Shares of LG Chem on recovery as advanced materials business gets a boost

LG Chem Ltd. logo [Courtesy of LG Chem]

Shares of South Korea’s top chemical giant LG Chem Ltd., which had plunged sharply following the spin-off of its battery division, are beginning to recover the pre-divestiture level on the back of strong foreign buying.

According to the Korea Exchange on Wednesday, shares of LG Chem soared 31 percent this year. The stock gained 80 percent from the lowest peak in March 2022, which is a huge turnaround since they nosedived after the spin-off. LG Chem announced a decision to spin off its battery business in September 2020 and completed the divestiture in December that year.

LG Chem shares plunged to the 610,000 won ($460.3) range at the time as investors were shocked by the announcement. The shares fell to as low as the 430,000 won range in March last year. The stock, however, bottomed out a year ago and has been on a recovery lately. Foreigners net purchased 209.3 billion won in LG Chem shares this year.

The stock gained momentum recently as attention is given to the competitiveness of the key advanced materials business amid a rise in demand for investments in secondary batteries. LG Chem’s advanced materials business is responsible for developing customized products in response to technological changes in the information technology (IT) and automotive sectors.

The market particularly saw potential in secondary battery materials such as cathode materials and separators. LG Chem’s advanced materials business soared to 3.4 trillion won in 2022, up from 2.5 trillion won in 2020.

LG Energy Solution Ltd. logo [Courtesy of LG Energy Solution]

Industry insiders noted that LG Chem has divested its lucrative secondary battery business into a separate entity, LG Energy Solution Ltd., but it nurtured the materials business into a core business in a short time.

The advanced materials division posted an operating profit of 18 billion won in the fourth quarter of last year but profit is projected to reach 154 billion won in the first quarter and 237 billion won in the fourth quarter of this year.

The operating margin of the advanced materials business stood at 11.6 percent last year, followed by that of life science at 8 percent, and petrochemicals at 4.9 percent.

Brokerage houses analyze that LG Chem’s advanced materials business is valued similarly to that of the battery business based on the stake it holds in LGES.

Hi Investment & Securities Co. projected the business value of the advanced materials division at 32.3 trillion won versus 32.9 trillion won of the battery division. The valuation is also more than four times the 7 trillion won of the petrochemical division, which accounts for the company’s largest share of sales. The life science and Farm Hannong divisions were valued at 2 trillion won.

LGES is still a subsidiary of LG Chem that has an 81.8 percent stake after the spin-off. For this reason, LGES’s growth translates into improved consolidated earnings of LG Chem, which is likely to increase if the benefits of advanced manufacturing production credit (AMPC) under the U.S. Inflation Reduction Act (IRA) are reflected in the operating profit of LGES. LGES currently accounts for about 50 percent of LG Chem’s sales.

Securities firms, in the meantime, are proposing a stock target price of 1 million won for LG Chem, up 11 percent from the current level.

According to Samsung Securities Co., LG Chem’s price-to-book ratio (PBR) this year is estimated at 1.75 times, which means that LG Chem is undervalued given that its PBR has moved between 1.1 times and 3.73 times in the past 20 years.

Shares of LG Chem were trading 1.81 percent higher at 789,000 on Thursday morning.