[MarketING] POSCO Holdings Hits 52-Week High... Expectations for Secondary Batteries Amid China Reopening

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The KOSPI fell for the first time in five days. Profit-taking emerged ahead of the 2480 level, leading to a weak trend. Secondary battery stocks continued their strong performance due to eased uncertainties surrounding the Inflation Reduction Act (IRA). In particular, POSCO Holdings hit a 52-week high, buoyed by expectations of steel demand recovery following China's reopening (resumption of economic activities) combined with momentum related to secondary batteries.

On the 3rd, the KOSPI closed at 2472.34, down 4.52 points (0.18%) from the previous session. The KOSDAQ ended the day at 854.96, up 7.44 points (0.88%). The KOSPI declined for the first time in five days, influenced by profit-taking ahead of breaking through the 2480 level. Meanwhile, the KOSDAQ rebounded after one day and set a new yearly high.

Kim Seok-hwan, a researcher at Mirae Asset Securities, explained, "The KOSPI started higher on relief from the decline in the Personal Consumption Expenditures (PCE) price index and eased uncertainties regarding the IRA, but downward pressure increased as the Korean won weakened and foreigners sold over 1 trillion won in futures during the session." He added, "The KOSDAQ maintained its upward trend due to the strong performance of secondary battery stocks amid eased uncertainties following the announcement of the detailed IRA legislation in the U.S."

Most secondary battery stocks showed gains. POSCO Holdings rose 6.52%, POSCO Future M 5.87%, Samsung SDI 1.36%, L&F 4.63%, and EcoPro BM 3.34%.

The strength in secondary battery stocks was due to eased uncertainties following the announcement of the detailed IRA legislation. According to the IRA detailed legislation announced by the U.S. Treasury Department on the 31st of last month (local time), the U.S. government will provide subsidies totaling $7,500 (approximately 4.87 million KRW), with $3,750 each for battery components and critical minerals, for vehicles meeting both requirements starting from the 18th of this month. The battery component requirement stipulates that from this year, at least 50% (gradually increasing to 100% by 2029) of the total value of electric vehicle battery components must be produced or assembled in North America to qualify for the $3,750 tax credit. The critical minerals requirement mandates that at least 40% of essential minerals used in batteries?including lithium, nickel, manganese, graphite, and cobalt?must be sourced from the U.S. or countries with which the U.S. has a Free Trade Agreement (FTA). This percentage will gradually increase to 50% in 2024, 60% in 2025, 70% in 2026, and 80% in 2027.

Jung Yong-jin, a researcher at Shinhan Investment Corp., stated, "With the announcement of the detailed IRA guidelines by the U.S. Treasury and IRS, most uncertainties regarding North American investments have been removed." He added, "Companies defined as battery component manufacturers?such as those producing cells, modules, separators, and electrolytes?are expected to accelerate local investments targeting North America," maintaining an overweight investment opinion on domestic secondary battery companies.

In particular, POSCO Holdings touched 400,000 KRW during the session, setting a 52-week high. It rose to as high as 401,500 KRW intraday. POSCO Holdings has been on a recent sharp rise, having increased more than 8% in the previous trading day. The stock price has risen 18.07% compared to a month ago. This strong performance is attributed to expectations of steel demand recovery due to China's reopening effect, combined with secondary battery optimism.

Ahn Hoe-soo, a researcher at Ebest Investment & Securities, said, "Ahead of the announcement of China's Purchasing Managers' Index (PMI) on the 31st of last month and the U.S. IRA detailed legislation, POSCO Holdings' stock price rose to about 0.6 times the 12-month forward price-to-book ratio (PBR)." He added, "Data related to China's housing and real estate market have shown improvement trends since February, and the March China PMI exceeded expectations." He further noted, "The regional strengths of POSCO Holdings' lithium and nickel businesses within the value chain are also being highlighted." POSCO Holdings' ore-type primary and salt-lake-type secondary lithium projects, as well as nickel projects, meet the IRA's critical minerals requirements. Most of POSCO Holdings' NITEL investments are made in regions with which the U.S. has FTAs, making them important in the value chain.

POSCO Holdings' first-quarter earnings this year are expected to fall short of expectations, but earnings recovery is anticipated from the second quarter.

Researcher Ahn said, "POSCO Holdings' first-quarter earnings are expected to show sales of 19.7 trillion KRW, up 2.5% from the previous quarter, and an operating profit of 583 billion KRW, turning positive." He added, "Although operating profit will recover significantly from the 425.3 billion KRW operating loss in the fourth quarter of last year, it is expected to fall short of market consensus." For the second quarter, sales are projected to increase 5.3% from the previous quarter to 20.7 trillion KRW, and operating profit is expected to rise 87% to 1.1 trillion KRW. Researcher Ahn said, "These results are due to the complete normalization of sales volume and additional price increases," adding, "Revenue from new businesses is also approaching."

Securities firms expect first-quarter earnings to fall short of expectations but have raised POSCO Holdings' target price across the board, reflecting earnings recovery from the second quarter and optimism about new businesses. Ebest Investment & Securities raised POSCO Holdings' target price by 18% to 460,000 KRW. Shinhan Investment Corp. increased it from 390,000 KRW to 410,000 KRW. Samsung Securities raised it by 12.8% to 440,000 KRW. Baek Jae-seung, a researcher at Samsung Securities, explained, "We raised the target price due to improved earnings from the recovery of the steel market and the contribution of new businesses to valuation enhancement." He added, "With the alleviation of the steel industry's oversupply cycle strengthening steel business profitability and the approaching visible earnings generation period for new businesses represented by lithium, we have adjusted the target price upward."

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