LGES Strong 2Q Earnings Guidance + New Orders, Target Price Raised to KRW530,000

Overview

J.P. Morgan expresses optimism about LGES's prospects after discussions with management, despite higher-than-expected fixed costs in 1Q26 due to rapid expansion (from 1 ESS plant in 3Q25 to 5 by 3Q26). The report highlights upcoming Gen3 LFP batteries (10% higher energy density, 15% lower cost), new large-scale grid project orders (delivery from 2028), and reported >100GWh BMW 46-series cylindrical battery order (10-year supply, 14GWh annually). Despite underperformance due to weak 4Q25/1Q26 results, J.P. Morgan expects profit recovery in 2Q and stronger rebound in 2H26, driven by improved cylindrical battery shipments, increased European EV battery shipments, and potential Ultium plant restart in July. The target price is raised to KRW530,000 (from KRW510,000), maintaining Overweight rating.

Core views

LGES is a top-five global EV battery supplier. J.P. Morgan is bullish due to product mix optimization and strong US ESS shipments. **ESS Business Turnaround**: 1Q26 ESS continued losses due to new plant ramp-up delays (pack bottlenecks), but company expects >50% Q/Q revenue growth in 2Q, with share rising from ~15% in 1Q to >30% by 4Q26; J.P. Morgan forecasts >35%. This shift is crucial as US ESS orders contribute higher net profit to shareholders due to AMPC (Advanced Manufacturing Production Credit) sharing arrangements versus US EV battery orders. Since mid-2024, LGES has accumulated >100GWh LFP ESS orders, expected to generate ~KRW4 trillion net profit. ESS revenue share projected to rise from 8% in 2024 to >30% by 2027. **New Orders Drive Growth**: In 1Q26, LGES signed new grid projects (delivery from 2028) using Gen3 LFP pouch batteries (10% higher energy density, 15% lower cost). LGES will also launch LFP prismatic ESS batteries in 2H27, likely for Tesla Megapack. 46-series cylindrical battery orders grew from 300+GWh in 4Q25 to 440+GWh by April, with ~140GWh reportedly from BMW (KRW10 trillion total, KRW1 trillion annual revenue, 3.5%-4.3% of LGES FY26 revenue guidance). This order is significant as BMW was not a major LGES client previously. LGES also noted potential for European cylindrical battery plant given "large order volumes from local customers." **Tesla Europe Supply Chain Opportunity**: Despite Tesla's global 1Q26 sales declining 14% Q/Q, LGES shipments to Tesla rose as it mainly supplies Tesla Europe. EU5 EV penetration rose to 31% in March (from 29% in February), with sales +84% Q/Q and +46% YoY. Tesla Europe market share rose from 1.3% in 2025 to 2.8% in March 2026, with new registrations +96% YoY (strong in Norway, France, Sweden). LGES also reported stronger pouch battery shipments to European clients (likely including Volkswagen). **Profit Outlook Turnaround**: 1Q26 adjusted EBIT was only KRW1,286 billion, below guidance. But J.P. Morgan expects 2Q recovery (low base), further improvement in 3Q/4Q. 2H26 operating profit will benefit from higher cylindrical/EU shipments and Ultium plant restart. FY26 adjusted EBIT maintained at KRW1,286 billion, but FY27/28 raised to KRW3,745 billion/KRW5,230 billion.

Analysis framework

J.P. Morgan's framework focuses on: (1) Product mix evolution and profit contribution differences—ESS vs EV battery orders' varying net profit impacts due to US subsidy sharing; (2) Order pipeline and commercialization timeline—tracking signed orders (>100GWh ESS, 440+GWh 46-series) and new tech (Gen3 LFP) to assess future growth drivers; (3) Geographic and client diversification—Tesla Europe, BMW, and factory expansions (ESS:1→5). Cross-validation derives a "product upgrade + order growth + geographic diversification" profit recovery path.

Methodology notes

• Industry Analysis FrameworkSupply-demand framework

  Strong ESS/EV battery demand faces temporary supply bottlenecks (ramp-up delays, pack constraints)

  Focuses on ESS plant expansion (1→5), pack bottlenecks, and >50% Q/Q growth expectations—classic supply constraint analysis where demand outstrips temporary supply, with profit recovery upon capacity release.

• Valuation MethodEV/EBITDA valuation

  15x 2-year forward EV/EBITDA multiple for target price

  Multiple aligns with Korean EV battery peers. Using 2-year forward (2027/28) EBITDA reflects confidence in mid-term profit recovery and product upgrades, not short-term volatility.

• Industry Analysis FrameworkVolume-Price Breakdown

  Differentiating ESS/EV orders' volume vs. price impact on profits

  ESS orders may have lower GWh but higher net profit per unit due to AMPC. >100GWh ESS orders contribute KRW4 trillion net profit—volume-price tradeoffs highlight why mix optimization matters more than sheer growth.

• Fundamental & Financial FrameworkWorking capital cycle

  Fixed cost amortization and ramp-up cyclical pressures during expansion

  1Q26 ESS losses stem from fixed costs (5 new plants) before utilization rises. As shipments accelerate Q/Q, unit fixed costs decline, boosting margins—classic capacity cycle dynamics.

• Industry Analysis FrameworkSubstitution Effect Analysis

  Middle East conflict spiking oil/gas prices, accelerating EV adoption and battery demand

  EU5 EV penetration rose (29%→31%) amid energy crisis, benefiting Tesla Europe sales and LGES shipments—macro changes via traditional energy→EV substitution.

• Competitive & Strategic FrameworkMoat / competitive advantage

  LGES's leadership in high-nickel pouch, cylindrical, and LFP product lines forms barriers

  BMW order significance reflects LGES's cylindrical tech/scale lead—won despite multi-supplier competition. Gen3 LFP (10% denser, 15% cheaper) further differentiates.

• Event-Driven & Behavioral FinanceExpectation Gap/Management

  Conservative prior guidance versus new order announcements driving positive revisions

  YTD underperformance due to weak 4Q25/1Q26, but new orders (BMW 140GWh) and improved 2Q guidance (>50% Q/Q) create positive expectation gap, supporting valuation uplift.

Asset mapping & comparison

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

• LG Energy Solution (LGES, 373220.KS)

  Report subject; benefits from ESS demand growth, new orders, Gen3 LFP tech, Tesla Europe supply chain expansion

  Strengths

  Top-five global EV battery supplier; leader in high-nickel pouch, cylindrical, LFP; new BMW 140GWh order; Gen3 LFP 10% denser/15% cheaper; high-margin US ESS (AMPC)

  Weaknesses

  1Q26 ESS losses from ramp-up delays; EV battery competition pressures margins; fixed cost drag; Ultium plant downtime limits shipments

  Risks

  US ESS demand weakness if solar ITC phases out; AMPC subsidy risks (sharing changes); US tariffs on Korea/Indonesia raising costs

• BMW

  New 140GWh 46-series order (10-year supply); report expects 14GWh annually

  Strengths

  Large OEM client validates LGES cylindrical tech; long-term contract stability; KRW10 trillion total, 3.5%-4.3% of LGES FY26 revenue

  Comparison

  BMW wasn't a major LGES client—order signifies new client diversification vs. Tesla (existing)

  Risks

  Long contracts face tech/cost risks; OEM bargaining power

• Tesla

  Major client; strong Europe sales (March +96% YoY) boost LGES shipments; report notes LGES mainly supplies Tesla Europe

  Strengths

  Tesla Europe share rising fast (1.3%→2.8%), sales surging, indirectly benefiting LGES

  Weaknesses

  Global sales volatility (1Q26 -14% Q/Q); client concentration risk

  Comparison

  Tesla and BMW multi-client approach reduces reliance

  Risks

  Tesla sales declines/product changes may hit shipments; strong client bargaining

Key data

• 1Q26 ESS Operating MarginNegative (Loss)Due to fixed costs from expansion (5 plants), but >50% Q/Q improvement expected in 2Q
• Cumulative ESS Orders>100GWhAccumulated since mid-2024, expected to contribute KRW4 trillion net profit
• 46-Series Cylindrical Battery Orders440+GWh (end-April), up 140+GWh from 4Q25~140GWh reportedly from BMW, 10-year supply (14GWh annually)
• BMW Order Total ValueKRW10 trillionKRW1 trillion annual revenue, 3.5%-4.3% of LGES FY26 revenue guidance
• Gen3 LFP Batteries10% higher energy density, 15% lower costCommercialization for new grid projects from 2028
• Tesla Europe Market Share Change1.3% (2025) → 2.8% (March 2026)March registrations +96% YoY, strong in Norway, France, Sweden
• EU5 EV Penetration29% (Feb) → 31% (Mar), sales +84% Q/Q, +46% YoYMiddle East conflict spiked oil/gas prices, boosting EV demand
• Ultium Plant Restart ExpectationJuly 2026To drive 2H26 operating profit rebound
• ESS Revenue Share Projection8% (2024) → >30% (2027)Core product mix optimization
• FY26/27/28 Adjusted EBITKRW1,286 / KRW3,745 / KRW5,230 billionReflects 2Q recovery, 2H rebound, multi-year compound growth

Impact & implications

This report's key takeaway is LGES's significant business model and profit turnaround. Short-term, 1Q26 ESS losses may mark the bottom, with recovery in 2Q/2H. Medium-term, ESS upgrades (8%→>30% revenue share) and higher margins (AMPC) will offset EV battery competition. Long-term, Gen3 LFP tech, new clients (BMW), and European capacity expansion (responding to rising EV penetration) form sustainable growth engines. The KRW530,000 target price (15x 2-year forward EV/EBITDA) reflects strong FY27/28 profit recovery confidence. The rating suits investors tolerating near-term volatility but believing in mid-term profit rebound.

Risks

• US ESS demand weaker than expected if solar ITC phases out
• US AMPC subsidy losses from sharing agreement changes
• US tariffs on Korea/Indonesia raising costs
• 1Q26 ESS losses suggest ramp-up may lag, 2Q rebound uncertain
• Ultium plant restart later than July could delay profit rebound
• New orders (BMW 140GWh) may have lower-than-expected margins
• Gen3 LFP commercialization delays beyond 2028

What to watch

• 2Q26 ESS shipments/margins confirming >50% Q/Q growth
• ESS revenue share progress toward >30% by 4Q26
• BMW order execution and margin contribution
• Tesla Europe sales and LGES supply share
• Ultium plant restart timing and ramp-up speed
• Gen3 LFP commercialization progress by 2028
• New grid project orders (from 2028) client/size details
• US subsidy/tariff policy changes