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A Big EV Battery IPO Is Here. Be Careful

A Big EV Battery IPO Is Here. Be Careful

Wednesday, 15 December, 2021 - 05:30

One of the biggest electric-vehicle battery companies in the world is going public. South Korea’s LG Energy Solution, which makes powerpacks for the likes of General Motors Co., is looking to raise up to almost $11 billion in a listing that could value the company at close to $60 billion. Big, bold and promising as that is, investors need to look carefully.

For deep-pocketed money managers, especially those hoping to fulfill their ESG mandates, the LG Energy initial public offering has all the trappings of the perfect investment. It’s backed by one of South Korea’s well-established, chemical-to-electronics conglomerates, which guarantees its place in a supply chain-crunched world. It has a long-list of captive customers (mostly carmakers), a huge order backlog, and most importantly, the battery technology. LG Energy has a grip on over a fifth of the global market by production capacity, just behind Chinese battery behemoth Contemporary Amperex Technology Co., or CATL.

It’s worth injecting some skepticism, though. A big advantage for LG is its hold on the tech and its ability to quickly scale production. Unlike CATL, though, it hasn’t been able to convert that into fat margins yet. The company, which ran a loss over 2019 and 2020, posted an operating margin of just over 5% in the first nine months of this year, compared with CATL’s 12% to 15%. Its mainstream batteries — the nickel-cobalt-manganese variety, or NCM712 — are more energy-dense and expensive than the now widely used lithium-iron-phosphate powerpack, one of the main types produced by CATL. Yet the company hasn’t been able to leverage its advantages fully. That raises questions about its ability to execute its business plans and steer where the fast-evolving EV market is going.

Then there’s battery chemistry. Up-to-date as LG’s is, less-advanced but safer LFP batteries have been taking market share from the NCM variety this year, shrinking prospects in the medium-term for the one LG makes. The company doesn’t yet manufacture the other variety, unlike CATL – which does both. Only in recent months have there been some reports that it may start making LFPs, too. Investors are pinning their expectations to the explosive growth of batteries in general – but at the current point of the cycle, type matters.

Part of the doubt cast over certain NCM types has been because of LG’s own issues: Defective batteries that could cause fires forced GM and Hyundai Motor Co. to recall recently launched electric vehicles. These are now some of the most expensive incidents for EVs and have put a focus on battery safety.

In addition to the fear around nickel-dense batteries, there’s also the cost of the massive recall for LG, and the more than $1 billion it’ll need to digest. Just because the story is no longer not in the news and these are one-time charges doesn't mean the problem has been fixed. As Smartkarma analysts noted, putting it on the books won't make “the controversy over the appropriate level of the recall provisions … disappear.” There is a significant difference in the amount of provisions that GM has already announced, the analysts wrote. This will be an overhang.

All of this comes back to whether the firm can get it together and effectively leverage future demand. Investors are pinning their expectations to what the company should be able do in the future. It’s worth remembering, though: Having all the ingredients is essential, but how you put them together is what makes the difference.


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