Strong Growth in ESS and Cylindrical Batteries Offsets Weak U.S. EV Demand; Q2 Operating Profit Expected to Break Even

Overview

Goldman Sachs released its earnings commentary report for LG Energy Solution’s Q1 2026 results. The company’s Q1 revenue and operating profit matched preliminary results, with EBITDA margin (excluding IRA Advanced Manufacturing Production Credit AMPC) rebounding to 11% quarter-on-quarter, driven primarily by increased shipments of energy storage systems (ESS) and cylindrical batteries, partially offset by rising ESS ramp-up costs and reduced sales of North American EV pouch batteries. The ESS business is becoming the core growth engine, with its revenue share rapidly increasing; orders for 46-series cylindrical batteries have grown significantly. However, weak U.S. EV demand persists, and ramp-up costs from simultaneously launching five ESS plants in North America are weighing on short-term margins. Goldman Sachs maintains a Neutral rating with a 12-month target price of 410,000 KRW, believing that the current stock price already reflects baseline scenario expectations for market share and core margin growth.

Core views

The ESS business transformation is accelerating, becoming the primary driver of revenue growth. ESS revenue share has rapidly risen from less than 10% in 2025 to around 20% mid-year in Q1 2026, and management guides it will further expand to 30% mid-year by year-end. In February, the company signed additional grid-scale ESS supply contracts with existing North American strategic customers, starting deliveries of next-generation large-capacity LFP products from 2028, with cost improvements exceeding 10%. To meet growing ESS demand, LGES is converting EV production lines across North America into ESS capacity; this quarter, it added a new joint venture plant in Ohio with Honda, bringing the total number of North American ESS sites to five, aiming for over 50 GWh of North American ESS capacity by year-end 2026. The EV business shows regional and product line differentiation. U.S. EV pouch battery shipments fell sharply quarter-on-quarter due to conservative inventory management by major North American strategic customers, leading to temporary production halts at joint ventures. However, shipments of mid-to-low-end European products (high-voltage medium-nickel) continue to grow, and cylindrical batteries remain strong in non-North American markets thanks to upgraded EV model launches. The 46-series cylindrical batteries began production in Okcheon, South Korea, at the end of 2025, and shipments are now rising, accounting for a mid-single-digit percentage of small-battery segment revenue in Q1 2026. Orders for the 46-series have grown from over 300 GWh at the end of 2025 to over 440 GWh as of end-April 2026, and mass production at the Arizona plant is scheduled to start by year-end 2026 as planned. Second-quarter and full-year guidance is solid. Management forecasts Q2 2026 revenue to rise more than 10% quarter-on-quarter, driven by continued increases in ESS shipments, stable cylindrical battery sales to strategic customers, and improving EV demand in Europe. In terms of profitability, the company aims for operating profit to break even across the board in Q2 2026 (excluding IRA tax credits AMPC). North American EV demand remains weak, but management notes a slight improvement in U.S. EV sales (including the used car market) in March. For the full year, management reaffirms guidance for 15-20% year-on-year revenue growth, though warns of short-term pressure from rising logistics costs and utility cost inflation triggered by the U.S.-Iran conflict. ESS operating margin (including AMPC) is still projected to be in low single-digit losses in Q2 2026, with improvements expected in the second half of 2026 once new sites stabilize. In terms of valuation, LGES’s current trading price is close to its mid-cycle EV/EBITDA multiple. Goldman Sachs uses a blended approach combining DCF (WACC 8.4%, perpetual growth rate 3.3%) and 2027E EV/EBITDA at 50% each weight, applying a 20x mid-term multiple to adjusted (excluding JV shares) 2027E EBITDA, arriving at a 12-month target price of 410,000 KRW. The report sees positive fundamentals, expanding global battery technology leadership, and upcoming commercialization of new products such as large-size 4680 cylindrical batteries, module-free LFP batteries (starting 2025), and dry electrode processes (starting 2028). Market share in the U.S. is expected to grow, boosting margins and returns (Goldman Sachs forecasts 35% CAGR for 2025-2027E EBITDA, with CROCI expansion of 3.7 percentage points). However, the current stock price already reflects a baseline scenario of 14% market share and 18% core EBITDA margin by 2030 (compared to 12%/9% in 2024).

Analysis framework

Goldman Sachs’s analytical framework revolves around three main axes: business structure transformation, regional market differentiation, and product line variations. First, it tracks changes in ESS and EV battery revenue shares, assessing the company’s progress in shifting from a single EV battery exposure toward diversified chemical systems. Second, it distinguishes demand performance across different regions like North America and Europe—North America shows weak EV demand but strong ESS demand, while Europe sees improving demand for mid-to-low-end EVs. Third, it analyzes separately different product lines such as pouch, cylindrical, and 46-series batteries; the growth in 46-series cylindrical battery orders is seen as a positive signal. Profit forecasts are based on a comprehensive consideration of capacity ramp-up progress, cost structures, and policy incentives. The IRA 45X advanced manufacturing production credit ($45 per kWh) and the 48E investment tax credit (about 40% subsidy on capital expenditure) provide cost advantages for domestic North American producers, though JV partner OEMs previously sought to share more of the tax credit benefits. Valuation employs a blended DCF and EV/EBITDA approach, reflecting the company’s position during a capacity expansion period with high free cash flow volatility.

Methodology notes

• Valuation MethodDCF Cash Flow Discounting

  DCF Cash Flow Discounting

  Calculates enterprise value by forecasting future free cash flows and discounting them using the weighted average cost of capital (WACC). In this report, Goldman Sachs uses WACC 8.4% and a perpetual growth rate of 3.3% for DCF valuation, accounting for 50% of the target price derivation.

• Valuation MethodEV/EBITDA valuation

  EV/EBITDA Valuation

  The multiple of enterprise value to EBITDA, suitable for capital-intensive industries with significant depreciation and amortization. This report applies a 20x mid-term multiple to adjusted 2027E EBITDA, accounting for 50% of the target price derivation.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Supply-Demand Framework

  Analyzes the balance between industry supply and demand to determine price and profit trends. This report separately examines the diverging supply-demand dynamics—rapid growth in ESS demand (1-3 years lead time for solar+ESS deployment vs. 5-15 years for traditional power) and weak North American EV demand.

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Industry Chain Transmission

  Upstream-Midstream-Downstream Industry Chain Transmission

  Tracks the cost and profit transmission mechanisms across various links in the industry chain. This report analyzes how IRA tax credits (45X AMPC $45 per kWh, 48E ITC 40% capital expenditure subsidy) affect the cost advantage of domestic producers relative to imported Chinese products.

• Cycle and Economic Sentiment FrameworkCapacity/Equipment Cycle (Juglar)

  Capacity/Equipment Cycle (Juglar)

  Tracks the impact of corporate capacity expansion cycles on profits and cash flows. This report focuses on the ramp-up cost pressures from simultaneously launching five ESS sites in North America, as well as the impact of the Arizona plant’s mass production plan by year-end 2026 on capacity utilization and margins.

• Company Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Operating/Financial Leverage Analysis

  Analyzes the amplifying effect of fixed cost ratios and capacity utilization changes on profits. This report highlights how fast or slow the launch of new battery factories impacts operating leverage, creating upside/downside risks for operating margin estimates.

• Event Game Theory and Behavioral FinanceExpectation Gap/Expectation Management

  Expectation Gap/Expectation Management

  Compares market consensus expectations with company guidance to identify investment opportunities. This report contrasts Goldman Sachs’ baseline scenario (14% market share, 18% EBITDA margin by 2030) with the implied expectations embedded in the current stock price, concluding that the stock price already reflects the baseline scenario.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• LG Energy Solution (373220.KS)

  Covered asset, with positive developments in ESS transformation and 46-series cylindrical battery progress, but weak North American EV demand weighs on short-term margins

  Strengths

  Largest battery manufacturer outside China (based on 2024 market share), leadership in high-nickel chemistry; upcoming commercialization of new technologies including 46-series cylindrical batteries, module-free LFP batteries, and dry electrode processes; expected growth in U.S. market share and higher margins

  Weaknesses

  Persistent weakness in North American EV pouch battery demand; ramp-up cost burden from simultaneously launching five ESS sites; potential distribution disputes over IRA tax credit shares with JV partner OEMs

  Comparison

  Coverage includes Ecopro BM, L&F, LG Chem, Posco Future M, SK Innovation, Samsung SDI, etc.; LGES has technological leadership in cylindrical batteries and high-nickel chemistry

  Risks

  Market share growth faster/slower than expected; new battery factory launch faster/slower than expected; global EV penetration higher/lower than expected

Key data

• Q1 2026 EBITDA Margin (Excluding AMPC)11%Rebounded quarter-on-quarter, compared to an average of about 11% in fiscal year 2024
• ESS Revenue ShareAbout 25% in Q1 2026Rapidly rose from under 10% last year, targeting 30% mid-year by year-end
• 46-Series Order BookOver 440 GWhData as of end-April 2026, compared to over 300 GWh at end-2025
• Q2 2026 Revenue GuidanceMore than 10% QoQ growthDriven by increased ESS shipments, stable cylindrical battery sales, and improved European EV demand
• Q2 2026 Operating Profit GuidanceBreak-even (Excluding AMPC)Target across the whole company
• Full-Year 2026 Revenue Growth Guidance15-20% YoYManagement reaffirmed, but warned of inflationary pressures from logistics and utilities costs
• North American ESS Capacity TargetOver 50 GWh by year-end 2026Five ESS sites launched simultaneously
• Target Price410,000 KRW12-month target price, based on blended DCF + EV/EBITDA valuation
• 2027E EV/EBITDA Multiple20xMid-term multiple applied to adjusted (ex-JV shares) EBITDA

Impact & implications

For LGES, the ESS business transformation is progressing according to guidance, and the accumulation of 46-series cylindrical battery orders is encouraging, demonstrating the company’s competitiveness in non-North American markets and new product lines. However, weak North American EV pouch battery demand persists, coupled with ramp-up cost burdens from simultaneously launching five ESS sites, keeping short-term margins under pressure. Goldman Sachs believes that the current stock price already reflects baseline scenario expectations for market share and core EBITDA margin growth (14%/18% by 2030, compared to 12%/9% in 2024), thus maintaining a Neutral rating. For the industry, local policies such as the IRA tax credit (45X AMPC, 48E ITC) and the European iAA proposal (requiring regionally produced batteries to qualify for public procurement) continue to favor domestic battery producers in North America and Europe. The structural case for ESS—early deployment of solar+ESS (1-3 years lead time vs. 5-15 years for traditional power)—suggests potential TAM expansion in the medium to long term.

Risks

• Market share growth faster/slower than expected: LGES’s pace of gaining market share relative to other tech leaders may exceed/fall below estimates, driving upside/downside risks for long-term margins and market share
• New EV battery factory launch faster/slower than expected: Accelerated/delayed launch of new battery factories could result in higher/lower operating leverage, posing upside/downside risks for operating margin estimates
• Global EV penetration higher/lower than expected: Higher/lower oil prices and changing IRA tax credit implementation difficulties could lead to higher/lower EV penetration, posing upside/downside risks for profit estimates

What to watch

• Can ESS revenue share reach the mid-year guidance of 30% by year-end 2026?
• Progress of mass production and order execution for 46-series cylindrical batteries (Arizona plant mass production by year-end 2026)
• Progress of commissioning and cost absorption at five North American ESS sites
• Trend of recovery in U.S. EV demand (including the used car market)
• Changes in IRA tax credit policies (AMPC, ITC) and their allocation arrangements with JV partners
• Impact of logistics and utility cost inflation on margins