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Inventory adjustments lead to earnings shock; recovery likely in 2H24

Lower TP to W83,000

We lower our target price on SK IE Technology (SKIET) to W83,000. The firm’s 1Q24 earnings significantly missed the consensus due to sluggish demand from key downstream customers amid inventory adjustments (delayed from 4Q23). While downstream inventory adjustments should inevitably weigh on 2Q24 earnings as well, we expect earnings to start improving in 2H24.

We believe the medium/long-term investment case remains intact, as: 1) shipments to North American OEMs and new domestic customers are set to begin in 2H24; and 2) North America is projected to experience a separator shortage from 2025 due to foreign entities of concern (FEOC) rules. While the stock could come under pressure amid short-term earnings deterioration, we continue to recommend accumulating shares from a medium- to long-term perspective.

1Q24 review: Earnings shock

SKIET suffered an earnings shock for 1Q24, with revenue of W46.2bn (-73% QoQ) and an operating loss of W67.4bn (turning to loss QoQ). Sluggish demand from SK On (as well as line adjustments at the cell maker) weighed on earnings. Moreover, relatively muted downstream inventory adjustments for separators (compared to other materials) in 4Q23 led to weaker volume in 1Q24. As separators involve heavy fixed costs, the decreases in utilization and shipments caused profitability to deteriorate sharply (gross margin of -73% and OP margin of -146%).

2Q24 preview and future outlook

We expect earnings to remain sluggish in 2Q24; we look for revenue of W71.2bn (+54% QoQ) and an operating loss of W46.3bn (remaining in the red QoQ). While shipments should increase QoQ, the effect should be outweighed by fixed cost pressures. However, earnings are likely to markedly improve in 2H24. We see shipment volume expanding to 550mn m2 in 2H24 (from 140mn m2 in 1H24), driven by: 1) accelerating growth in shipments to SK On; and 2) the start of shipments to North American OEMs and new domestic customers. As major cell makers prepare to ramp up North American production in 2025, FEOC rules are hindering the entry of Chinese players. As such, we expect North America separator supply to be tight over the medium/long term.