SK On, Q2 Deficit Expected to Continue... Prolonged Poor Performance

Fixed Costs Expected to Rise with New Plant Operation
EV Demand Recovery and Market Share Defense Needed
SK Inno Stock Price Expected to Remain Weak for Now

SK On, the battery company of SK Group, is expected to continue posting losses through the second quarter. This is due to ongoing inventory adjustments caused by weak sales of Ford's electric vehicle (EV) pickup trucks, a major customer. Securities firms anticipate a return to profitability starting from the fourth quarter of this year.

According to SK Securities on the 1st, SK On's operating loss for the second quarter is projected to be 301.3 billion KRW, indicating continued losses. This forecast assumes a 12% increase in shipments compared to the first quarter and an 8% decline in prices. Researcher Park Hyung-woo explained, "Fixed costs will increase due to the operation of the new plant," adding, "Since sales improvement is minimal, excluding the Advanced Manufacturing Production Credit (AMPC), the scale of losses is likely to widen compared to the first quarter." The AMPC is expected to recover to 96.3 billion KRW, up from the previous quarter.

Overall, securities firms evaluate that short-term poor performance for SK On is inevitable, attributing it to weak sales of Ford's EV pickup trucks. They point out that for performance recovery, it is necessary to see a rebound in EV demand, aggressive EV sales promotion by customers, and successful retention of market share within customer companies.

According to market research firm SNE Research, the annual growth rate of global EV (pure electric vehicles and plug-in hybrid vehicles) battery usage is slowing down. It recorded 107% in 2021 → 69.3% in 2022 → 38.8% in 2023. This year’s growth rate is expected to be around 16.3%, lower than last year.

Jeon Woo-je, a researcher at KB Securities, said, "Due to the mid-term market conditions and the slowdown in sales in the first half, we are lowering the 2024 earnings per share (EPS) forecast by 32% compared to the previous year," and predicted, "Battery selling prices in the second quarter will hit the lowest point of the year."

Concerns about financial stability are also significant. Although cash flow is deteriorating, ongoing facility investments cannot be halted. SK On plans to continue projects with Ford's joint venture BlueOvalSK (BOSK) and Hyundai Motor's North American joint venture (JV) this year. In this regard, SK On's battery investment (CAPEX) plan remains at 7.5 trillion KRW, unchanged from before.

Researcher Kang Dong-jin of Hyundai Motor Securities analyzed, "The profitability of the battery business is expected to be worse than anticipated," adding, "The operating rate of the U.S. plant is estimated to be very low, so the scope of performance improvement in the first half will be limited."

However, from a mid- to long-term perspective, expectations for the growth cycle among the three major battery companies are relatively high. Researcher Kang said, "Among secondary battery manufacturers, this company is expected to experience the greatest earnings leverage effect due to the AMPC effect," and analyzed, "Since yield and productivity have normalized, if it can withstand the downcycle, the perception change will be the greatest at the point when a rebound is detected."

Researcher Kim Do-hyun of SK Securities forecasted, "Considering the shipment expansion due to the line conversion at the Georgia plant and the gradual stabilization of battery price declines, a full-scale return to profitability is expected from the fourth quarter."

Meanwhile, DB Financial Investment lowered the target stock price of SK Innovation, the parent company of SK On, to 130,000 KRW due to SK On's losses. Additionally, Daol Investment & Securities lowered it to 140,000 KRW, KB Securities to 150,000 KRW, and Hi Investment & Securities to 160,000 KRW, judging that stock price weakness is inevitable for the time being.

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