Investors Upbeat About LG Chem
‘Green’ Trend Powers Global Demand for Eco-Friendly Batteries
By Kim Yoo-chul
In the electronic parts business, there are a few things that are considered as surefire indicators of success ― the company's size, level of investment, timing of strategies, market conditions and a wealth of clients.
When considering these and other key factors, LG Chem, the largest South Korean chemical company, may expect a bright 2010, according to industry watchers.
The country's leading producer of lithium-ion rechargeable batteries, is benefiting from "green tech efforts" pushed by different governments and is adding a growing number of carmakers to its list of clients, including General Motors (GM).
"The company's earnings momentum will be continued throughout 2010, although the fourth quarter could come with a seasonal dip. Demand in petrochemicals is solid, and the company looks to have some big deals in the pipeline with European carmakers. The company's third-quarter earnings were impressive," said Lim Ji-soo, an analyst at Shinhan Financial Investment.
LG Chem surprised the industry with a profitable third-quarter earnings report, where the company's net profit of 543 billion won (about $464.7 million) represented an 83 percent increase year-on-year.
The higher demand for rechargeable batteries, helped by the Chinese government's economic stimulus package that included green tech as a key element, was an important factor that drove the profit hike, company officials said.
LG Chem has also benefited from the increasing demand for batteries in mobile phones, laptop computers, and hybrid and electronic vehicles in China, and other parts of the world.
Benefiting From Green Bandwagon
Rising sales of rechargeable batteries and strengthened efforts in the auto industry to produce eco-friendly cars paint a rosy picture for LG Chem in 2010.
The operating profit of LG Chem's electronic materials division, which designs and produces rechargeable batteries, more than doubled during the third-quarter compared to last year, and analysts believe that fourth-quarter numbers could be even more impressive.
"Batteries are the driving factor behind LG Chem's growing profit. The company's major deals with GM, Hyundai-Kia, CT&T and Hyundai Mobis show that the company has the auto industry's respect," said an analyst from Daewoo Securities.
Japanese companies had dominated the market for rechargeable batteries for vehicles, but LG Chem has been gaining on its rivals by focusing on the fast-growing lithium-ion batteries segment.
The firm is strengthening its collaboration with key business partners in the auto industry to sustain growth. Hyundai Motor is a major client that is looking to move aggressively into the market for low emission cars.
Although most of the demand for the batteries is being generated by consumer electronics products, cars are expected to be the next gold mine.
Governments in North America, Europe and Asia are giving massive subsidies to eco-friendly business projects amid pressure to cut greenhouse gas emissions.
The United States, in particular, is hoping that electric vehicles and other eco-friendly cars will help revive the country's struggling auto sector.
GM and Nissan are among the major car makers showing a strong commitment to electric vehicles.
To meet the expected increase in demand, LG Chem is investing 1 trillion won in a new production facility for lithium-ion batteries in Korea, and also plans to start the construction of another manufacturing line in Michigan in July next year.
Some $300 million will be spent to build the U.S. plant, which will start commercial production of batteries for electric and hybrid vehicles in 2012.
Nearly half of the investment or $150 million is coming in the form of a cash grant from the U.S. federal government, while the state of Michigan will give $130 million in tax credits to LG Chem for plant construction.
The South Korean government, meanwhile, is also going all-out to nurture promising industries. In doing so, it recently ruffled some feathers in Japan.
It instituted rules requiring manufactured products sold in the country to carry certificates from South Korean organizations ― ones that it officially designates itself.
"The investment timing was good and situation, favorable. Amid intensifying competition between global carmakers in battery supremacy, LG Chem, previously just a parts supplier, is forecast to expand sales and market share," Daewoo said.
"Technology standards for lithium-ion batteries will soon be standardized. After that a few proven players may get bigger chances and LG Chem is one of them," the local brokerage added.
Flat-Screen Biz as Backup
In addition to batteries, LG Chem's petrochemical division and LCD-making units are helping the chemical maker strengthen its cash-balance sheets.
It is planning to invest 3 trillion won or $2.5 billion by 2018 in producing glass for liquid crystal display (LCD) panels in Paju, Gyeonggi Province.
Work will start this year on a production line ― to open by early 2012 ― and six more will be added in phases by 2018.
When all the lines are operating LG Chem said it aims to produce more than 50 million square meters (538 million square feet) of LCD glass every year, with annual sales of 2 trillion won or $1.7 billion).
The LCD glass business is a high-yielding segment as the flat-screen business has also been rapidly growing thanks to rising demand for consumer electronics amid eased woes in global economies.
LCD glass is the key component in making LCD panels. LG Chem inked a technology import contract in February 2009 with Schott of Germany. It is supplying the glass to LG Display, the world's No. 2 maker of LCD panels.
"Batteries aren't the only driver for LG Chem. Its efforts for business diversification will create more synergy coupled with the battery business," Lee Hak-moo, an analyst at Mirae Asset Securities, said.
With the glass, earnings in the company's petrochemicals division are expected to rise thanks to Beijing's massive economic packages.
"Rising oil prices and strong upstream products, and even good prices based on domestic and emerging market demand for PVC products will lift margins," Ahn Sang-hee, an analyst at Daishin Securities, said.
A stable margin based on consistent demand is expected to increase with the need for acrylates and plasticizers, while the recovery of the auto industry is helping rubber and specialty resin demand, analysts add.
"Steady business results are expected in various competitive non-petrochemical downstream products with resilient fundamentals," Ahn said.