S&P Global Ratings has changed its outlook on LG Chem (KRX:051910) and core subsidiary LG Energy Solution (KRX:373220) to negative from stable while maintaining their long-term issuer and issuer credit ratings at BBB, according to a recent release.
Operating challenges will hound the companies over the next year given lingering weakness in the chemical sector and a decline in electric vehicle (EV) demand that will weigh on profitability, S&P said.
The companies may have to wait longer before seeing a turnaround on operating losses in the EV battery and chemical segments, the rating agency said.
EV battery sales could fall by more than 20% this year amid subdued demand following the expiry of U.S. consumer tax credits for these autos, the rating agency said.
Heightened competition from large, integrated Chinese producers as well as continued overcapacity and trade risks also impact the companies' business risk profile.
Still, LG EnSol's quickly expanding energy storage system (ESS) business and lower capital investment should partially offset negative factors, according to S&P.
The rating agency expects the ESS segment to contribute to 10% to 16% of LG EnSol's operating profit margin, with gains driven by production incentives for building US battery plants and a boost in supply chains.
LG EnSol's capital expenditure will materially drop to about 6 trillion won this year and 4 trillion won in 2027 given the completion of large projects, S&P said.
Notable shifts in the companies' profitability and cash flows, as reflected in the debt-to-EBITDA ratio, given EV battery demand, ESS growth and supply trends in the chemical segment could trigger future rating actions.
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