LG Energy Solutions Has More Short-Term Catalysts Beyond Short-Selling Ban Boost

By Alex Sirois

• Rising demand for electric vehicles and renewable energy installation is stoking growth in global lithium-ion batteries

• LG Energy Solutions (KRX:373220) leads the pack of the world’s manufacturers

• This week’s stock surge has investors looking at what else is under the hood

LG Energy Solutions (KRX:373220) is a leading global manufacturer of lithium-ion batteries and one of the larger firms in the Korean economy. The company supplies batteries to major automakers like General Motors (NYSE:GM), Ford (NYSE:F), and the Hyundai/Kia Automotive Group (KRX:005380, KRX:000270). 

The company benefits from a strong growth outlook driven by rising demand for EVs and renewable energy, both in SouthKorea and overseas. However, investors should consider potential risks such as intense industry competition, technology disruptions, commodity price volatility, and Seoul’s short-selling ban.

Short-Selling Ban A Strong Catalyst 

Let’s start with the short-selling ban because it’s the most relevant catalyst favoring LG Energy Solutions presently. 

Korea’s benchmark Kospi Composite Index shot up on Nov. 6 on the news that short selling will be banned through June of 2024. While the index rose by 6%, LG Energy Solutions shot upward by 23% to 493,500 Korean Won ($380.25). That difference strongly suggests that it could continue to be an outsized beneficiary of the decision by Korea’s Financial Services Commission. 

The move was prompted by concerns over naked short selling in which investors short the stock without borrowing it first. 

The battery-maker’s shares rank 13th out of 105 stock holdings in iShares MSCI South Korea ETF (NYSEARCA:EWY), at a 1.43% weight. While LG Energy shares are down less than 1% year to date, EWY stock is up more than 13%. That exchange-traded fund is a bit skewed, with the biggest holding Samsung Electronics (KRX:005930) at a weight (24.5%) that’s almost four times the next largest, SK Hynix (KRX:000660).

Logic Behind Regulator Move

South Korea has a large and active retail investor base. The government is concerned that short selling could be used to manipulate the market and harm retail investors. Short selling is often seen as a destabilizing force in the market. Thus, the government is likely instituting the ban on short selling in order to maintain and increase market stability. 

Evidence suggests that short selling gives institutional investors an unfair advantage over retail investors. By banning short selling, the Seoul government can level the playing field and make it more difficult for institutional investors to manipulate the market.

Financial market regulators have instituted similar bans multiple times since the 1980s. For now, there is no indication that the ban will be lifted or extended upon expiration in June of 2024.  Korea’s regulatory governing boards will be weighing the balance of the ban’s effects on stabilizing the market while keeping a sharp eye on overall liquidity for any negative signs. 

Let’s get back to the business of LG Energy Solutions and why you, the investor, should consider it on a fundamental basis. 

Business Remains Strong Even as EV Industry Roils

LG Energy Solutions released Q3 earnings several weeks ago that indicate the company continues to do well amid a slowdown that has blunted enthusiasm across the sector. 

Revenue increased by 7.5% reaching 8.22 trillion KRW ($6.33 billion). Operating profits jumped by 40.1% to 731.2 billion KRW ($563.22 million). 

Investors should expect the firm to focus on planned incremental improvements across its battery product portfolio in the immediate term as external challenges for EV demand persist. In turn, input commodity prices are also expected to remain low and that will force a renewed effort into improving internal factors.

Strengthen Major Relationships While Targeting Lower-Tier Targets

LG Energy Solutions secured a 10-year supply agreement with Toyota (JPX:7203.T, NYSE:TM) earlier this month. It will supply 20 GWh of high-nickel NCMA batteries per year for the period. 

The company also expects to begin producing mid-nickel NCM batteries by 2025 that are anticipated to reduce costs by 10%. This will be done by reducing nickel and cobalt inputs made possible by increasing energy density and stability. 

46-Series Cylindrical Battery Production in Arizona

It’s also important to note that LG Energy Solutions is strongly allied with not only U.S. manufacturers, but also efforts to produce in the U.S. 

The company recently announced that it had changed plans to facilitate production of 4680 batteries for Tesla (NASDAQ:TSLA). The initial plan to produce model 2170 batteries at an annual rate of 27 GWh has been modified. LG Energy Solutions will now produce 36 GWh annually of 46-series batteries beginning late in 2025. 

Thus, LG Energy Solutions continues to strengthen its strong relationships with its GM Ultium joint venture, a long-term contract with Toyota, production plans in Arizona for Tesla, strong operations, and a short selling ban that is lifting most ships on the Kospi currently.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. None of the above should be construed as investment or financial advice. Investing is inherently risky. Please perform your own due diligence.

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