Goldman Sachs maintains Buy rating on LG Energy Solution; core 2Q margins missed expectations, but ESS and utilization recovery remain key focuses

Overview

This report reviews Goldman Sachs' takeaways from LG Energy Solution's preliminary 2Q26 results and key topics for the analyst call. The company's 2Q26 revenue recovery was broadly in line with expectations, and operating profit turned positive from a loss in the previous quarter, but core operating margin was below expectations. Goldman Sachs maintains its Buy rating, believing the market underestimates the support to medium-term earnings from ESS demand, increased US market share, new product commercialization, and recovering capacity utilization.

Core views

The key views are: first, the 2Q revenue recovery was mainly driven by ESS ramp-up and resilient demand for small cylindrical batteries, particularly the strength of the small cylindrical business related to Tesla demand; second, weak core margins may be related to the timing of recognizing OEM take-or-pay compensation and ESS production-line conversion costs; third, the key focus of the upcoming analyst call will be the path to core earnings recovery, ESS fixed-cost absorption, and margin resilience amid potential oversupply; fourth, the GM JV restart in the United States, improving utilization at European plants, and the commercialization pace of next-generation technologies such as dry electrodes and ASSB will affect the realization of medium-term valuation.

Analysis framework

The report uses earnings variance analysis, a breakdown of operating drivers by business, scenario valuation, and an assessment of the medium-term earnings recovery path. The short-term focus is on deviations in 2Q revenue, AMPC, operating profit, and core margins versus Goldman Sachs' forecasts and market consensus; the medium-term focus is on FY26E through 2028E capacity utilization, EBITDA growth, ESS demand, US market share, and new technology mass production.

Methodology notes

• Valuation methodologyBlended DCF and EV/EBITDA valuation

  The target price is derived using a 50/50 weighting of DCF and 2027E/28E EV/EBITDA

  Goldman Sachs assigns a 12-month target price of W520,000, using a DCF with an 8.4% WACC and 3.3% TGR, together with a mid-cycle multiple of 20x 2027E/28E adjusted EBITDA.

• Scenario analysisBase/Bull(ESS)/Bull(EV+ESS) valuation scenarios

  The potential upside of the share price relative to the current closing price is assessed through ESS and EV+ESS upside scenarios

  The Bull(ESS) scenario assumes higher long-term ESS shipments, market share, and margins; Bull(EV+ESS) further adds improvements in EV shipments, market share, and margins.

• Factor analysisGS Factor Profile

  The stock's positioning relative to the market and industry is measured through Growth, Financial Returns, Multiple, and Integrated

  Goldman Sachs' factor framework uses analyst forecasts for sales, EBITDA, EPS, ROE, ROCE, CROCI, valuation multiples, and other metrics to compare the company with covered stocks and industry peers.

Asset mapping & comparison

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

• LG Energy Solution (373220.KS)

  Subject of the report and recommended security

  Strengths

  One of the largest battery manufacturers outside China, with technology and capacity positioning in high-nickel batteries, small cylindrical batteries, 4680 large cylindrical batteries, LFP cell-to-pack, and dry-electrode processes.

  Weaknesses

  2Q26 core margin remained negative, EV pouch-cell batteries were affected by the GM JV shutdown, and US shipments remained below the prior-year level.

  Comparison

  The report states that the share price implies an exit EV/EBITDA multiple near the low end of the historical forward range over the past 12 months, while the current price is below Goldman Sachs' base case.

  Risks

  Market share, ramp-up of new EV/ESS production lines, global EV penetration, and margins amid ESS oversupply are all key risks.

• ESS battery business

  Important driver of short- and medium-term earnings recovery and scenario upside

  Strengths

  The 2Q revenue recovery was driven by ESS ramp-up, and the market is focused on whether it can sustain a double-digit margin.

  Weaknesses

  Concurrent production-line conversion may create start-up costs and pressure on fixed-cost absorption.

  Comparison

  The Bull(ESS) scenario assumes higher long-term ESS shipments, market share, and margins than the base case.

  Risks

  Potential oversupply after new entrants such as Ford add capacity could compress ESS margins.

• US EV battery business and GM JV

  Key variables for US utilization and AMPC recovery

  Strengths

  AMPC indicates that US battery shipments recovered from 1Q, while long-term gains in US market share are viewed as factors that could enhance profits and returns.

  Weaknesses

  US EV pouch-cell volumes in 2Q remained constrained by the GM JV shutdown.

  Comparison

  US battery shipments were approximately 5GWh in 2Q26, above approximately 4GWh in 1Q26 but below approximately 10GWh in 2Q25.

  Risks

  If the GM JV restart is slower than expected, it will affect US EV capacity utilization in 3Q and 4Q.

Key data

• 2Q26 revenue excluding AMPCW7.3tnUp 15% qoq and 32% yoy, broadly in line with Goldman Sachs' W7.0tn estimate and Bloomberg consensus of W7.4tn.
• 2Q26 AMPCW241bnImplying US battery shipments of approximately 5GWh, above approximately 4GWh in 1Q26 but below approximately 10GWh in 2Q25.
• 2Q26 operating profitW113bnTurned positive from -W208bn in 1Q26, but was below Goldman Sachs' W224bn estimate and Bloomberg consensus of W204bn.
• Core OP margin excluding AMPC-1.7%Improved from -6.2% in 1Q26, but remained weaker than 0% in 2Q25.
• Target priceW520,000Goldman Sachs maintains its 12-month target price.
• DCF parametersWACC 8.4%, TGR 3.3%Used as part of the blended valuation for the target price.
• Valuation multiple20x 2027E/28E EV/EBITDAApplied to 2027E/28E adjusted EBITDA excluding the JV share.
• Capacity utilization expectationApproximately 42% in FY26E rising to approximately 67% in 2028EGoldman Sachs believes the market underestimates the utilization recovery path.
• Earnings growth expectationGSe 2026E-28E EBITDA CAGR 51%The report believes increased US market share and ESS demand could support improvements in profits and returns.
• Expected return metric2026E-28E CROCI expansion of 6.5 percentage pointsGoldman Sachs believes US market share growth will enhance margins and returns.

Impact & implications

The implication for investment judgment is that near-term core margin weakness in 2Q could weigh on market sentiment, but if ESS ramp-up costs were substantially reflected in 2Q, OEM compensation is recognized in 2H26, the GM JV restart improves US EV utilization, and a recovery in European BEV registrations helps European plants turn profitable, LGES's medium-term earnings recovery path could still support the Buy rating and target price.

Risks

• Market share falls below expectations.
• New EV/ESS battery plants ramp up more slowly than expected.
• Global EV penetration falls below expectations.
• Additional capacity in the ESS industry puts pressure on margins.
• OEM take-or-pay compensation is recognized later than expected.
• The GM JV restart and recovery in US EV utilization fall short of expectations.
• European BEV registrations and European plant utilization improve more slowly than expected.

What to watch

• Management's comments during the 2Q26 earnings call on the path to core earnings recovery and the shape of the 2H26 recovery.
• The timing of OEM take-or-pay compensation recognition and the extent to which it boosts operating profit.
• Whether ESS production-line conversion start-up costs were fully included in 2Q or will continue to create pressure in 3Q.
• Whether ESS can sustain a double-digit margin in a potential oversupply environment.
• The pace of the GM JV restart in 3Q and its impact on US EV utilization in 4Q.
• Improvement in European plant utilization and the timeline for returning to profitability.
• Commercialization progress for new technologies including dry electrodes, ASSB, 4680 large cylindrical batteries, and LFP cell-to-pack.