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The author is an analyst of NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com. — Ed.

SiOx capacity to rise to as high as 80,000

With rechargeable battery makers expected to start applying SiOx in earnest from 2024, we believe that Daejoo offers the strongest growth potential among domestic suppliers of rechargeable battery materials. We view its shares as being undervalued versus those of peers.

Lower TP, but boost SiOx demand forecast

We adhere to a Buy rating, but lower our TP on Daejoo Electronic Materials by 21% to W110,000. Although we have raised 2024E EBITDA (the basis for calculating our TP) by 30%, our new TP reflects a cut in our materials peer multiple (26.0x → 15.6x) due to recent share price drops (Table 4). The 2024E earnings upward revision reflects a 65% hike in our 2024 silicon oxide (SiOx) shipment forecast (2,450 tons → 4,050 tons) in light of both higher demand forecasts for existing customers and the recent acquisition of new clients. From 2024, when SiOx application at rechargeable battery makers is to begin in earnest, Daejoo’s sales growth should clock at the fastest pace among domestic rechargeable battery material makers. Based upon 2024E EV/EBITDA of 12x, we view Daejoo’s shares as being undervalued compared to the average of both cathode materials makers (17x) and rechargeable battery materials players (13x).

Firm’s SiOx capacity to expand to as high as 80,000 tons (1,000GWh)

Daejoo should post consolidated 2Q22 sales of W57.9bn (+15% y-y, +51% q-q) and OP of W5.2bn (+12% y-y, +49% q-q). After not being reflected in 1Q22 due to lockdown effects, sales at the Shanghai subsidiary (conductive materials) are to be reflected in Daejoo’s 2Q22 results—we believe that sales at the subsidiary upped sharply q-q by W8bn. Meanwhile, Daejoo’s SiOx sales likely totaled W7bn (+46% y-y, +19% q-q).

Daejoo’s annual SiOx sales are expected to expand to W62.5bn (+108% y-y) in 2023, W283.1bn (+353% y-y) in 2024, and W604.6bn (+113% y-y) in 2025, with the SiOx sales portion widening to 25%, 59%, and 75%, respectively. Given the high margins for SiOx, the corresponding OP portions should prove even higher.

Full-fledged production growth of SiOx is to begin from 3Q23 at LG-GM JV Ultium Cell’s second plant. Also from 3Q23, the portion of SiOx additives used in rechargeable batteries is set to climb (3% → 8%). Thus, in addition to an ongoing increase in battery demand, existing SiOx capacity is to be further eroded by the widening portion of additives. The currently visible capacity target for Daejoo is 20,000 tons (250GWh at 8% addition) by 2026, but actual capacity could be pushed up to 80,000 tons (1,000GWh at 8% addition) if all of the Sihwa MTV industrial complex sites secured by Daejoo are utilized. We estimate that capacity of 80,000 tons is equivalent to around W3.5tn in sales. Also boding well, over 2024~2025, in addition to the existing EVs and power tools, a new type of silicon composite is expected to be supplied by Daejoo to the mobile market.

 

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