Is SK Innovation's Physical Division Necessarily Negative? Target Price Rises Even with Discount Rate Change...

[Asia Economy Reporter Lee Seon-ae] SK Innovation's stock price plunged following the announcement of its plan to spin off the battery business, leaving the securities industry puzzled. Most experts hold a positive view, seeing this as an opportunity for SK Innovation's business to be re-evaluated. Although concerns exist that the stock price discount would be inevitable if SK Innovation becomes a holding company through the spin-off, they still believe there is room for the stock price to rise compared to the current level. Target stock prices have also been revised upward.

According to the securities industry on the 4th, Hanwha Investment & Securities raised SK Innovation's target stock price from 290,000 KRW to 340,000 KRW on the 2nd, the day after news of the spin-off review was announced, stating that "the battery business division will be re-evaluated as an opportunity through the spin-off," and maintained a 'buy' investment rating.

Researcher Jeon Woo-je said, "In the very short term, the stock price may be sluggish due to concerns over the battery spin-off and transition to an intermediate holding company, but it will recover quickly." He noted that the company's stock price had already been suppressed by the possibility of a physical spin-off of the battery business and the holding company concept, and that the battery business was undervalued. Reflecting recent expansions in production capacity and order backlog, he increased the estimated value of the battery business division from the previous 4.1 trillion KRW to 27.3 trillion KRW. When calculating the target price of 290,000 KRW, the battery business division's value was based on a 30% discount on 4.1 trillion KRW, but applying a 50% discount results in 340,000 KRW, he analyzed.

He particularly emphasized, "LG Chem's stock price fell about 18% in one week immediately after announcing its battery spin-off but rose 68% three months later, and SK Innovation's subsidiary SK IE Technology (SKIET) also saw its corporate value increase significantly from 2 to 4 trillion KRW before the spin-off to 13 trillion KRW after listing."

SK Innovation announced plans to increase its battery production capacity from 40 gigawatt-hours (GWh) this year to 200 GWh by 2025 and 500 GWh by 2030. It expects the battery division to turn profitable next year. By 2025, its battery production capacity is projected to surpass Samsung SDI's 153 GWh. It also revealed that its battery order backlog expanded by 62.5%, from the previous 80 trillion KRW to 130 trillion KRW (1,000 GWh). KB Securities researcher Baek Young-chan explained, "The expansion of the order backlog increases the value of the battery business," adding, "Concerns over the physical spin-off have significantly diluted very positive news."

However, concerns were also raised that if SK Innovation becomes a holding company through the spin-off, a stock price discount would be inevitable. Han Sang-won, a researcher at Daishin Securities, explained, "The spin-off has both positive aspects as an opportunity for re-evaluation of the battery business value and negative aspects such as dilution of shares upon listing and the possibility of a holding company stock price discount."

He added, "Currently, the value of the battery business reflected in SK Innovation's stock price is estimated to be only 5 trillion KRW," and judged that "considering the market capitalizations of competitors such as CATL (218 trillion KRW), LG Chem (60 trillion KRW), and Samsung SDI (50 trillion KRW), the positive effect from corporate value re-evaluation (re-rating) will be greater."

Samsung Securities researcher Cho Hyun-ryeol diagnosed, "The method of capital recovery through physical spin-off and listing of a growth subsidiary, which is rare overseas, is a major cause of discounting the subsidiary's equity value," and said, "As similar spin-off cases have continued recently, this news acts as a short-term negative due to market fatigue." However, he emphasized, "Considering that LG Chem's battery business value reflected in its market capitalization is estimated at 40 to 45 trillion KRW and that SK Innovation's order backlog is similar, the battery business value of 5 trillion KRW reflected in the current stock price is excessively low even accounting for the possibility of physical spin-off and listing, and maintains a positive outlook in the mid to long term."

Hyundai Motor Securities was the only one to lower its target stock price from 310,000 KRW to 290,000 KRW, based on the forecast that the discount rate for the battery business division could increase up to 50% if the physical spin-off is decided. However, if there is no physical spin-off, the target price was raised to 360,000 KRW.

Earlier, SK Innovation CEO Kim Joon said at a mid- to long-term strategy announcement event, "A considerable amount of resources is being invested for the growth of the battery business, and we are reviewing the spin-off as one of the financing methods," adding, "It has not yet been decided whether it will be a physical spin-off or a demerger." He added, "If the battery business spin-off is realized, SK Innovation will transition to a pure holding company form," and "We will also consider options such as Nasdaq listing or simultaneous domestic listing."

This content was produced with the assistance of AI translation services.