The author is an analyst at NH Investment & Securities. He can be contacted at [email protected] — Ed.
Given expectations for earnings normalization in 2H22 and overseas factory expansion, Dongwha Enterprise’s current undervaluation should fade going forward.
Dongwha Electrolyte seems heavily undervalued
We maintain a buy rating and a TP of 120,000W on Dongwha Enterprise. Reflecting the slowdown in the construction sector, we are reducing the 2023F and 2024F EBITDA of the wood business by 20% and 13%, respectively, but maintaining our TP due to the reduction in net debt. We advise focusing on Dongwha Electrolyte’s growth potential rather than any slowdown in wood-related earnings. Profitability should normalize in 2H22 with the stabilization of raw material prices for electrolytes, and capacity would increase from 53,000 tons at the end of 2022 to 243,000 tons at the end of 2025. LiPF6, a key raw material, should be produced in North America. North through cooperation with non-Chinese companies. Therefore, the conditions must be met to qualify for US subsidies for electric vehicles. Considering Dongwha Electrolyte’s market capitalization of W384.7 billion, the electrolyte business is valued at a 2024F EV/EBITDA of just 5.8x. As this figure is less than half of the 13.7x average for rechargeable battery material sets, we see excessive underpricing. Given expectations of earnings normalization and smooth overseas expansion, this undervaluation should fade going forward.
Profitability to fully normalize in 2H22
Dongwha Enterprise recorded 2Q22 consolidated sales of 278.2 billion W (+20% yy, -2% qq) and an OP of 25.9 billion W (-29% yy, -10% qq), the two figures lacking consensus. Dongwha Electrolyte returned to profit, with sales of 29.7 billion W (+51% over one year, -17% qt) and an OP of 200 million W (OPM of +0.6%). Sales slowed qq due to a temporary decrease in the production of small batteries at large customers due to disruptions in parts supply. Helped by a 48% qq decline in the price of LiPF6, Dongwha Electrolyte became profitable in 2Q22. Given existing inventory, a full-fledged improvement in profitability is expected from 3Q22. In the wood business, despite robust sales, profitability slowed due to rising costs.
We forecast for 3Q22 consolidated sales of 294.5 billion W (+34% yy, +6% qt) and an OP of 24.4 MdW (-18% yy, -5% qt). At Dongwha Electrolyte, sales and OP are expected to improve to 30.3 billion W (+28% yy, +2% qq) and 1.5 billion W (+5% OPM), respectively. It should be noted that the fall in LiPF6 prices in 2Q22 must be reflected in the costs of 3Q22. Our forecast for relatively slow qq sales growth reflects the planned line conversion due to take place in September for EV electrolyte production in 4Q22. Profitability should fully normalize in 4Q22, with electrolyte sales reaching 40.6bn and OP W3.4bn (OPM of +8%).