Bullish indicating open at $55-$60, IPO prices at $37
Investing.com -- S&P Global Ratings has lowered its long-term issuer and issue credit ratings for LG Chem and its core subsidiary, LG Energy Solution Ltd. (LG EnSol), to ’BBB’ from ’BBB+’ on March 4, 2025. The downgrade is attributed to high capital expenditure and challenging operating conditions for the chemical and electric vehicle (EV) battery businesses.
LG Chem’s debt leverage is anticipated to remain high due to aggressive investments in EV-related businesses. The company’s adjusted debt is estimated to remain at Korean won (KRW) 25 trillion-KRW27 trillion in 2025-2026, compared to KRW22 trillion in 2024 and KRW16 trillion in 2023.
LG Chem’s profitability has been impacted by a slowdown in demand for EV batteries and prolonged challenges in the chemical business. The company’s EBITDA declined to KRW5.4 trillion in 2024, from KRW6.5 trillion in 2023. The company’s adjusted debt-to-EBITDA ratio weakened to 4.0x in 2024, from 1.5x in 2022 and 2.4x in 2023.
The company’s chemical business is expected to remain in a prolonged cyclical trough in 2025 due to overcapacity in China and subdued demand. The weak petrochemical business cycle and escalating trade tensions could indirectly impact the profitability of LG Chem’s chemical business.
LG Chem has been restructuring unprofitable chemical businesses and considering selling a stake in its naphtha cracking center ( NCC (NSE:NCCL)) facilities. However, these divestments are not factored into base-case assumptions due to the low visibility at this stage.
Uncertainties around EV battery demand and energy policy changes in the U.S. pose a risk for LG EnSol. The company’s operating performance could be affected by changes to consumer and production tax credits under the Inflation Reduction Act (IRA). LG EnSol received an AMPC of about KRW1.4 trillion in 2024.
Despite a gradual decline in capex, LG EnSol’s financial metrics will likely remain weaker than anticipated. The company’s capex is expected to reduce to KRW9 trillion in 2025 and KRW7 trillion in 2026, compared with KRW12 trillion in 2024. The company’s adjusted debt will likely grow to about KRW18 trillion in 2025, from KRW13 trillion in 2024, resulting in a debt-to-EBITDA ratio of about 3.5x in 2025.
The stable outlook for both companies reflects expectations of modest profitability improvement over the next one to two years, largely due to a ramp-up of new EV battery capacity in the U.S. However, leverage metrics are likely to remain volatile due to ongoing operational headwinds in the chemical business and macroeconomic uncertainties.
S&P may lower the ratings on LG Chem and LG EnSol if LG Chem’s debt-to-EBITDA ratio surpasses 3.5x on a sustained basis or if there is a continuing downcycle in the chemical business. The ratings may also be lowered if there are delays in the recovery of EV battery demand, more aggressive investments, or weakening in current policy support in the U.S.
The ratings may be raised if there is an improved prospect of the parent’s debt-to-EBITDA ratio moving below 2.5x on a sustainable basis. Material profitability gains in the EV battery and chemical businesses, and substantial debt reduction with more prudent financial policies could lead to an upgrade.
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