LG Chemical (051910.KS) BUY / TP KRW490,000 Refining/Chemical/Utility Kang Dong-jin +822-3787-2228 dongjin.kang@hmsec.com

Batteries charged for a turnaround Share price (KRW, Sep 11) 324,000

Upside (%) 51.2

Market cap (KRW bn) 22,872

Shares outstanding (’000) 70,592

Paid-in capital (KRW bn)/ Face value (KRW ) 391/5,000

52-week high/low (KRW) 394,500/307,000

60-day avg. daily T/O (KRW bn) 49

Foreign ownership (%) 38.23

Major shareholders (%) LG and six others 33.38

Price performance 1M 3M 6M

Absolute (%) 2.2 -5.0 -10.2

Relative (%p) -3.4 -2.1 -6.4 K-IFRS, consolidated

(KRW) 19F EPS 20F EPS TP

Previous 13,904 24,733 490,000

Revised 11,845 21,737 490,000

Consensus 11,763 19,882 462,318

Difference (%) 0.7 9.3 6.0

12-month price performance

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LG ChemicalKOSPI

Source: WiseFn, Hyundai Motor Securities

Earnings forecasts and valuations Sales OP NP EBITDA EPS Growth P/E P/B EV/EBITDA ROE Div. yield

(KRW bn) (KRW bn) (KRW bn) (KRW bn) (KRW) (%YoY) (x) (x) (x) (%) (%)

2017 25,698 2,928 1,945 4,330 26,903 43.5 15.1 2.0 7.1 12.9 1.5

2018 28,183 2,246 1,473 3,733 20,203 -24.9 17.2 1.6 7.8 8.9 1.7

2019F 29,911 1,565 883 3,376 11,845 -41.4 27.2 1.4 9.0 5.1 1.9

2020F 36,122 2,536 1,581 4,418 21,737 83.5 14.8 1.3 7.3 8.7 1.9

2021F 41,261 3,144 1,830 5,684 25,262 16.2 12.7 1.3 5.5 9.4 1.9

Note: K-IFRS, consolidated

1) Investment highlights - We expect 3Q19 results to be slightly below consensus due to a weak ABS spread and ESS fire issues. - Batteries will likely generate an operating profit of KRW80bn led by robust top/bottom-line growth in small

batteries as well as widening EV battery margins. - Earnings momentum is expected to pick up further in 4Q19 helped by higher EV battery yields. We continue to

present LG Chem as our chemical sector top pick.

2) Major issues and earnings outlook - We expect 3Q19 results to be slightly below consensus, with sales coming in at KRW7.8tn (+9.3% QoQ, +8.5% YoY)

and operating profit at KRW441.3bn (+65% QoQ, -27% YoY). The lower-than-expected results are mainly because of the weak ABS spread, raw material cost hikes, and recent ESS fire. That said, the turnaround of the battery business should lead to a considerable QoQ increase in operating profit.

- Small battery sales and margins have greatly improved as the company started supplying Tesla with its 21700 battery cells, Samsung Electronics (005930.KS, BUY) for its Galaxy Note 10+, and Apple for its iPhone (with more models adopting L-shaped batteries). We expect quarterly sales to surpass KRW1tn on an operating margin in the high single digits. 1) The media is reporting that LG Chem may supply Tesla’s Shanghai plant. Assuming one Model 3 requires

4,000 cells of the 21700 battery on average, LG Chem is expected to supply 600mn battery cells to produce 150K Model 3s in the initial batch, which alone represents 50% of its production volume last year. This should generate KRW1tn in annual sales. Tesla plans to up the Shanghai plant’s capacity to 500K units per year. Given the tight supply of cylindrical batteries, LG Chem should be able to keep its margins high.

2) According to media reports, Tesla is in talks with CATL as well. However, CATL does not produce cylindrical batteries and it will take time for it to be able to supply Tesla, meaning Tesla will depend on LG Chem for the foreseeable future.

3) Since the Galaxy Note 7’s exploding battery debacle, LG Chem has been supplying batteries for most of Samsung’s mass-market models but it has recently begun to supply batteries for the Note 10+, which we believe is a testament to its technology.

- The recent ESS fire may disrupt production to some degree but it will not spiral into an industry-wide issue as it did in 1H19.

- EV battery production yields continue to improve, and we expect the business to reach the BEP sometime during 3Q19. If the target yield is met in 4Q19, EV battery margins could improve to the high-single digits.

- LG Chem is shipping its batteries to Audi (E-Tron) and Volkswagen (ID 3). It has also sealed a deal with Porsche to supply batteries for more than 20,000 Taycans. We believe LG Chem’s ability to produce wide, silicon-based battery cells will help it to remain the leader in battery technologies.

3) Share price outlook and valuation - The turnaround of the battery business provides robust growth momentum for the company, which we believe will

be reflected in share price performance.

Company Note September 16, 2019

2

COMPANY NOTE

Fig 1. 3Q19 earnings preview (KRW bn)

Quarterly results Change Consensus

3Q19F 3Q18 2Q19 %YoY %QoQ 2Q19F %diff

Revenue 7,847.4 7,234.9 7,177.4 8.5 9.3 7,882.1 -0.4

Operating profit 441.3 602.4 267.5 -26.7 65.0 468.8 -5.9

Operating margin (%) 5.6 8.3 3.7 -2.7p 1.9p 5.9 -0.3p

Pretax profit 381.4 485.1 192.9 -21.4 97.7 411.4 -7.3

Net profit (CI) 281.2 343.4 68.1 -18.1 313.0 287.8 -2.3

Note: K-IFRS, consolidated Source: Company data , FnGuide, Hyundai Motor Securities

Fig 2. Earnings revisions (KRW bn)

2019F 2020F

Revised Previous %change Consensus %difference Revised Previous %change Consensus %difference

Revenue 29,910.8 30,364.6 -1.5 30,088.6 -0.6 36,121.6 36,496.2 -1.0 36,670.9 -1.5

Operating profit 1,565.0 1,705.7 -8.2 1,515.9 3.2 2,536.4 2,824.4 -10.2 2,384.1 6.4

OPM (%) 5.2 5.6 -0.4p 5.0 0.2p 7.0 7.7 -0.7p 6.5 0.5p

Net profit (CI) 882.6 1,027.9 -14.1 920.9 -4.2 1,580.9 1,792.4 -11.8 1,556.4 1.6

Source: Company data, FnGuide, Hyundai Motor Securities

Fig 3. P/B bands Fig 4. ABS spread

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Price 1.2x 1.6x2.0x 2.4x 2.8x

(KRW)

Source: FnGuide, Hyundai Motor Securities Source: Cischem, Hyundai Motor Securities

Fig 5. Tesla Model 3’s battery consumption by range Fig 6. Volkswagen’s ID.3 at Frankfurt Motor Show

Source: Google, Hyundai Motor Securities Source: www.irishtimes.com, Hyundai Motor Securities

2,976

3,744

4,416

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Refining/Chemical/Utility

Kang Dong-jin +822-3787-2228 / dongjin.kang@hmsec.com

Fig 7. Earnings forecasts

(KRW bn) 2017 2018 2019F 2020F 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19F 3Q19F 4Q19F Sales 25,698 28,183 29,911 36,122 6,554 7,052 7,235 7,343 6,639 7,177 7,847 8,247

%QoQ - - - - 1.9 7.6 2.6 1.5 -9.6 8.1 9.3 5.1

%YoY 24.4 9.7 6.1 20.8 1.0 10.5 13.1 14.2 1.3 1.8 8.5 12.3

Basic materials 17,427 18,036 15,276 15,393 4,359 4,671 4,649 4,357 3,749 3,936 3,852 3,740

%QoQ - - - - 1.4 7.2 -0.5 -6.3 -14.0 5.0 -2.2 -2.9

%YoY 20.6 3.5 -15.3 0.8 -3.0 8.2 7.7 1.4 -14.0 -15.7 -17.2 -14.2

I&E materials 3,062 3,273 5,105 5,356 760 765 847 902 1,234 1,254 1,306 1,312

%QoQ - - - - -5.2 0.6 10.8 6.4 36.9 1.6 4.2 0.4

%YoY 15.3 6.9 56.0 4.9 4.7 2.3 7.6 12.5 62.4 63.9 54.1 45.5

Energy solutions 4,561 6,520 9,745 15,461 1,245 1,494 1,704 2,077 1,650 2,009 2,800 3,286

%QoQ - - - - -0.6 20.0 14.1 21.9 -20.5 21.8 39.3 17.4

%YoY 28.0 43.0 49.5 58.7 24.5 33.4 43.4 65.8 32.6 34.5 64.3 58.2

Life sciences 551 575 614 663 131 151 135 158 144 154 146 171

%QoQ - - - - -11.4 15.1 -10.3 16.6 -9.1 7.3 -5.1 16.6

%YoY - 4.3 6.8 7.9 1.3 11.6 -2.5 6.6 9.5 2.1 8.1 8.1

Farm Hannon 604 600 587 657 237 188 92 83 228 170 99 90

%QoQ - - - - 251.0 -20.8 -50.9 -9.8 174.4 -25.6 -41.4 -9.8

%YoY 6.3 -0.7 -2.1 12.0 -6.7 1.0 -4.8 23.1 -3.8 -9.6 8.0 8.0

Operating profit 2,929 2,246 1,565 2,536 651 703 602 290 275 268 441 581

%QoQ - - - - 5.8 8.1 -14.3 -51.9 -4.9 -2.9 65.0 31.6

%YoY 47.0 -23.3 -30.3 62.1 -18.3 -3.2 -23.7 -52.9 -57.7 -62.0 -26.7 100.6

Basic materials 2,808 2,131 1,501 1,457 637 705 548 242 399 382 368 352

%QoQ - - - - 0.5 10.6 -22.3 -55.8 64.7 -4.1 -3.7 -4.3

%YoY 31.3 -24.1 -29.6 -2.9 -13.2 2.8 -27.5 -61.8 -37.4 -45.7 -32.8 45.5

I&E materials 111 -28 64 96 -10 -22 12 -9 4 19 21 21

%QoQ - - - - TR RR TB TR TB 442.9 9.6 0.4

%YoY TB TR TB 50.1 TR TR -71.1 TR TB TB 76.5 TB

Energy solutions 29 209 41 1,001 2 27 84 96 -148 -128 80 237

%QoQ - - - - -84.7 1185.7 212.2 13.6 TR RR TB 196.2

%YoY TB 623.9 -80.6 2366.0 RR 260.0 365.7 599.3 TR TR -5.2 147.0

Life sciences 54 50 53 54 7 16 13 14 12 14 14 14

%QoQ - - - - 677.8 125.7 -16.5 2.3 -12.6 15.8 -1.0 1.2

%YoY - -7.6 6.5 2.0 -66.0 -16.4 0.0 1400.0 68.6 -13.5 2.6 1.4

Farm Hannon 35 15 4 8 45 11 -19 -23 38 9 -21 -22

%QoQ - - - - TB -74.9 TR RR TB -76.2 TR RR

%YoY TB -56.8 -74.0 94.7 -9.9 -16.2 RR RR -15.9 -20.2 RR RR

OPM 11.4 8.0 5.2 7.0 9.9 10.0 8.3 3.9 4.1 3.7 5.6 7.0

Basic materials 16.1 11.8 9.8 9.5 14.6 15.1 11.8 5.6 10.6 9.7 9.6 9.4

I&E materials 3.6 -0.9 1.3 1.8 -1.3 -2.9 1.4 -0.9 0.3 1.5 1.6 1.6

Energy solutions 0.6 3.2 0.4 6.5 0.2 1.8 4.9 4.6 -9.0 -6.4 2.9 7.2

Life sciences 9.7 8.6 8.6 8.1 5.3 10.5 9.8 8.6 8.2 8.9 9.3 8.0

Farm Hannon 5.9 2.6 0.7 1.2 19.2 6.1 -20.4 -27.3 16.8 5.4 -21.0 -25.0

Pretax profit 2,564 1,940 1,314 2,144 653 644 485 158 280 193 381 460

%QoQ - - - - 50.6 -1.4 -24.7 -67.5 77.5 -31.0 97.7 20.5

%YoY 54.5 -24.3 -32.3 63.3 -6.5 -11.7 -30.9 -63.7 -57.2 -70.1 -21.4 191.8

Net profit (CI) 1,945 1,473 883 1,581 531 478 343 120 194 68 281 339

%QoQ - - - - 68.3 -10.1 -28.1 -65.0 61.9 -65.0 313.0 20.5

%YoY 51.8 -24.3 -40.1 79.1 0.0 -17.2 -34.1 -62.0 -63.4 -85.7 -18.1 182.0

Note: TB=turn to black; TR=turn to red; RR=remain in red Source: Company data, Hyundai Motor Securities

4

COMPANY NOTE

Income statement

Balance sheet (KRW bn) 2017 2018 2019F 2020F 2021F (KRW bn)

2017 2018 2019F 2020F 2021F

Sales 25,698 28,183 29,911 36,122 41,261 Current assets 11,206 12,089 14,016 14,765 17,516

Change (%) 24.4 9.7 6.1 20.8 14.2 Cash and cash equivalents 2,249 2,514 2,730 1,706 2,325

Cost of goods sold 20,134 22,837 26,522 33,489 38,018 Short-term investment assets 530 43 37 40 43

% of sales 78.4 81.0 88.7 92.7 92.1 Accounts receivable 4,449 4,381 5,239 6,154 7,182

Gross profit 5,564 5,346 3,389 2,633 3,243 Inventory assets 3,352 4,289 4,882 5,734 6,691

Gross margin (%) 21.6 19.0 11.3 7.3 7.9 Other current assets 625 861 1,127 1,132 1,274

Change (%) 36.9 -3.9 -36.6 -22.3 23.2 Non-current assets 13,836 16,856 20,208 22,372 22,279

SG&A expenses 2,635 3,100 1,824 96 99 Tangible assets 11,211 13,839 16,948 19,135 19,061

% of sales 10.3 11.0 6.1 0.3 0.2 Intangible assets 1,823 2,006 2,115 2,087 2,061

EBITDA 4,330 3,733 3,376 4,418 5,684 Investment assets 352 424 508 514 521

EBITDA margin (%) 16.9 13.2 11.3 12.2 13.8 Other non-current assets 449 586 636 636 636

Change (%) 30.1 -13.8 -9.6 30.8 28.7 Other financial assets 0 0 0 0 0

Operating profit 2,928 2,246 1,565 2,536 3,144 Total assets 25,041 28,944 34,223 37,137 39,794

Operating margin (%) 11.4 8.0 5.2 7.0 7.6 Current liabilities 6,645 7,274 8,002 9,201 10,282

Change (%) 47.0 -23.3 -30.3 62.1 23.9 Short-term debt 958 1,254 1,001 1,001 1,001

Non-operating profit -371 -311 -262 -392 -681 Accounts payable 2,015 2,166 2,643 3,104 3,623

Interest income 240 210 179 30 29 Current portion of long-term debt 493 359 473 532 332

Interest expenses 320 367 346 262 270 Other current debt 3,179 3,494 3,886 4,564 5,326

Other non-operating income -292 -154 -94 -160 -440 Non-current liabilities 2,058 4,348 8,303 8,849 9,013

Subsidiaries/affiliate income 7 5 10 0 0 Bonds 1,047 2,703 5,503 5,703 5,703

Pretax profit from cont ops 2,564 1,940 1,314 2,144 2,463 Long-term debt 519 982 1,847 2,047 2,047

Pretax margin (%) 10.0 6.9 4.4 5.9 6.0 LT financial debt (incl. lease) 27 54 116 116 116

Change (%) 54.5 -24.3 -32.3 63.3 14.9 Other non-current debt 464 610 836 982 1,146

Income tax 542 421 379 515 591 Other financial liabilities 0 0 0 0 0

Profit from continuing ops 2,022 1,519 935 1,630 1,872 Total liabilities 8,703 11,622 16,305 18,050 19,295

Profit from discontinuing ops 0 0 0 0 0 Owners of parent equity 16,169 17,083 17,642 18,763 20,132

Net profit 2,022 1,519 935 1,630 1,872 Paid-in capital 391 391 391 391 391

Net margin (%) 7.9 5.4 3.1 4.5 4.5 Capital surplus 2,274 2,275 2,275 2,275 2,275

Change (%) 57.8 -24.9 -38.5 74.3 14.9 Capital adjustment, etc. -363 -374 -374 -374 -374

NP from controlling interest 1,945 1,473 883 1,581 1,830 Other accumul earnings and comp income -174 -203 -62 -62 -62

NP from non-controlling interest 77 47 52 49 42 Retained earnings 14,039 14,994 15,412 16,532 17,902

Other comprehensive income -146 -86 146 0 0 Non-controlling interest 170 239 276 325 367

Total comprehensive income 1,876 1,433 1,081 1,630 1,872 Total equity 16,339 17,322 17,918 19,088 20,500

Cash flow Key financial data (KRW bn) 2017 2018 2019F 2020F 2021F (KRW, x, %) 2017 2018 2019F 2020F 2021F Operating cash flow 3,181 2,125 2,592 3,066 4,049 EPS (based on net profit) 27,990 20,865 12,587 22,429 25,859

Net profit 2,022 1,519 935 1,630 1,872 EPS (based on parent net profit) 26,903 20,203 11,845 21,737 25,262

Depreciation on tangible assets 1,305 1,379 1,715 1,813 2,473 BPS (based on total equity) 208,717 221,281 228,893 243,836 261,870

Amortization on intangible assets 97 108 96 68 66 BPS (based on owners of parent equity) 206,544 218,227 225,365 239,683 257,180

FX-related profit 0 0 20 40 320 DPS 6,000 6,000 6,000 6,000 6,000

Dec (inc) in working capital -715 -1,264 -450 -486 -683 P/E (based on net profit) 14.5 16.6 25.6 14.4 12.5

Others 472 383 276 0 0 P/E (based on parent net profit) 15.1 17.2 27.2 14.8 12.7

Investing cash flow -1,640 -3,639 -5,303 -4,089 -2,769 P/B (based on total equity) 1.9 1.6 1.4 1.3 1.2

Dec (inc) in investment assets 3 -67 -74 -6 -6 P/B (based on owners of parent equity) 2.0 1.6 1.4 1.3 1.3

Decrease in tangible assets 403 442 66 0 0 EV/EBITDA (reported) 7.1 7.8 9.0 7.3 5.5

Increase in tangible assets (capex)

-2,253 -4,219 -5,123 -4,000 -2,400 Dividend yield 1.5 1.7 1.9 1.9 1.9

Others 206 205 -171 -83 -363 Growth (%)

Financing cash flow -737 1,794 2,878 -1 -660 EPS (based on net profit) 49.3 -25.5 -39.7 78.2 15.3

Increase (decrease) in debt -768 804 657 200 0 EPS (based on parent net profit) 43.5 -24.9 -41.4 83.5 16.2

Increase (decrease) in bond 1,008 1,656 2,800 200 0 Profitability (%)

Increase in capital 1,139 0 0 0 0 ROE (based on net profit) 13.3 9.0 5.3 8.8 9.5

Dividend -386 -494 -484 -460 -460 ROE (based on parent net profit) 12.9 8.9 5.1 8.7 9.4

Others -1,729 -172 -95 59 -200 ROA 8.9 5.6 3.0 4.6 4.9

Other cash flow -29 -15 49 0 0 Stability (%)

Increase (decrease) in cash 775 264 216 -1,025 619 Total liabilities/equity 53.3 67.1 91.0 94.6 94.1

Beginning cash 1,474 2,249 2,514 2,730 1,706 Net debt/equity 1.6 16.2 34.5 40.1 33.3

Ending cash 2,249 2,514 2,730 1,706 2,325 Interest coverage 29.3 16.6 7.1 9.7 11.7

Note: K-IFRS, consolidated

5

Refining/Chemical/Utility

Kang Dong-jin +822-3787-2228 / dongjin.kang@hmsec.com

Investment rating and target price history Two-year price chart

Date Rating TP Difference (%)

Average High/Low

18/11/23 BUY 530,000 -34.0 -31.1 18/12/14 BUY 530,000 -34.2 -31.1 19/01/04 BUY 530,000 -33.9 -30.2 19/01/22 BUY 530,000 -33.3 -28.5 19/01/31 BUY 530,000 -32.7 -28.3 19/02/15 BUY 530,000 -31.7 -25.6 19/03/06 BUY 530,000 -31.1 -25.6 19/04/22 BUY 530,000 -31.0 -25.6 19/04/25 BUY 530,000 -31.9 -25.6 19/05/31 BUY 530,000 -32.0 -25.6 19/06/04 BUY 490,000 -29.4 -26.8 19/07/16 BUY 490,000 -29.0 -26.2 19/07/25 BUY 490,000 -31.3 -26.2 19/09/16 BUY 490,000 - -

Compliance note • The author(s) of this report does(do) not have any interests in the company(ies) covered herein. • Hyundai Motor Securities has not disclosed the material contained in this report to any institutional investor or third party prior to its publication. • The author(s) of this report does(do) not own more than 1% of the shares of the company(ies) covered in this report. • Hyundai Motor Securities has not taken part in securities issuance (DR, CB, IPO, and market making) of the company(ies) covered in this report as lead manager for

the past six months. • This report accurately reflects the author(s)’s professional views and was written without any undue external influence or interference.

Investment rating Hyundai Motor Securities offers three sector investment ratings based on six-month forward fundamentals and share price outlook.

• OVERWEIGHT: Sector-wide fundamentals and share prices are expected to turn up. • NEUTRAL: No meaningful fundamental improvement is expected. • UNDERWEIGHT: Sector-wide fundamentals and share prices are expected to turn down.

Hyundai Motor Securities offers three company investment ratings based on the relative return expected in the following six months, based on the closing price on the date of rating declaration.

• BUY: Excess return of +15%p or more • MARKETPERFORM (M.PERFORM): Excess return of between -15%p and +15%p • SELL: Excess return of -15%p or less

Stock ratings distribution (July 1, 2018-June 30, 2019)

Rating Count % of rating category BUY

MARKETPERFORM SELL

148 18 0

89.16 10.84

0.0

• This report has been prepared for informational purposes only and thus may not be reproduced or distributed without the prior written consent of Hyundai Motor Securities. • The information and statistical data contained herein were taken from sources believed to be relia ble but in no way can be guaranteed and, therefore, final investment decisions should be

made based on each client’s own judgment. • This report cannot be used as evidence in any legal disputes related to the client’s investment de cisions.

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