Samsung SDI: EV Battery Momentum Still Solid
Summary
- 1Q20 results beat consensus estimates.
- Cylindrical batteries are becoming more widely adopted.
- Tesla is aggressively beefing up its capacity.
Investment highlights
1Q20 results beat the prematurely lowered consensus estimates. EV battery earnings were stronger than anticipated. 2Q20 earnings are unlikely to increase much QoQ because of the coronavirus pandemic but earnings from EV batteries should remain on the rapid growth track throughout the year. Strengthening European environmental laws work to accelerate major OEMs' efforts to convert to EVs. Mass production of Gen 5 batteries is scheduled to begin next year. Samsung SDI (OTCPK:SSDIY) continues to excel its Chinese peers with the technological gap widening even further. We continue to view SDI in a positive light, and maintain BUY and our KRW380,000 target price.
Major issues and earnings outlook
SDI reported higher-than-expected results for 1Q20, with sales of KRW2.4tn (-15% QoQ, +4.1% YoY) and operating profit of KRW54bn (+168% QoQ, -55% YoY). Small battery earnings were weak due to anemic demand for cylindrical batteries, COVID-19 and unfavorable seasonality. We do not see earnings meaningfully recovering QoQ in 2Q20. Margins remain low compared with the past. Cylindrical batteries are becoming more widely adopted, and Tesla (TSLA) is aggressively beefing up its capacity. We expect to see cylindrical batteries increasingly used in EVs going forward. Panasonic (OTCPK:PCRFF) remains cautious, while there are no Chinese players capable of mass-producing cylindrical batteries. EV battery earnings were better than expected in 1Q20 thanks to: 1) 82% growth in EV sales during the quarter in Europe; 2) Prospect of quarterly sales breaching above KRW1tn in 2H20 after the coronavirus pandemic is contained, although 2Q20 sales will likely remain flat QoQ due to COVID-19; 3) Expectations that 2020 EV battery sales will surge 67% YoY with the business turning to profit in 3Q20.
Major OEMS, having invested heavily in EV conversion, are against the idea of relaxing environmental regulations. Through energy conversion, Europe plans to secure growth momentum and boost investments. ESS should undergo steady growth after the 1Q20 bottom. We forecast ESS sales will increase at a 20% CAGR. We believe Chinese players such as CATL are experiencing a delay in migrating to NCM batteries. There is little sign that Chinese names are effectively catching up with Korean peers. Accordingly, SDI should be able to expand its market share further on the back of its technological prowess.
Share price outlook and valuation
Despite concerns, SDI continues to strengthen its position in the market. We believe the expected turnaround of the EV battery business in 2H20 will be a key turning point for the company.
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