and analysts expect CATL margins to come under pressure.
“In the long run, given the separation, we see[between China and the west]. . . it creates opportunities for companies outside China, in particular LGES, which is CATL’s largest competitor, ”said Beveridge.
Kwon Young-soo, the new CEO of LGES, predicts that its share of the global market will eventually overshadow that of CATL. But serious shortcomings in some of his company’s batteries, which forced GM and Hyundai to make some of the most expensive withdrawals in the industry, scared some investors. Other key customers, including Tesla and VW, also plan to internalize battery production.
“Solving safety issues is very important for partners like GM,” Lim said. “The company will be pushed out by competitors if it can’t.”
Rising commodity prices also add urgency to LGES’s efforts to reduce its dependence on rare earth elements in China, where growing EV sales have led to a shortage of metals vital to battery production.
LG Chem is ready to invest $ 5.2 billion in the production of chemicals and battery materials for electric vehicles by 2025. But Yoon Hyuk-jin, an analyst at SK Securities, said the group still “needs to invest more in projects up downstream to increase the stability of its supply chain ‘.
In the short term, investors are focused on how the battery maker’s shares will develop when trading starts on Thursday.
“The share price will easily double the price of the IPO, given all the fanfare about electric car batteries. Then I’ll just cash in, “said Shin Geum-ok, a housewife who received 19 shares after making offers worth 360 million Won.
But after companies amassed a record 17 tons on the Kospi market in Seoul last year, some fear that LGES’s poor performance could dampen the appetite for major listings in the pipeline, including Hyundai Engineering, Kakao Entertainment and the delivery platform. of Food Market Kurly.
Other South Korean groups may have trouble replicating LGES ‘success, VIP Choi warned, noting that regulators are increasingly focusing on shareholder complaints against companies that reject listing business that dilutes existing shareholders.
“It will not be easy for Korean companies to follow this kind of division and listing tactics.