---
endpoint: analytics
pattern: Technology
status: done
latency_ms: 194552
conversation_id: fb0834b6-7152-47f3-9c54-1611bbf3a585
citations: 13
created: 2026-05-31 21:22:32Z
---

# What is the investment thesis for LG Energy Solution in the current market environment?

# LG Energy Solution (373220 KS) — Investment Thesis in the Current Market Environment

**As of 31 May 2026 | Current price (per latest CLSA coverage): ₩290,500**

LG Energy Solution sits at a complicated inflection point: a structurally weakening pure-EV-battery base, an aggressively scaling ESS franchise filling that hole, and a geopolitical/policy environment that is simultaneously the source of its biggest tailwind (localization) and its biggest downside risk (AMPC policy uncertainty + supply-chain shocks). Internal sell-side (CLSA) sits on the cautious side; management's own Q1 2026 print and commentary sketch the more constructive case.

---

## 1. CLSA's Internal House View — Underperform

CLSA transferred coverage of LGES to Dong Cheol Shin in May 2025 with the following stance [1]:

| Metric | Value |
|---|---|
| **Rating** | U-PF (Underperform) |
| **Target Price** | ₩330,000 |
| **Current Price (16-May-25)** | ₩290,500 |
| **Implied Upside to TP** | ~13.6% |

**Thesis (bear case)**: "Despite risks surrounding slower EV penetration and EV delivery delays being more or less priced in, we continue to see risks with regard to 2025 consensus OP. Hence we believe the negatives are not fully priced in and continue to exhibit caution towards the stock." [2]

**Valuation methodology**: CLSA derives the TP via DCF, treating LGES as "largely a pure EV battery play." Critically, **NOPAT used in the DCF excludes US AMPC** (advanced manufacturing production credits), with AMPC credits valued separately and then **discounted by 50%** to reflect potential policy risks. [3] — This is the single most important valuation modeling choice for the name: a meaningful share of LGES's operating profit comes from AMPCs, and a 50% haircut materially compresses fair value.

**Identified upside risk**: Sector-rotation flows (batteries are currently underweight in institutional portfolios) and a sharp rebound in EV demand to +20% in 2025. [4]

**Rating trajectory** — CLSA has been progressively more cautious over the past three years; the rating has migrated from BUY (₩780,000–₩860,000 TPs in 2022–early 2023) to O-PF, then HLD, then U-PF, with TPs collapsing from ~₩860k peak to ₩180k April-2025 stock price territory before the current ₩330k TP reset [5]:

| Date | Rating | Target Price |
|---|---|---|
| May 2022 | BUY (Old) | ₩780,000 |
| Feb 2023 | BUY | ₩840,000 |
| Mar 2023 | O-PF | ₩820,000 |
| Jul 2023 | O-PF | ₩580,000 |
| Nov 2023 | U-PF | ₩480,000 |
| Jan 2024 | SELL (Old) | ₩460,000 |
| Apr 2024 → present | HLD → U-PF | ₩400k → ₩330k |

---

## 2. The Bull Case — Per Management's Q1 2026 Disclosures

Filed 29-April-2026, the Q1 2026 earnings call paints a far more constructive picture than CLSA's thesis suggests, anchored on three pillars: **ESS scale-up, localization moat, and order-book momentum**.

### 2.1 Headline Q1 2026 numbers

- **Revenue: KRW 6.6 trillion**, +1% Q-o-Q, despite continued weak North American EV demand — supported by robust ESS and cylindrical battery shipments [6].
- **Operating loss: KRW 207.8 billion** (negative 3% margin) — driven by ESS ramp-up costs and lower EV pouch volume to the strategic NA customer [7].
- **AMPC credits collapsed**: KRW 189.8 billion in Q1 2026, **down >40% Q-o-Q**, reflecting the strategic customer's JV production suspension [7]. This is the empirical validation of CLSA's AMPC discount thesis — IRA credits are volatile and customer-dependent.
- **Capital structure stretched but managed**: Liabilities-to-equity 140%, debt-to-equity 83%, net debt-to-equity 70%; cash KRW 3.7 trillion; CapEx -47% YoY at KRW 1.6 trillion [13].

### 2.2 Order backlog inflection

Order backlog grew from **300 GWh at YE 2025 → 440+ GWh as of end-April 2026** — a ~47% step-up in four months [8]. This is the strongest counter-narrative to the EV-slowdown thesis: management is signing new orders even as North American EV volumes stay soft.

### 2.3 ESS pivot — from sub-10% to mid-30% of revenue

The most important structural shift in the thesis:

- **ESS revenue mix**: <10% in 2024 → **mid-20%** in Q1 2026 → guided to **mid-30%** by year-end 2026 [13].
- **North American ESS capacity**: targeting **50+ GWh** by year-end 2026 across five production sites (Michigan, Canada Ontario, Lansing standalone, Honda JV, GM JV Phase 2). EV lines at Tennessee Phase 2 are being converted to ESS [8].
- **Demand pull**: Management cites a **~20% CAGR for North American ESS demand through 2030**, structurally driven by AI data center power requirements. Critically, **Chinese players are restricted from entering the market**, and the pool of non-Chinese players with local production is small — implying durable pricing power for incumbent locals like LGES [12].
- **Already booked**: NA ESS order book had hit 140 GWh by end-2025; a Feb-2026 contract for an additional grid-scale project (delivery 2028) features 10% better energy density and ~15% lower landed cost vs current LFP ESS [13].

### 2.4 Geopolitics as a constant, not a variable

Management's framing: **"geopolitics has become a constant, not a variable"** — and they are explicitly positioning around it:

- **Localization moat**: OBBBA in the US and the EU's IAA (proposed March 2026) both require local battery production for subsidy/tender eligibility. Management argues that **"customers' preference for players with a local production base will continuously increase"** [9] — favoring LGES's heavy NA/EU footprint over Chinese competitors.
- **Energy security tailwind**: The US–Iran war (~2 months running per Q1 call) has spiked oil to >$100/bbl from ~$70 — pushing both EV TCO economics (narrowing vs ICE) and ESS demand (grid stability, data center power, time-to-build advantage of 1 year for renewables+ESS vs 5–15 years for traditional generation) [9].

### 2.5 Forward guidance

- **Q2 2026**: Revenue +10%+ Q-o-Q; targeting OP turning **positive ex-AMPC** as ESS ramp stabilizes [10].
- **FY2026**: Reaffirming **+10% to +15–20% top-line growth** vs. original guidance [11].

---

## 3. Synthesis — The Investment Thesis as a Probabilistic Bet

The current investment thesis on LGES distills to a **valuation debate, not a fundamental one**:

| Axis | Bull (Management / Q1 2026 data) | Bear (CLSA U-PF) |
|---|---|---|
| **EV demand** | NA still weak, but European mid-nickel/LFP/HEV strong; cylindrical to Tesla robust; possible NA recovery as gas prices stay high [8][9] | EV penetration slower than consensus; 2025/2026 OP at risk; 'negatives not fully priced in' [2] |
| **ESS** | Structural growth engine, mid-20% → mid-30% of revenue, 20% NA market CAGR through 2030, limited supply [13][12] | Treated as a pure-EV play in DCF, ESS upside likely not captured [3] |
| **AMPC** | KRW 189.8B Q1, supports profitability even with EV softness [7] | 50% discount to AMPC value in DCF — significant policy-risk haircut [3] |
| **Localization** | OBBBA + EU IAA structurally favor LGES local footprint [9] | Same risks but offset by execution / customer-mix concentration |
| **Backlog** | 300 → 440+ GWh in 4 months proves customer pull [8] | New orders are at lower-margin ESS/mid-nickel chemistries |

**The crux**: CLSA's caution rests on (a) the assumption that LGES is "largely a pure EV battery play" in valuation, and (b) a 50% policy-risk discount on AMPCs. Management's Q1 2026 disclosures argue the company has materially de-risked the EV-cyclicality concern by pivoting to ESS — which now represents a quarter of revenue and growing — while the AMPC volatility risk has already partially materialized (-40% Q-o-Q in Q1).

**Forensic tell — what is absent in management's narrative**: Management does NOT provide an explicit FY26 OP guidance, only top-line. They explicitly say "it is a very difficult and a bit challenging to set out a forecast for the second half or for the full year" [11]. The ex-IRA "turn to black" target [10] is precisely the variable CLSA penalizes hardest. **The base case OP path is unguided** — and this silence is the strongest validation of CLSA's caution.

**Sector rotation optionality** — CLSA itself flags this as the dominant upside catalyst [4]: batteries are underweight in institutional portfolios. If 2026 EV demand surprises to the upside (+20%), or if the OBBBA / EU IAA localization themes translate into faster-than-expected orderbook conversion, the multiple expansion alone could drive significant outperformance even before fundamentals confirm.

---

## 4. What to Watch (Next 6 Months)

1. **Q2 2026 OP ex-AMPC** — Does the company actually turn black ex-credits as guided? [10]
2. **Order backlog trajectory** — Does the 440 GWh number keep climbing into year-end? [8]
3. **ESS revenue share** — Is the mid-30% by YE2026 target tracking? [13]
4. **AMPC trajectory** — Does the strategic NA customer's JV production resume in H2, restoring AMPC contribution? [7]
5. **NA ESS pricing discipline** — As LGES, Tesla Megapack, and Fluence all scale local capacity, is the 20% CAGR demand growth sufficient to absorb supply without margin compression? [12]

---

**Sources**

[1] Korea EVs (Transfer of coverage), CLSA — Dong Cheol Shin (16 May 2025) — Rating table — 607959725LinqAlpha.PDF
[2] Korea EVs (Transfer of coverage), CLSA — Investment thesis section — 607959725LinqAlpha.PDF
[3] Korea EVs (Transfer of coverage), CLSA — Valuation details / DCF + AMPC methodology — 607959725LinqAlpha.PDF
[4] Korea EVs (Transfer of coverage), CLSA — Investment risks — 607959725LinqAlpha.PDF
[5] Korea EVs (Transfer of coverage), CLSA — Historical rating/price table — 607959725LinqAlpha.PDF
[6] LG Energy Solution Q1 2026 Earnings Call (29-April-2026) — IR opening
[7] LG Energy Solution Q1 2026 Earnings Call (29-April-2026) — AMPC and OP recap
[8] LG Energy Solution Q1 2026 Earnings Call (29-April-2026) — Order backlog & ESS capacity
[9] LG Energy Solution Q1 2026 Earnings Call (29-April-2026) — Localization (OBBBA, EU IAA)
[10] LG Energy Solution Q1 2026 Earnings Call (29-April-2026) — Q2 outlook
[11] LG Energy Solution Q1 2026 Earnings Call (29-April-2026) — FY26 guidance
[12] LG Energy Solution Q1 2026 Earnings Call (29-April-2026) — NA ESS market structure
[13] LG Energy Solution Q1 2026 Earnings Call (29-April-2026) — ESS mix & financials

## Citations

- [1] **607959725LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607959725LinqAlpha.PDF>
- [2] **607959725LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607959725LinqAlpha.PDF>
- [3] **607959725LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607959725LinqAlpha.PDF>
- [4] **607959725LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607959725LinqAlpha.PDF>
- [5] **607959725LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607959725LinqAlpha.PDF>
- [6] **LG Energy Solution Ltd., Q1 2026 Earnings Call, 29-April-2026 9** · external
- [7] **LG Energy Solution Ltd., Q1 2026 Earnings Call, 29-April-2026 9** · external
- [8] **LG Energy Solution Ltd., Q1 2026 Earnings Call, 29-April-2026 9** · external
- [9] **LG Energy Solution Ltd., Q1 2026 Earnings Call, 29-April-2026 9** · external
- [10] **LG Energy Solution Ltd., Q1 2026 Earnings Call, 29-April-2026 9** · external
- [11] **LG Energy Solution Ltd., Q1 2026 Earnings Call, 29-April-2026 9** · external
- [12] **LG Energy Solution Ltd., Q1 2026 Earnings Call, 29-April-2026 9** · external
- [13] **LG Energy Solution Ltd., Q1 2026 Earnings Call, 29-April-2026 9** · external

