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Top-tier players to continue to outperform

Maintain TP of W480,000; our top pick in the sector

We maintain our Buy rating and target price of W480,000 on LG Energy Solution (LGES). For 1Q25, the company reported operating profit of W374.7bn (swinging to profit QoQ), significantly above our recently raised estimate (W127bn). Even taking into account favorable factors such as the front-loading of orders (due to US policy uncertainties) and the won’s weakness, we believe LGES delivered a standout performance within the sector. We expect the company to sustain robust earnings momentum thanks to its early investments in the US and strong customer/product portfolios.

1Q25 review: Earnings surprise

For 1Q25, LGES posted revenue of W6.3tr (-2.9% QoQ) and operating profit of W374.7bn (swinging to profit QoQ), exceeding our estimates. Advanced manufacturing production credit (AMPC) recognition came in at W457.7bn (vs. our estimate of W312bn), as shipments from the Ultium and Michigan plants increased amid the conversion of some lines from EV to ESS battery production.

We estimate that about W50bn of the operating profit beat can be attributed to the higher USD/KRW rate, and some one-off gains may have also contributed to the strong result. However, we think the fundamental drivers of LGES’s earnings surprise were its proactive investments in the US, flexible line conversion in response to fast-changing market demand, well-diversified product portfolio, and strong bargaining power. We believe the global rechargeable battery industry remains in survival-of-the-fittest mode, with order wins increasingly being concentrated among top-tier players.

Underlying competitiveness to remain largely intact even amid policy changes

Downstream customers are likely to adjust their strategies in response to ongoing policy developments related to tariffs, the EU’s automotive industry action plan, and the US Inflation Reduction Act (IRA). However, we believe that tariffs could have a limited impact on EV penetration, given that prices will rise across all vehicle types (not only EVs). Higher tariffs on Chinese battery products should also work to LGES’s advantage, as it has already made significant investments in the US (giving it a competitive edge in order wins). We expect policy uncertainties to ease in 2Q25, once details of demand stimulus measures under the European action plan and final changes to IRA provisions are confirmed. Accordingly, we expect the global battery market to bottom out in 1H25.