Growing Earnings Expectations for SK On... Three Factors Holding It Back

Expecting Profit Turnaround Next Year... Funding, China Investment, Battery Fire 'Headwinds'
Bond Issuance Announced but Impacted by Tightening Capital Market
Pre-IPO Negotiations Ongoing Since Early This Year Also Delayed

[Asia Economy Reporter Oh Hyung-gil] SK On is gaining momentum in the outlook that it will turn profitable next year following an improvement in losses within this year, as concerns have been alleviated through stabilization of yield rates at its overseas factories.

However, there are also views that fundraising for large-scale investments, which have entered a speed race, as well as the China business it has focused on and fires directly related to product safety, could pose obstacles.

According to the industry on the 12th, SK On, a battery subsidiary of SK Innovation, recorded sales of 2.1942 trillion KRW and an operating loss of 134.6 billion KRW in the third quarter. Sales increased by 906.2 billion KRW compared to the previous quarter, and the operating loss significantly decreased compared to the previous quarter (326.6 billion KRW).

Market analysts are predicting the turnaround to profitability to occur next year. Choi Go-woon, a researcher at Korea Investment & Securities, said, "Due to economies of scale and accumulated experience, the Yancheng 2 plant and Georgia 2 plant will be able to improve yield rates faster," and added, "It will turn profitable next year."

Benchmark Mineral Intelligence (BMI), an international raw materials market research organization, recently evaluated that SK On recorded the highest growth rate in market share among the three domestic battery companies this year, and its production capacity will increase more than 294 times from 1.7 GWh in 2017 to 500 GWh in 2030.

Despite positive external evaluations, SK On has recently faced a major variable due to tightening in the capital markets. SK On must fulfill its investment plan of 5.1 trillion KRW by 2027 at the latest for BlueOvalSK, a joint venture with Ford in the U.S. It plans to issue bonds for fundraising, but the bond market has been unstable since the Legoland incident.

SK On already conducted a capital increase worth 900 million USD for the Hungary 3 plant in July and completed a new borrowing of 2 billion USD last month. These funds were for the construction of the Hungary 3 plant. In particular, the pre-IPO investment attraction, which has been ongoing since early this year to secure long-term investors, has yet to be finalized even in negotiations.

Kim Yang-seop, head of finance at SK Innovation, stated, "There are investment projects for the U.S. 2 plant, Hungary 3 plant, Yancheng plant, and BlueOvalSK in the U.S.," and added, "Fundraising is progressing smoothly regardless of the global financial market situation."

SK On’s China business, which it has expanded so far, has also been hit hard. This is due to the U.S. Inflation Reduction Act (IRA), which has triggered a reorganization of the global battery supply chain.

SK On operates battery factories in Changzhou and Huizhou through a joint venture established with China’s EVE Energy, and plans to add the Yancheng plant.

Through another joint venture, Changzhou BTR New Material Technology, it is also promoting the production of high-nickel cathode materials, a key battery component, and increased its stake from 25% to 31.3% by adding 85 billion KRW in July.

However, once the Inflation Reduction Act is implemented next year, batteries and cathode materials produced in China will not be eligible for use in the North American market. The IRA excludes tax credits if minerals or components produced by foreign entities owned by countries such as China and Russia are used.

Although it is responding by promoting a cathode material joint venture with Ford and EcoPro BM in North America, uncertainty over its China business is expected to continue for the time being.

The SK C&C data center fire is another variable. A detailed investigation into the cause of the fire is underway, and if batteries supplied by SK On are found to be the cause, trust in product safety and reliability could be shaken. There will also be a burden of future compensation claims.

[Image source=Yonhap News]

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