Leona Tan Siew Hoon graduated from Indiana University Bloomington, US, majored in Finance and International Business. She started her career as an analyst in a financial-data company in the US. Upon her return to Singapore, she spent a few years in corporate finance before dedicating herself to working as an equity analyst at a brokerage firm in 2004. She joined a large Singaporean asset manager in 2007 and was involved in various roles such as portfolio manager for global and China-India equities funds. She joined Econopolis Singapore Pte Ltd in April 2017 and is responsible for stock selection in the emerging markets funds.
LG Chem is the leading South Korean vertically integrated chemicals company that has globally competitive products, including premium grade ABS, specialty polymers, polarisers and energy storage and electric vehicle (EV) battery cells. It holds the largest market share in the global ABS market and is leading the market as a global EV leader on its superior technology. LG Chem is a way to play the increasing penetration of EV and is also poised to benefit from the EU’s Green Energy Deal.
LG Chem is a diversified petrochemicals company that has higher exposure than peers to specialty chemicals. This is one of the key reasons the company has lower chemicals earnings volatility and a higher valuation than pure-play chemical companies. Outside of chemicals, around 7% of LG Chem’s operating profit comes from the non-petrochemicals business, which includes rechargeable batteries (RB) for small appliances and EV/HEV, Polarizers/advanced materials, and Biotechnology.
The company has strengthened its market dominance starting from the basic materials & chemicals business to energy solutions and has recently expanded into the Life Sciences area, building a future-oriented business portfolio. The company is therefore smoothing out its chemical cyclicality towards a sustainable growth trend into non-chemicals, especially the battery business.
LG Chem continues to solidify its EV battery leadership, which is currently being underrated by the markets, primarily due to its chemicals business. Indeed, on a consolidated basis, LGC is trading at 10x 2020e EV/EBITDA, a large discount to its battery pure play peers (MSe Samsung SDI at 22x and CATL at 24x). There will eventually be 5-6 key global players in EV batteries, and LG Chem is likely to be in the top-3 due to its technological advantage, partnerships and economies of scale. According to energy market tracker SNE Research, LG Chem climbed to the n° 1 spot in the global EV battery market commanding a 27.1% share in the first quarter of 2020, up from 10.7% a year earlier.
As a matter of fact, LG Chem has been supplying batteries to a total of 13 of the top-20 global car makers including Volkswagen, Renault, GM and Hyundai. It presently has 5 battery plants in South Korea, China, and the US and Poland with a total capacity of 70 GWh, increasing to 100GWh by end of 2020. The company is concentrating its efforts on the EU, which is expected to become the largest EV market beyond China in 2022. Its Wroclaw plant, which already is the largest EV battery production facility in Europe, is doubling production capacity by more than 35 GWh to around 65 GWh by end of 2022. This will enable LG Chem’s EV battery segment to enjoy further upside from favourable regulatory changes, mainly in the EU.
European countries are focusing on their Green Policy as part of the EU's economic recovery plan post COVID-19. Details of stimulus programs were unveiled for Germany and France, in which they aim to raise subsidies for BEVs to €9k/€7k, respectively (vs previous €6k each) as well as other VAT cuts and loan programs.
The global EV market is projected to take off significantly from 2020 onwards, posting strong growth figures and expanding from 38GWh in 2017 to 248GWh in 2020 and to 924GWh in 2025, driven by aggressive investments by automakers. Boosted by rising global EV penetration, LG Chem's EV battery business grows robustly (57% revenue compound annual growth rate over 2019-22e).
LG Chem is also building strong partnerships. Indeed, at the end of May Reuters reported that LG Chem was selected by Hyundai-Kia to supply “trillions of won” worth of batteries for pure EVs that will begin mass production in 2022, as part of their Electric-Global Modular Platform. It is also working with China’s Geely Automotive to build an EV battery plant, which will be completed by the end of 2021. In addition, LG Chem has obtained a huge order worth approximately 150 trillion won from the recent large-scale JV for EV batteries with GM. Car makers and battery makers are stepping up their collaboration to build battery cell/pack plants and develop next-generation technologies. Strong battery ties also inject more visibility into mass production of EVs and roll-out of new mass-market models. Battery leaders are well positioned to benefit from ongoing consolidation and strong ties with major car makers, while second-tier battery makers will struggle to balance between market share and profitability.
LG Chem is also making clear efforts towards sustainability and extensively reports on it. It strongly focuses on responsible product development and production, and aims to position itself in the circular economy. It also manages the impacts of climate change, and aims to reduce water consumption. Human rights/diversity, a responsible supply chain and safety and wellness at work are also points of attention.
ABOUT GLOBAL CHALLENGERS
A revolution in global business is under way. Companies based in emerging markets, boasting ambitious leaders, appealing products or services and state-of-the-art facilities and systems are expanding overseas and transforming industries and markets across the globe. The few emerging markets companies that have captured media attention only represent a small fraction of a larger phenomenon of the many emerging markets companies that are actively expanding beyond their domestic markets, or are planning to do so. As corporate governance has always been a key risk of emerging market investing, Econopolis opened up a Singapore research hub in 2013 to increase proximity to the companies we invest in and observe and listen to the signals you cannot get by just doing desktop research.
Our experienced investment team applies a disciplined, bottom-up fundamental investment approach. We believe in a ‘boots on the ground approach’, visiting and talking to companies. A high-conviction investment approach translates into a willingness to take active positions regardless of benchmarks. This results in a select number of strong franchises with clear competitive advantages and trustworthy management.
The Global Challengers we are looking for, are set to grow into global powerhouses with credible aspirations to build global footprints. The capabilities of these Global Challengers go beyond mere cost advantages. They have been building new capabilities, such as manufacturing higher-quality products, harnessing their cash resources, and investing in R&D. These Global Challengers can be divided into three groups:
- early movers (that started to globalise early on);
- fast followers (making rapid progress); and
- up-and-comers (whose ambitions have until recently been more regional than global).
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