Dongwha Enterprise: Battery Materials Earnings to Improve

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

Dongwha Enterprise’s wood division earnings are to remain sluggish for now, but we anticipate steady earnings growth at its electrolytes business.

Electrolyte margins to improve in 2023 on raw material cost drops

Although sticking to a Buy rating, we lower our TP on Dongwha Enterprise from W120,000 to W85,000, reflecting downward adjustments to both our earnings forecasts for its wood division (amid slowdown in the construction industry) and our shipment projections for the electrolyte division (due to production disruptions at clients). Both timber demand and ASPs are being dampened by the slowdown in the construction industry, whereas costs (wood chips) remain hefty, inevitably spelling profit erosion. Accordingly, we are taking a conservative view toward 2023F earnings for the wood division. Meanwhile, the firm’s electrolyte business margins are set to widen thanks to a drop in the price of LiPF6, (main raw material). While we estimate that the average purchase price of LiPF6 in 2022 was around US$35/kg, the figure this year should shrink by around 20% to around US$27/kg. With ASP deterioration for the firm’s electrolyte products expected to be minimal, its related profitability will likely strengthen.

Electrolyte supply contracts for EVs to be signed

Dongwha Enterprise should post consensus-satisfying consolidated 4Q22 sales of W259.8bn (-4% y-y, -7% q-q). But, OP likely fell to W1.8bn (-87% y-y, -89% q-q), 89% below the market projection. Dongwha Electric (electrolyte) sales for the quarter are sized at W27.2bn (-10% y-y, +7% q-q), with accompanying OP of around W1.7bn (OPM of 6.3%). Although profitability was likely helped by stabilization of raw material prices (including for LiPF6), we believe that the firm’s electrolyte sales declined y-y, noting a drop in EV-related shipments due to production disruptions at clients. The company’s wood business earnings likely narrowed on both rise in raw material prices hikes and a worsening in construction market conditions.

For 2023, we foresee overall sales of W1.1tn (+1% y-y) and OP of W45.5bn (-37% y-y), below current consensus. We expect the firm’s electrolyte business earnings to continue growing solidly, forecasting 2023 sales of W191bn (+61% y-y) and OP of W12.7bn (+416% y-y; OPM of 6.6%). But, its wood business earnings will likely remain tepid due to worsening construction market conditions and raw material burden.

In general, supply of electrolyte for use in EVs normally breaks down into the following stages: a development phase (1~2 years) → mass production verification (1~2 years) → construction (1~2 years). Given that 3 years and 6 months have passed since Dongwha Enterprise’s takeover of Dongwha Electric, we believe it is now at the point where tangible supply contracts will soon to be inked. We believe that it will complete trial mass production for supply to Samsung SDI (Rivian), SK On (Hyundai Kia, Ford), and LGES in 2023, and supply for use in EVs should begin in earnest in Hungary and China (2024) and in the US (2025). We expect the firm’s electrolyte sales to reach W418.7bn in 2024 (+119% y-y), before further climbing to W920.9bn (+120% y-y) in 2025.