Highlights:
- LG Chem is facing profitability challenges due to weakened global EV demand and losses in its petrochemical business. However, the company remains profitable overall, with its expansion of battery production capacity in North America providing strong support for future growth.
- While the company has increased debt to fuel its battery business expansion, its overall leverage remains at a relatively healthy level, and debt repayment pressure is manageable.
- LG Chem’s bonds offer yield to maturity between 5.2% and 5.5%, making them a favorable option for investors seeking stable income.
In our previous analysis (Idea of the Week: LG Chem–Investment Choice of Korean Chemical industry), we introduced LG Chem as South Korea’s largest integrated chemical company. Its diversified business portfolio includes LG Energy Solution, Petrochemicals, Advanced Materials, Life Sciences, and Agricultural Technology. LG Chem holds a prominent position in both the global chemical and new energy material markets.
Chart 1: LG Chem’s Revenue Breakdown
In the first three quarters of 2024, LG Energy Solution accounted for approximately 50% of LG Chem’s total revenue (see Chart 1). LG Chem spun off its battery manufacturing business in 2020 to establish LG Energy Solution as a subsidiary, while continuing to focus on the core raw materials for lithium-ion batteries. These materials include cathode materials, separators, and electrolytes, enabling LG Chem to achieve high vertical integration with LG Energy Solution and solidify its leadership in the battery market.
LG Chem’s petrochemical business, which accounts for around 35% of its revenue, focuses on producing basic chemicals and plastic materials widely used in the construction, automotive, and home appliance industries.
The advanced materials business, contributing approximately 12% of revenue, specialises in developing high-performance materials, including those materials for semiconductors and displays (such as OLED materials), battery separators, and thermal management materials. Key customers include Samsung, LG Electronics, Tesla, and Toyota.
The life sciences division, accounting for around 2% of revenue, operates in the healthcare sector, providing therapeutic drugs, vaccines, and diagnostic tools.
Finally, the agricultural technology business, which makes up about 1% of revenue, is managed by the subsidiary Farm Hannong and focuses on agricultural chemicals and seed technology.
LG Chem’s revenue declines in Q1-Q3 2024, but it has managed to remain profitable
In the first three quarters of 2024, LG Chem reported total revenue of KRW 36.6 trillion, a 13% YoY decline, and an operating profit of KRW 1.2 trillion, down 49% YoY. The operating profit margin fell to 3.2% (see Chart 2). The decline in revenue was primarily driven by a significant drop in LG Energy Solution’s revenue, while the sharp reduction in operating profit was further exacerbated by losses in the petrochemical business.
The revenue decline was partly due to a high base effect from 2023, when strong demand in the electric vehicle (EV) market fuelled rapid growth for LG Energy Solution, resulting in a high revenue baseline. Revenue in 2024 now falls between the levels of 2022 and 2023, but the company remains profitable overall.
Chart 2: LG Chem’s Revenue and Operating Profit
LG Energy Solution, LG Chem’s core revenue driver, posted a 25.5% YoY decline in revenue, to KRW 19.2 trillion in the first three quarters of 2024. The global EV market slowdown created challenges across major regions:
- European Market: EV penetration growth slowed as governments reduced subsidies for new energy vehicles, coupled with declining consumer purchasing power.
- US Market: Despite support from the Inflation Reduction Act (IRA) for the battery supply chain, demand for high-priced EVs remained weak. Major customers, such as Tesla, reduced orders, further impacting LG Energy Solution’s shipment volumes.
- Chinese Market: Sluggish consumer demand and intensified export competition negatively affected LG Chem. Local competitors like CATL and BYD expanded their market share by leveraging competitive pricing and localisation advantages, posing significant threats to LG Chem’s position in the region.
Despite these short-term pressures, LG Chem is well-positioned for long-term growth:
LG Chem signed a long-term supply agreement with General Motors, committing to supply 500,000 tons of cathode materials from 2026 to 2035. This deal, valued at $19 billion, provides stable long-term growth prospects.
The upcoming launch of LG Chem’s cathode materials plant in Tennessee will enhance its localized supply capabilities in the North American market, improving competitiveness and supporting revenue stability in the region.
LG Chem’s leadership in high-nickel NCMA batteries and solid-state batteries positions the company at the forefront of the EV battery market, ensuring its ability to maintain a competitive edge in future industry developments.
The revenue of the petrochemical business has remained relatively stable over the past few years, but its operating profit has placed a significant burden
The petrochemical business remains one of LG Chem’s important revenue drivers, with relatively stable revenue over the past few years. However, its operating profit has consistently been negative, which weighing heavily on the group’s overall profitability.
The profitability of LG Chem’s petrochemical business is closely tied to the performance of the broader chemical industry, evaluated using the Asian Naphtha Cracking Margin as a benchmark (see Chart 3). The Naphtha Cracking Margin reflects the profit per ton of naphtha (used as a feedstock) after processing into chemical products, with production costs deducted.
Chart 3: Asian Naphtha Cracking Margins and LG Chem’s Petrochemical Operating Profit
In mid-2022, the profitability of the petrochemical industry weakened significantly, primarily due to supply-demand imbalances and intensified market competition. Referring to Chart 3, the Asian Naphtha Cracking Margin turned negative at the end of 2022, reflecting three major pressures: elevated crude oil prices, rising raw material costs, and downward pressure on chemical product prices.
This directly led to a significant decline in LG Chem’s petrochemical business operating profit starting in late 2022. The operating profit turned negative in Q4 2022 and has remained in the red ever since.
As China is one of the most important markets for the business, fierce competition in the Chinese chemical industry has driven down product prices significantly. Additionally, crude oil prices have remained high, with WTI crude oil averaging around $70 per barrel over the past year, further weighing on profitability. These trends are unlikely to reverse quickly, and we believe that the potential for improvement in the petrochemical business remains limited in the near term.
LG Chem actively expands battery business, rise in leverage level but remains healthy
As of the end of September 2024, LG Chem’s short-term debt increased to KRW 9.1 trillion (see Table 1), while long-term debt reached KRW 19.0 trillion, representing a 28% growth in total debt compared to the end of 2023. The net gearing ratio rose to 42.3%, indicating an increase in leverage. The increase is primarily attributed to the company’s aggressive expansion of its battery business, which has led to a surge in capital expenditures exceeding operating cash flow.
At the same time, the Total Debt / EBITDA ratio rose to 6.2x, and the interest coverage ratio declined to 6.6x, reflecting the impact of higher debt levels. However, these metrics remain within a healthy range.
We believe LG Chem’s capital expenditures have likely peaked, as management has explicitly stated plans to moderately reduce spending over the next few years. Coupled with anticipated technological advancements from recent significant investments and future revenue growth, we expect the company’s leverage to gradually stabilize. In the short term, further deterioration in leverage levels appears unlikely.
Table 1: LG Chem Credit Metrics
| KRW Trillion Won | End of 2022 | End of 2023 | 2024 Sep |
| Short Term Debt | 3.8 | 7.1 | 9.1 |
| Long Term Debt | 12.2 | 14.9 | 19 |
| Cash and Cash Equivalent | 8.5 | 9.1 | 8.8 |
| Net Gearing Ratio (%) | 19.9% | 31.4% | 42.3% |
| Total Debt / EBITDA (x) | 4.8 | 5.6 | 6.2 |
| Interest Coverage Ratio (x) | 21.2 | 10 | 6.6 |
Source: Company's Reports, iFAST compilations Data as of 30 September 2024 | |||
LG Chem USD Bonds with YTM between 5.2% to 5.5%
Currently, there are four LG Chem USD bonds available on the platform, all rated BBB (S&P) and classified as investment grade. The bonds have maturities ranging from 1 to 6 years, with net yields to maturity between 5.2% and 5.5% (see Table 2).
Despite a slowdown in business growth, LG Chem continues to maintain a strong business foundation and a healthy credit profile, leveraging its leadership position in the chemical industry. Investors interested in LG Chem or South Korean issuers may consider bonds "LGCHM 1.375% 07Jul2026 Corp (USD)" and "LGCHM 3.625% 15Apr2029 Corp (USD)", which are suitable for those seeking stable income.
Table 2: LG Chem Bonds
| Bond | Years to Maturity | Ask Price (Investor Buy) | YTM |
| LGCHM 4.375% 14Jul2025 Corp (USD) | 0.5 | 99.6 | 4.6% |
| LGCHM 1.375% 07Jul2026 Corp (USD) | 1.5 | 94.6 | 4.8% |
| LGCHM 3.625% 15Apr2029 Corp (USD) | 4.3 | 93.2 | 5.2% |
| LGCHM 2.375% 07Jul2031 Corp (USD) | 6.5 | 82.5 | 5.4% |
Source: Bondsupermart Data as of 17 January 2025 | |||
Related Risks
LG Chem's battery-related products are highly sensitive to global electric vehicle (EV) market demand. If demand for EVs slows further or is negatively impacted by policy changes (e.g. subsidy reductions or trade restrictions), LG Chem’s revenue and profitability could be adversely affected.
The production of new energy materials relies heavily on critical raw materials like lithium, nickel, and cobalt. Price fluctuations in these materials can exert significant pressure on production costs and profit margins.
LG Chem also faces rising competition from Chinese companies such as CATL and BYD, which poses challenges to its global market position.
Conclusion
LG Chem is facing profitability challenges due to weakened global EV demand and losses in its petrochemical business. However, the company remains profitable overall, with its expansion of battery production capacity in North America providing strong support for future growth.
While the company has increased debt to fuel its battery business expansion, its overall leverage remains at a relatively healthy level, and debt repayment pressure is manageable.
LG Chem’s bonds offer yield to maturity between 5.2% and 5.5%, making them a favorable option for investors seeking stable income.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report holds a NIL position in the abovementioned securities.
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