Samsung SDI: Q2 Results In Line with Expectations, Maintain Overweight
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Samsung SDI: Q2 Results In Line with Expectations, Maintain Overweight
Morgan Stanley maintains its Overweight rating and KRW 850,000 target price for Samsung SDI, citing sequential improvement in Q2 results, strong BBU business, US ESS capacity expansion to 35GWh, and attractive valuation after the pullback.
- Maintain Overweight rating with a target price of KRW 850,000, implying 54% upside
- 2Q26 results largely in line with guidance; sequential improvement across segments, led by BBU
- US ESS capacity planned to expand to 35GWh by end-2027; NCA lines converting to LFP
- Applied for US tariff refund; if confirmed, could provide upside risk to near-term earnings
- Preferred over peers due to exposure to AIDC and EU EV markets, as well as shareholding stability
Report interpretation
Overview
Morgan Stanley released key takeaways from recent discussions with Samsung SDI, maintaining an Overweight rating and a target price of KRW 850,000. The report notes that the company's Q2 2026 performance is progressing according to guidance, with sequential improvements across all business segments, particularly strong performance in Backup Battery Units (BBU) for AI data centers. Despite short-term pressures from some ESS project delays and declining EV sales, expected US tariff refunds and favorable exchange rates may offer earnings upside. From a medium-to-long-term perspective, the company is actively adjusting its US capacity structure to meet market demand and possesses unique structural advantages among Korean battery stocks.
Core views
Performance Tracking and Short-Term Outlook: Management maintained its guidance for modest sequential revenue growth and narrowing operating losses in Q2 2026 (Q1 operating margin was -4.4%). The small battery segment performed slightly better than expected, driven by strong momentum in BBUs; Energy Storage System (ESS) revenue growth was somewhat soft, mainly due to the postponement of a domestic Korean ESS project construction from late Q2 to Q3; Automotive battery revenue declined by approximately 10% sequentially, while the electronic materials segment recorded mid-single-digit sequential growth, overall aligning with initial guidance. Additionally, the company has applied for US tariff refunds, which could be recognized as early as Q2. Combined with favorable FX tailwinds, this may provide moderate upside risk to near-term earnings, although the specific timing and amount remain uncertain. Capacity Expansion and Technology Roadmap Adjustment: The company reiterated its target of reaching 30GWh of US ESS capacity by the end of 2026. It plans to add two Lithium Iron Phosphate (LFP) production lines at the Stellantis joint venture plant in H2 2026, while retaining one EV-dedicated line. Given weakening demand for Nickel Cobalt Aluminum (NCA) batteries in the ESS sector, the company plans to convert existing NCA ESS lines to LFP next year, bringing total US ESS capacity to around 35GWh by the end of 2027. Further expansion beyond 35GWh remains unclear in terms of timing, as joint venture partners GM and Stellantis have shown limited commitment to new plant construction. Meanwhile, the plan to sell its stake in Samsung Display continues on schedule for completion within the year. Investment Preference and Valuation Logic: Despite a ~20% pullback in the stock price from recent highs and an absolute EV/EBITDA multiple of 16x based on 2027 estimated EBITDA remaining relatively high, the firm maintains an Overweight rating and prefers Samsung SDI among Korean battery stocks. Key reasons include: 1) BBU/UPS business aligns better with AI Data Center (AIDC) demand trends; 2) The EU EV market policy environment is more favorable than that of the US; 3) Lower pressure from share selling compared to peers like LG Energy Solution.
Analysis framework
The institution tracks quarterly sequential changes across business segments to validate earnings inflection points, paying particular attention to the hedging effect of emerging incremental businesses like BBU against traditional operations. In capacity analysis, it focuses not only on total volume expansion but also on the alignment of technology roadmaps (NCA to LFP conversion) with market demand, as well as constraints imposed by joint venture partners' willingness on expansion pace. For valuation, it employs the EV/EBITDA multiple method, setting target multiples based on historical averages and standard deviation ranges, and incorporates proceeds from the disposal of non-core assets (Samsung Display stake) into the target price to reflect the company's path back to profitability and potential value realization.
Methodology notes
Apply a target EV/EBITDA multiple of 23x based on 2027 estimated EBITDA, taking the midpoint between the historical average and +1 standard deviation.
EV/EBITDA eliminates differences in capital structure and depreciation policies, making it suitable for the capital-intensive, high-depreciation battery manufacturing industry. Taking the midpoint between the historical mean and +1 standard deviation reflects increased confidence in the company's earnings recovery path, without directly assigning the historical peak multiple, thus preserving a margin of safety.
Focus on joint venture partners' (GM, Stellantis) commitment to new capacity construction as a key constraint variable for judging the pace of ESS expansion.
In the joint venture model, capacity expansion depends not only on the company's own strategy but also on partners' capital investment and market judgment. When partner willingness is insufficient, actual implementation may be delayed even if the company intends to expand, providing an important perspective for assessing the realization of overseas capacity.
Treat US tariff refunds as potential earnings upside risk, while emphasizing the uncertainty regarding confirmation timing and amount.
For policy-driven benefits that have not yet materialized, the institution positions them as 'upside risk' rather than base-case forecasts, highlighting possible surprises while avoiding overly optimistic pricing. This approach helps investors distinguish between certain earnings and contingent gains, managing expectations reasonably.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Samsung SDI (006400.KS)Core coverage beneficiary of BBU/AIDC demand growth, ESS capacity expansion, and tariff refund expectations
- Strengths
- BBU/UPS business aligns with AIDC trends; EU EV policy environment superior to US; less share selling pressure than peers
- Weaknesses
- Risk of ESS project delays; short-term pressure on EV sales; unclear expansion path beyond 35GWh
- Comparison
- Better shareholding stability compared to LG Energy Solution; top pick among Korean battery stocks
- Risks
- EV recovery slower than expected; intensified ESS competition leading to margins below expectations; delay in Samsung Display stake sale
Key data
- Target Price850,000 KRWUnchanged, implying 54% upside
- US ESS Capacity Target by End-202735 GWhFurther increase from 30GWh by end-2026, including NCA to LFP line conversion
- 2Q26 Automotive Battery Revenue Sequential Change-10%In line with initial guidance, reflecting short-term pressure on EV demand
- 2027 Estimated EV/EBITDA16xAbsolute valuation remains high but below historical peaks
- Stock Price Pullback from Recent Highs~20%KOSPI index rose ~1% during the same period
Impact & implications
The report views Samsung SDI as being in a critical window for earnings repair, with the ramp-up of its BBU business providing a buffer against fluctuations in traditional EV demand. The transition of US ESS capacity to LFP will help enhance product competitiveness and market share, but subsequent expansion pace requires close monitoring of joint venture partners' attitudes. Tariff refunds, if successfully confirmed, will serve as a short-term catalyst. Within the Korean battery sector, the company is seen as a more defensive and growth-oriented choice due to its AIDC-related exposure, advantages in the EU market, and lower equity dilution risk.
Risks
- Breakthroughs in solid-state battery technology may alter the competitive landscape
- EV recovery speed falls short of expectations, limiting sales growth
- Intense competition in the ESS market leads to weaker-than-expected margin expansion
- Delay in the progress of Samsung Display stake sale
- Uncertainty regarding the timing and amount of US tariff refund confirmation
What to watch
- Timing and specific amount of US tariff refund confirmation
- Progress of LFP line commissioning at the Stellantis JV plant in H2 2026
- Execution of NCA ESS line conversion to LFP in 2027
- Whether the Samsung Display stake sale is completed as scheduled within the year
- Achievement of quarterly profit turnaround in 2H26