LG Chem to launch battery affiliate Dec. 1; IPO under review

LG Chem Ltd., South Korea’s leading chemicals maker, has endorsed a company plan to spin off its battery business as a standalone entity to strengthen its position as the world’s top manufacturer of rechargeable batteries for electric vehicles.

After a Sept. 17 board meeting, LG Chem said the new company, tentatively named LG Energy Solutions, will be incorporated on Dec. 1 following approval by its shareholders at an Oct. 30 meeting.

“We believe now is the right time to spin off our battery business unit, which by doing so, can focus on its own specialty areas. The spin-off will improve business efficiency and enhance corporate and shareholder value,” LG Chem said in a statement.

The news rattled investors, however, prompting them to dump shares, partly on profit-taking from recent sharp gains and in belief that the spin-off of a promising business division will limit the upside of the chemical maker’s share price.

LG Chem finished 6.1% lower at 645,000 won on Thursday, extending its losses for a second consecutive day. The stock fell 5.4% the previous day.

BATTERY SALES TO MORE THAN DOUBLE BY 2024

LG Energy Solutions, to be wholly owned by LG Chem, will be responsible for making EV batteries as well as small batteries for smartphones and energy story systems.

LG Chem said it expects the sales revenue of the new entity to rise above 30 trillion won ($25.6 billion) in 2024, from an estimated 13 trillion won for its current battery business division this year.

LG Chem has considered the split for years but did not follow through due to the massive deficit that piled up from its heavy investment in the expansion of the battery business.

But the tables turned in the second quarter when LG Chem’s battery business swung to a 155.5 billion won ($132 million) operating profit, backed by overwhelming orders from global EV makers. The company has an EV battery order backlog worth 150 trillion won.

The global EV battery market has been growing rapidly amid the race for automakers to go electric and eco-friendly due to tightened environment regulations. According to industry tracker IHS Markit, the EV market is forecast to grow at an annual average rate of 25% over the next seven years.

LG Chem is the world’s top EV battery maker with a 24.6% market share, according to market tracker SNE Research, and supplies rechargeable batteries to global carmakers such as GM, Ford, Renault, Volvo, Audi, Volkswagen and Daimler as well as Korean automakers Hyundai Motor and Kia Motors. China’s CATL is the second largest with a 23.5% market share, followed by Japan’s Panasonic at 20.4%.

NEW FUNDING LIKELY THROUGH BATTERY IPO

In an effort to widen its lead in the EV battery market, LG Chem plans to expand its battery production capacity to 120 GWh by the end of 2021 from 35 GWh in 2018. It is also building additional battery plants in the US and China. Analysts said the expansion plans will require at least 3 trillion won annually.

LG Chem is widely expected to list the new company, LG Energy Solutions, on the local bourse in the second half of next year to fund its investment in the battery business. Meanwhile the company said on Thursday it is considering an IPO,  but nothing has been decided yet.

Analysts said if LG Chem’s battery division is listed, it will be more fairly valued by the market.

LG Chem’s price-earnings ratio currently stands at a multiple of 36.7 times, much lower than CATL’s 93.3 times.

Write to Jae-kwang Ahn at ahnjk@hankyung.com