by Debra Fiakas CFA
The post “Energy Storage Restart,” which was published last week, discussed the efforts by
General Electric (GE: NYSE) to get back into the market for utility-scale energy storage. After some difficulties that required the partial closing of its battery manufacturing plant, GE has got back in the game with new contracts wins. In April 2015, the company won a contract to supply Con Edison Development with an 8-megawatt-hour battery storage system at a solar project in California. GE will be integrating lithium-ion batteries rather than its own battery technology into the project.
Where will GE source the lithium-ion batteries for the California project? So far, spokespersons have been non-committal on the name. Today’s post profiles a company that may not be a likely ‘bedfellow’ for GE, but it is a leader in lithium ion energy storage technology.
LG Chem (051910: KS) is Korea’s largest specialty chemicals company. It’s bread and butter business is supplying petrochemical feedstocks such as ethylene and propylene, aromatics such as benzene and toluene, and specialty polymers such as butadiene-based synthetic rubber. The company reported US$18.7 billion (21.8 trillion Korean won) in sales in the twelve months ending March 2015, providing US$9.48 in earnings per share (11,047.80 Korean won). LG Chem shares the wealth with a dividend that provides a 1.6% yield at the current share price near US$205 per share (238,000 Korean won).
The company got into the battery market thought its long-standing competence in materials sciences. LG Chem began a research and development effort in lithium ion technology in the mid 1990s. According to the Korean Intellectual Property Office, the company is responsible for over two thirds of patents and patent applications related to energy storage systems in Korea. That deep experience has given the company an edge in the automotive battery market. The company’s first product was a lithium-ion battery for a hybrid electric vehicle. In 2015, LG Chem is selling to more auto makers than any other electric vehicle battery producer. The other two leaders, Panasonic and AESC, are heavily dependent upon single customers – Tesla for Panasonic and Nissan for AESC.
In 2010, just five years ago LG Chem brought a residential energy storage unit to the market for households with solar energy installations. The company cuts its teeth in utility-scale energy storage by working with Korea Electric Power on domestic smart grid projects. By 2013, Southern California Edison bought LG Chem storage units for its Tehachapi Wind Energy Project. At the time it was the largest battery energy storage system in North America.
In early 2015, LG Chem recent forged a four-party agreement with Gexpro, Ideal Power and Geli to pursue the energy storage in the North America market. Under the pact, LG Chem will supply its lithium-ion batteries to electrical products distributor GexPro, mostly for residential ‘peak-shift’ applications. Interestingly, Gexpro was founded by General Electric as the old GE Supply and then sold in 2006 to its current parent, Rexel of France. While the partnership is not focused on utility-scale applications, it win a meaningful presence for LG Chem in the fast growing residential U.S. market.
LG Chem may never be a supplier of lithium ion batteries for General Electric. Yet it appears the company has a much if not a greater presence in the North American energy storage market than GE. Shares of LG Chem are trading at 21.5 times trailing earnings. For a company that delivers a 6.0% operating profit margin on mostly commodity products, that is a compelling value. It takes a bit of extra effort to take a position in a stock that is not trading on a U.S. exchange, but it may be well worth it based on LG Chem’s leadership in the battery space.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.