SK Group's Restructuring Plans for SK IET and an Earnings Shock for SK IET in 1Q 2024

• According to Maekyung Business Daily, SK Innovation maybe planning to sell its controlling interest in SK IE Technology (SK IET) which produces separators for rechargeable batteries.

• SK On is experiencing financial difficulties due to the sluggish demand for EVs. SK Innovation's 61.2% stake in SK IET is worth 2.5 trillion won.

• SK IE Technology had an earnings shock in 1Q 2024. It had sales of 46.2 billion won (67.8% lower than consensus) and operating loss of 67.4 billion won 1Q 2024.

Conclusion First

In the next 3-6 months, we believe that shares of SK IE Technology are likely to trade lower (20% to 30% or more). The biggest reason is because the company's earnings shock in 1Q 2024 and the consensus estimates are likely to be slashed in the next two years. Clearly, there are signs that the demand for EVs is slowing down, resulting in much lower demand for the company's core EV purpose rechargeable battery separators.

Furthermore, although the company has not formally announced that it is up for sale, Maekyung Business Daily's report that SK Group is trying to sell the controlling stake in SK IE Technology is likely to be true, in our view. Nonetheless, after a terrible earnings in 1Q 2024 and the fact that SK IET generates more than 70% of its sales from various SK affiliates, it is likely to be difficult for the company to quickly find a potential buyer that would be willing to pay a fat premium for the controlling stake.

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According to Maekyung Business Daily, SK Innovation (096770 KS) maybe planning to sell its controlling interest in SK IE Technology (361610 KS) which produces separators for rechargeable batteries. The main reason for this is to support SK On, which is experiencing financial difficulties due to the sluggish demand for electric vehicles. SK IE Technology currently has a market cap of 4.1 trillion won (US$3 billion). SK Innovation's 61.2% stake in SK IE Technology is worth 2.5 trillion won.

A Potential Sale of Controlling Stake in SK IE Technology or a Merger Between SK On with SK Enmove

The SK Group is reviewing various measures to restructure its rechargeable battery business portfolio but the exact details have not yet been decided. In addition to a potential sale of the controlling stake in SK IE Technology, the SK Group is also considering other measures including a plan to merge SK On with SK Enmove and then list it afterwards. SK Innovation owns an 89.5% stake in SK On.

SK On's Capex Requirement of Nearly 7.5 Trillion Won in 2024

SK On's planned capex financing requirement in 2024 is about 7.5 trillion won. Currently, SK On is raising funds through pre-IPO follow up investment (1 trillion won) and issuance of private equity securities (0.5 trillion won). However, the combined investment of 1.5 trillion won falls far short of SK On's total capex requirement of nearly 7.5 trillion won.