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ESS OP margin likely to surpass 20% in 2026

Raise TP to W530,000; time to revalue the ESS business

We raise our target price on LG Energy Solution (LGES) to W530,000 (from W420,000), as we updated our base year for ESS earnings estimates to 2027 and revised up our target EV/EBITDA for the division to 20x. We forecast ESS OP margin (including the AMPC) at 21% in 2026 and 24% in 2027, assuming North American ESS shipments of 20GWh in 2026 and 26GWh in 2027. Unlike EV batteries, which are sold as individual cells, ESS products are sold as integrated packs or systems, making it reasonable to assume an AMPC subsidy of US$45/kWh. As such, we estimate LGES’s ESS-related AMPC recognition at W910bn in 2026 and W1.2tr in 2027.

ESS division performing well above our recently raised expectations

In 2026, we expect the ESS division (including the AMPC) to deliver revenue of W5.5tr (+59% YoY) and operating profit of W1.2tr (+350% YoY; OP margin of 21%). Assuming North American shipments reach 20GWh in 2026, ESS-related AMPC recognition should reach approximately W910bn. LGES plans to expand its ESS capacity in North America from 16GWh at end-2025 to 30GWh by end-2026. With EV demand slowing, we expect more of the company’s existing EV joint venture lines to be repurposed for ESS. Even assuming a flat AMPC contribution from EVs in 2026, we believe the strength of the ESS division alone justifies an upward revision to overall earnings.

In North America, ESS investments will likely surge as companies rush to meet the eligibility deadline for the investment tax credit (ITC) and production tax credit (PTC); this pull-forward of demand should drive significant earnings growth through 2027. With tariffs and recent legislative changes?posing significant barriers to Chinese rivals, we believe it is time to revalue LGES’s ESS business. In 2027, we forecast the ESS division (including the AMPC) to deliver revenue of W7.4tr (+33% YoY) and operating profit of W1.8tr (+49% YoY). We estimate the ESS business will account for 33% of total operating profit in 2026 and 34% in 2027.

Parallels with 2023 semiconductor sector recovery

In early 2023, the semiconductor sector began to emerge from a deep down-cycle, driven by: 1) a reduction in the supply of legacy products; and 2) a growing profit contribution from HBM. A similar dynamic seems to be unfolding in the rechargeable battery sector, with: 1) signs of Chinese government supply controls emerging; and 2) ESS beginning to contribute significantly to revenue and profits, especially in North America. While EV demand trends continue to warrant close monitoring, we believe it may be time to reconsider the sector’s broader cyclical outlook.