LG Energy Solution Q3 profit likely up 34% on US EV sales rush

LG Energy Solution (LGES) reported an estimated 34% increase in Q3 operating profit to 601 billion won ($420 million), surpassing analyst forecasts, largely due to a surge in U.S. EV sales driven by consumers capitalizing on federal tax credits before their September 30 expiration. This strong performance, which saw LGES shares rise, contrasts with the company's earlier warnings of a demand slowdown post-incentive removal, and comes as LGES diversifies into energy storage with a $4.3 billion Tesla deal, despite a 2-3 month delay at its Georgia joint battery factory with Hyundai following an immigration raid.

Analysis

LG Energy Solution (LGES) reported a preliminary Q3 operating profit of 601 billion won ($420 million), marking a 34% year-over-year increase and significantly surpassing the LSEG SmartEstimate of 528 billion won. This strong performance was primarily driven by a surge in U.S. electric vehicle (EV) sales as consumers capitalized on federal tax credits expiring on September 30. Excluding U.S. Inflation Reduction Act (IRA) manufacturing incentives, operating profit would have been 236 billion won, highlighting the impact of government support.

Despite the robust Q3, LGES had previously warned of a potential slowdown in EV demand by early next year due to the cessation of these tax credits and existing U.S. import tariffs. In response, the company is actively diversifying its revenue streams by boosting production for Energy Storage Systems (ESS), exemplified by a significant $4.3 billion supply deal with Tesla. This strategic pivot aims to offset anticipated sluggishness in the EV battery market.

However, LGES faces operational headwinds, notably a 2-3 month delay at its joint battery factory with Hyundai Motor in Georgia following an immigration raid in September. While the company is working to resume U.S. business trips for employees, this incident introduces uncertainty regarding production timelines and capital expenditure efficiency. LGES shares reacted positively, rising 1.5% against a wider market decline of 1.4%, indicating investor confidence in its overall strategy despite these challenges.

Key Decisions for Investors

• Investors should closely monitor LGES's Q4 and 2024 guidance for EV battery demand, given the expiration of U.S. federal tax credits and prior company warnings of a slowdown.
• Evaluate the ramp-up and financial contribution of the Energy Storage Systems (ESS) segment, particularly the $4.3 billion Tesla deal, as a key diversification strategy.
• Assess the operational and financial impact of the 2-3 month delay at the Georgia joint factory with Hyundai, considering its potential effect on future production capacity and market positioning.
• Consider the ongoing influence of U.S. fiscal policies, such as IRA incentives and import tariffs, on LGES's profitability and strategic investment decisions in the region.