Ecopro Co Ltd

KOSDAQ:086520

Earnings Call Analysis

EcoPro Faces Challenges but Eyes Growth in EV and ESS Market

In Q2 2024, EcoPro's revenue fell 15% quarter-over-quarter to KRW 864.1 billion, primarily due to declining demand for electric vehicle (EV) batteries. Despite a 13% drop in average selling prices (ASP) for cathodes, the company expects a gradual stabilization and slight recovery in sales volumes. Notably, sales for energy storage system (ESS) cathodes increased by 85%, signaling potential growth. EcoPro anticipates a 2.9% decline in dollar-based ASP in Q3 but aims to improve profitability through diversified production and new customer acquisition, particularly in the lithium business, where new raw materials are expected to enhance margins by year-end.

Navigating Challenges: EcoPro's Q2 Performance

In the second quarter of fiscal year 2024, EcoPro faced notable challenges as consolidated revenues declined by 15% quarter-on-quarter, totaling KRW 864.1 billion. This was driven primarily by falling average selling prices (ASP) across their key segments, particularly in their battery materials for electric vehicles (EVs). The ASP for cathodes saw a sharp drop of 13% quarter-on-quarter due to declining metal prices, which adversely affected operating income, resulting in an operating loss of KRW 54.6 billion. Despite these setbacks, EcoPro remains cautiously optimistic as operational adjustments and sector trends may lead to improved performance in subsequent quarters.

Resilience in Specific Segments

While overall sales dipped, EcoPro did experience growth in certain areas. For instance, sales of power tools and energy storage systems (ESS) cathodes surged dramatically, with an increase of 46% and 85%, respectively, quarter-on-quarter. This reflects a growing interest in sustainable energy solutions and hints at a potential recovery in market demand, particularly for ESS as businesses and consumers increasingly adopt eco-friendly technologies.

Future Growth Opportunities and Strategic Shifts

Looking to the future, EcoPro plans to pivot strategically in response to market conditions. There's anticipation of a stabilization in ASP, with a projected decline of approximately 2.9% in Q3, but overall trends might stabilize as demand recovers. The company's lithium business is expected to increase its external sales volumes following a long-term supply contract secured with Samsung SDI, which should strengthen revenues moving forward. Moreover, EcoPro's expansion projects in Hungary are crucial; the European cathode plant, with a capacity of 54,000 tons per annum, is set to begin production in Q3 2025.

Addressing Inventory and Profitability Concerns

EcoPro’s approach to managing inventory valuation has been dynamic, with expectations that approximately 20% of an inventory valuation reserve of KRW 230 billion will be reversed in the second half of the year. This could positively impact profitability as the valuation becomes more favorable amidst stabilizing metal prices, which are expected to stabilize or even rise in the latter half of the year.

Market Outlook and Regulatory Landscape

The EV market's slower recovery continues to pose challenges, particularly with high inventory levels at automotive OEMs affecting cathode materials. However, the expected exhaustion of these inventories by late 2024 may lead to a rebound in demand at that time. Furthermore, geopolitical factors like increased tariffs on Chinese EVs by the EU serve to bolster local manufacturing initiatives, rendering EcoPro’s European expansions strategically advantageous.

Investment in Sustainable Growth

EcoPro’s commitment to investing in sustainable materials and associated technology helps to secure its foothold in a competitive market. The company's ongoing initiatives in Indonesia related to nickel MHP production and recyclable lithium solvent solutions signal a proactive approach to securing raw materials needed for battery production, thus enhancing both cost efficiency and sustainability.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and good evening. First of all, thank you, all, for joining this conference call. And now we will begin the conference of the fiscal year 2024 second quarter earnings results by EcoPro. [Operator Instructions] Now, we shall commence the presentation on the fiscal year 2024 second quarter earnings result by EcoPro.

[Unknown Executive]

Good morning. Thank you for joining the company's earnings call today despite your very busy schedules. I have with me today from EcoPro, [indiscernible], CFO; Soon-Ju Kim, Managing Director of Finance and Accounting; [indiscernible] [ Chang ], Managing Director of Global Resources Department; from EcoPro BM, CFO, [ Jang Woo Kim ]; Development Team 2 Leader, [ Choi Yoon Young ]; from EcoPro Materials Procurement and Sales, [ Ji Sun Chung ]; [ Ji Sun Chung ], Strategic Planning Team Leader; and EcoPro HN, [indiscernible], Business Management Team Leader; and [ Chang-Guk Kim ], R&D Team Leader.

Please note that the earnings presented today are yet to be audited by an independent auditor and hence are subject to change upon the review.

With that being said, we will now begin with EcoPro's earnings presentation for Q2 of 2024.

[Soon-Ju Kim, executive]

Good morning. I'm Soon-Ju Kim, Managing Director of Finance and Accounting Department at EcoPro. Please follow along the presentation material that we've circulated. We will begin today with performance highlights of 4 Ecopro affiliates, followed by an update of the company's European expansion.

Let's begin on Page 5, consolidated P&L of EcoPro BM. EcoPro BM's Q2 '24 consolidated revenue was down 17% on quarter, reporting KRW 809.5 billion with operating profit at KRW 3.9 billion. ASP declines for cathodes driven by falling metal prices continued this quarter, pushing down ASP 13% Q-on-Q on KRW basis.

Operating profit was flat Q-over-Q on the back of reversals of inventory valuation loss. In Q3, we expect uptrend in sales for single crystal cathode on the back of ESS market expansion in North America, while growth in cathode sales for EV is projected to be limited. In Q3, we're expecting 2.9% decline in dollar-based ASP compared to Q2, which signals start of stabilizing trend with a limited decline versus the first half of the year.

Next, on Page 6 is on revenue structure and financial status. Total Q2 cathode sales volume was down 3.6% Q-on-Q. Power tools and ESS cathode sales volume increased 46% and 85% Q-on-Q, respectively, driving a up line -- top line trend despite the ASP decline.

Moving on to financial status. On the right, total asset as at end of Q2 '24 was down 0.6% Q-on-Q to [ KRW 4.2552 ] trillion, total liabilities down 1.6% Q-on-Q to [ KRW 2.6185 ] trillion and equity increased 1.1% Q-on-Q reporting [ KRW 1.6367 ] trillion.

Although borrowing inched up due to capacity expansion, debt-to-equity ratio decreased marginally to 160% Q-on-Q. And thanks to efforts made to minimize the working capital, inventory was down 19% Q-on-Q.

Next, on Page 7 is P&L for EcoPro Materials. EcoPro Materials revenue in Q2 '24 was down 16% Q-on-Q, reporting KRW 66.7 billion, with operating loss at KRW 3.7 billion. Due to subdued downstream demand, precursor sales were down, but there has been an improvement in terms of profitability on the back of rising FX rates and widening spread between ASP and material cost.

In Q3 '24 we are expecting to see higher share of non-captive precursor sales to our external customers and will continue to run production tests so as to secure new customers. Capacity expansion for CPM3 and CPM4 is well underway as planned, which will help better meet growing non-captive external demand in the future.

Page 8 is revenue structure and financial status. In Q2, total precursor sales volume was down 44% Q-on-Q, while ASP increased 2.9%. Aside from precursors, we also have additional sales channel through which we sell high-purity metal sulfate produced through the RMP processes for the external market.

In terms of the financial position, on the right, total assets as at Q2 end was up 3.7% Q-on-Q, recording KRW 1.114 trillion. Total liabilities increased 18% versus last quarter, reporting KRW 346.5 billion, with total equity down 1.5% Q-on-Q to KRW 767.6 billion.

To meet downstream demand expansion, in the second half of the year, there was procurement of MHP raw materials, leading to a 31% increase in inventory assets as of end of Q2, while an increase in borrowings for CapEx, debt-to-equity ratio inched up 38% last quarter to 45% as at the end of Q2.

Next is Page 9, EcoPro HN's P&L update. Revenue for EcoPro HN in Q2 '24 was down 9% on quarter to KRW 46.8 billion. Operating profit came in at KRW 3.6 billion, with OP margin at 7.7%. Sales dipped due to deferred revenue recognition from our abatement businesses for greenhouse gas and fine particles. And due to changes in the sales mix on higher revenue from new water treatment business, quarterly profitability declined.

We expect to see normalization of our greenhouse gas and fine particles business as we enter into Q3 and expect each segment's downstream demand to be solid. Also, Cho-pyeong industrial complex under construction since last year is expecting completion in Q3 and we plan to build out new business production lines.

Moving on to Page 10, revenue structure and financial status. In terms of revenue by segment, Chemical Filter business revenue was KRW 12.3 billion, underpinned by robust sales, while greenhouse business revenue fell to KRW 8.2 billion due to deferred revenue recognition. Water Treatment business, which is our new business, gained momentum, driving an increase of [ 64% ] on quarter and posting KRW 22.3 billion in revenue.

Financial status on the right-hand side show total asset as of end of Q2 '24, down by 0.9% Q-on-Q to KRW 228 billion, with total liabilities down 4.5% Q-on-Q to KRW 116.1 billion and equity of 3.2% Q-over-Q to KRW 111.9 billion. Cash and cash equivalents decreased due to dividend payout and investments for Cho-pyeong complex in the second quarter and their active working capital management. Debt-to-equity ratio recorded Q-on-Q decline coming in at 104%.

On Page 11 is holding company EcoPro's consolidated P&L. Q2 '24 consolidated revenue for EcoPro was down 15% Q-on-Q to KRW 864.1 billion with operating loss of KRW 54.6 billion. We saw battery material ASP decline and flowing downstream demand, while operating loss widened on the impact from higher material cost in the lithium and recycling business.

Meanwhile, the impact from Global Resources investment was more pronounced in Q1 -- Q2, driving equity method gain of KRW 4.9 billion. We are making additional investment into the nickel project with 85,000 ton per annum production capacity so as to secure a steady stream of precursors and to generate investment returns.

In Q3, Lithium business is expected to grow its external sales volume in line with the long-term supply contract executed with Samsung SDI last April. For the recycling business, despite market headwinds, such as falling metal prices, by expanding collaboration with partners with the likes of Hyundai Glovis and U.S. Cirba solutions, we plan to fully prepare for the future market.

On Page 12 is financial status of EcoPro, the holding company. Total assets as of second quarter end increased 2.7% Q-on-Q to [ KRW 7.6415 ] trillion. Liabilities was up 6.3% Q-on-Q to [ KRW 4.232 ] trillion and total equity was down 1.3% Q-on-Q to [ KRW 3.4095 ] trillion.

CapEx for future growth continued at our affiliates, including the cathode plant in Hungary, which drove an increase in tangible asset as of end of Q2 by KRW 425.6 billion versus last quarter. And an increase in borrowings to fund our Global Resources investment, debt ratio as of end of Q2 reported 124.1% and net debt dependency was 30.8%, posting somewhat of an increase.

On Page 13, I will walk through the update on EcoPro in Europe and the Hungary expansion. As part of EU's stronger policy initiative for EV industry promotion, we expect Europe to be a battleground for global secondary battery players. The importance of the battery value chain is, therefore, growing on the back of CRMA, Critical Raw Material Act, and EU battery regulation. And we see accelerating trend away from reliance on China. And following the U.S., Europe also announced higher tariffs on Chinese EVs, which makes local production ever more important.

In more detail, EU announced that it will increase tariffs on Chinese EVs effective July 2024 from the previous level of 10% to 26% to 48%. Also, EU and U.K. Trade Corporation Agreement, TCA, provides for origin tracking for EVs, batteries and cathodes. And 10% tariff exemption will be given on EU, U.K.'s trade of such items when they are locally produced, which is expected to boost battery and EV manufacturing industry inside the European market.

CRMA, as widely known, seeks to reduce dependence on import of critical raw materials for batteries and mandates local supply chain and production, while EU battery regulation mandates minimum use of recycled materials for manufacturing of batteries starting from 2031, which is expected to make battery recycling in EU quite important.

Moving on to next page. We are bringing already proven production system of EcoPro Pohang campus to Europe, implementing the system to fit the market environment to gain a leading market position in a very competitive European market, underpinned by our strong local presence.

The cathode plant with 54,000 ton capacity per annum will commence production starting Q3 of 2025, and we would be the first cathode plant to be built in Europe versus other competitors from Korea, China and Japan. And we plan to establish 180,000 ton capacity by 2028.

And to fund the investment, we have secured the ECA policy fund of KRW 1.2 trillion in July of '24. And by having both NCA and NCM production facilities, we are in a position to attract new customers in Europe, which will give us a competitive edge in the European market going forward.

Thank you. That brings me to the end of my earnings presentation.

[Unknown Executive]

So this ends our presentation. And now we will go over our outlook for the second half of the year.

This is [indiscernible], CFO of EcoPro. Let me first go over the second half outlook, focusing on the holding company and the lithium and recycling business, after which we will have separate presentations by each company about the second half outlook for the cathode, precursor and environment-related businesses.

As you are aware, the battery materials business is by nature sensitive to raw material price changes. Due to this nature, in the first half, the company's lithium and recycling business faced a situation in which it had to input raw material at a relatively higher price than what was reflected in the sales price. This led to a challenging situation in terms of profitability.

Metal prices in the second half are expected to show less price volatility than the first half and we expect there may be a possibility of prices gradually rising. However, sensitivity to price changes is still high and we have engaged in a wide variety of business strategies in order to decrease the uncertainties of the business, and we expect the effects will slowly realize from the second half.

First, at the holding company level, the results of the investments made in Indonesia from 2022 to secure nickel MHP, the QMB Phase 1 and 2 are expanding. Last year, the QMB project investment-related gains were KRW 16.4 billion. And this year, it was KRW 5.4 billion in Q1 and KRW 9.7 billion in Q2, which means that the gains continues to grow. In the second half, we expect it to jump once again, which would contribute to better profitability in the second half of the year.

For the Lithium business, in the second half we are planning to focus on inputting a variety of raw material and developing new customers. Recently, EcoPro innovation following the number 1 factory started mass production on its number 2 factory, which has led to higher costs. But we expect new raw material that will be added in the second half, such as recycled lithium solvent solutions, should lead to better profitability.

In addition, from a sales perspective, we are planning to move away from the group-based sales to add non-captive customer sales channels. From the third quarter, we are planning to ramp up sales of lithium hydroxide to Samsung SDI, which is expected to gradually increase over time. In addition, we are also planning to engage in more active sales activities in the second half, such as discussing lithium supply opportunities with various partners, including North American OEMs.

For the recycling business, having a wide variety of raw material sourcing channels and processing capabilities is key. To increase our sourcing channels, we have engaged in business discussions with many potential local and overseas partners. As a result, as mentioned during the presentation, in addition to Hyundai Glovis and Cirba solutions in the U.S., we are planning to source raw material from 2 Japanese partners in the second half. As a result, we expect our lithium and recycling business in the second half to perform better than the first half in terms of both sales and profitability due to a wider customer base and more diverse raw material sourcing.

[Unknown Executive]

This is [ Kim Jang Woo ], CFO of EcoPro BM, and let me discuss the business outlook for the second half. Recently, the downstream market has continued to recover, but we expect it will be difficult for the business environment in the second half to show a meaningful rebound versus the first half.

First, for the EV market, the growth slowdown is expected to continue in the second half. However, in terms of inventory, the stock held by auto OEMs that was accumulated due to more production than demand last year, is expected to exhaust significantly in the October-November season, so that in December and after, we may cautiously forecast a rebound in sales volume for EV cathode materials.

In addition to overcome the challenges posed by the weak EV market, we are trying to diversify our end applications. In this slide, we are focusing on ESS batteries as an additional source of demand and ESS cathodes sales volume has grown by around 85% Q-o-Q.

To look at the ESS market, recently, demand has increased due to the adoption of environmentally-friendly policies globally and AI data center-related demand, which we expect will lead to stronger downstream demand in the second half.

In the case of cathode material for power tools, second quarter sales volume increased by approximately 46% quarter-over-quarter, representing a rebound. However, we still expect it will take more time to see a meaningful turnaround to previous levels. Once interest rates are cut in the second half, we expect sales volumes to show a gradually improving situation as the construction industry recovers.

[Unknown Executive]

This is [ Ji Sun Chung ], Strategic Planning Team Leader at EcoPro Materials, and let me discuss our second half business outlook. In interpreting the FEOC regulations that will apply to the U.S. market in 2025, many customers, including OEMs and [ cell ] manufacturers are taking a very conservative approach.

In addition, many companies are also concerned about being too dependent on China for their material value chain. At the current time, we are the only company outside the Chinese players that is able to be both cost competitive and have large-scale mass production capabilities. So leveraging this position, we are currently engaged with multiple parties about future business opportunities.

In the second half, reflecting this business backdrop, we expect to increase the percentage of our non-captive business, which is expected to drive sales volume higher. In terms of profitability, less volatility and metal prices, coupled with less fixed income cost burden due to a recovery in sales volume, we cautiously expect will lead to an improvement in margins. As of the current time, the downstream market is challenging. But we will win additional customers to increase our market share in the global precursor market.

[Unknown Executive]

This is [indiscernible] [ Jin Jung ], Business Management Team Leader at EcoPro HN. The second quarter business environment for the company was driven by a complex mix of internal and external factors, such as the weak investment sentiment and the environment equipment industries due to globally high interest rates, high inflation and a strong U.S. dollar, coupled with the rise in construction cost such as raw materials and labor cost.

As a result, construction on existing contracts that we won were pushed back, leading to slower revenue recognition and resulting in weaker sales and profits. Thus, the second quarter sales achieved KRW 46.8 billion, down by around 9% Q-o-Q.

However, a positive momentum created by better export performance driven by the recovery in the global economy, the mid to long-term growth expectations of semiconductors and rechargeable batteries, the unwavering nature of the carbon neutral policy [ stance ] and stronger air and water quality related environmental policies, are all expected to result in a gradual improvement in the business environment.

Thus, we expect our customers to restart CapEx plans that they had pushed back or put on hold and also for new investments to increase. Based on this momentum, the company expect sales in the second half to improve, which is also expected to lead to better Y-o-Y top line growth in 2024 as a whole.

As most of our customers are engaged in the semiconductor or secondary battery business, the company is planning to widen the technical gap versus peers to provide industry-specific chemical filters, environment equipment, greenhouse gas solutions and water treatment solutions.

Based on this, we will actively conduct our business by strengthening our relationship with our new -- with our existing customers and also acquiring new customers. At the same time, we will maintain our mid to long-term growth by successfully engaging in our new businesses.

With this, to wrap up our presentation on the second half business outlook and now start the Q&A session.

[Operator]

[Operator Instructions] The first question will be provided by YongJin Jung from Shinhan Securities.

[YongJin Jung, analyst]

There are 3 common questions that I would like to ask you. First, if you look at your main [ cell ] customers in terms of the battery production, it does seem to be that their view on the second half is that demand will continue to be weak and that the second half will continue to be sluggish. If that is the situation, what is the company's overall stance towards the second half of the year? So for example, are you planning to take any measures such as moderating the pace of capacity additions or maybe acquiring new customers to overcome this situation?

The second question that I would like to ask is that, if you look at the company situation for 3 quarters consecutively, it seems to be that your performance is going up and down according to the inventory valuation gains and losses that you are incurring for each quarter. So it does seem to be that as of the end of the second quarter, inventory has reached a lower level. But do you think that the impact from the inventory valuation gains is something that will disappear or dissipate towards the second half of the year?

The third question that I would like to ask you is that, if you look at the low end and low-price EV market, it does seem to be that the performance and sales pickup there has been a bit sluggish. I do think that there was a lot of expectations that as EV prices fall, that we would be able to overcome this [ chasm ] phase and that there would be more demand for EV vehicles. However, it does not seem to be that EVs are that attractive yet. So from the company's standpoint, in terms of a recovery in the EV market, what do you believe needs to happen or would be necessary to overcome this current situation?

[Unknown Executive]

So yes, maybe I can address your first question about our major cell customers having sluggish demand and also whether we have any plans to maybe adjust some of the new capacity additions that we are planning. This is [ Kim Jang Woo ], CFO from EcoPro BM.

As you have mentioned during your question, if you look at the current downstream market, in terms of the market environment, it does seem to be that the recovery and demand for EV vehicles at our key OEM customer level is a bit slow. And as a result of that, we also understand that this is impacting our key customers and their overall operations.

In the case of the company, in light of the fact that there has been a slowdown in growth in the EV market recently and also the volatility within the market, for the mid to long-term, [ cathode ] capacity plans that we have, we are currently reviewing the possibility of maybe slowing the overall capacity expansion plans down or maybe adjusting the level to a more moderate level.

However, that have been said, in the Europe and North American region right now, from region to region because of the new regulations that are being implemented at the OEM level, there is a high demand for localization. So as a result of that, we are planning to continue to invest. However, as mentioned, over the mid to long-term horizon, we may adjust the overall size of our investments. So as a result, once we have made a decision on those plans, we will make sure to communicate with the market in the second half of the year.

In the case of securing new customers, I do think that right now we are in a discussion and trying to cooperate and talk about supply opportunities with multiple new companies, discussing cathode material for high-nickel batteries that are used in premium vehicles to high-voltage mid-nickel and also LFP and other mid to low-end battery types.

So as a result of that, however, with regards to the details on any contract possibilities, if any, and any additional progress information, I do think that this is something that we will be able to relay once again to the market once we have more details available.

So maybe I can address your second question about the inventory valuation issue. This is [indiscernible], the CFO of EcoPro. If we look at the situation last year as the EV market entered into a [ chasm ] phase, the demand has been a bit sluggish and also there has been a continuous fall in key metal prices. So as a result of that, many cathode producers at the end of last year did recognize a significant loss on their inventory valuation.

If you look at EcoPro, based on a consolidated basis, we had set aside a inventory valuation reserve of around KRW 230 billion. Of that, around 40% was actually reversed in the first half of this year. And as of the second half end, around 60% of that reserve is still left.

So as of the current time, if we talk about any changes in the valuation gains or losses situation that can take place going forward, if you look at a market research company called FastMarket and if you look at their view about metal prices in the second half of this year, I do believe that the general view would be that they are looking towards a gradual increase in crisis.

So for us, what that means is based upon this overall expectation towards the second half of the year for the reserves that we set aside of KRW 230 billion, we do believe that there could be a reversal of around 20% that would take place towards the second half of the year.

If you look at the first half performance for the holding company and if you look at the overall unit price and volume that we have applied when doing our inventory valuation versus the FastMarket overall expectations, I do think that we were a bit conservative. So as a result of that, that's somewhat deflated how we presented our profitability. But what that means is that towards the second half of the year, there will be a higher possibility of a reversal taking place, which we believe should help our profitability.

[Unknown Executive]

So this is the CFO of EcoPro BM, [ Kim Jang Woo ] and maybe I can address the inventory valuation issue pertaining to EcoPro BM alone. So in the case of the key material for cathodes, which would be lithium hydroxide and nickel, if you look at the market prices, after hitting a high in 2023 -- in the beginning of 2023, thereafter, prices have continued to fall.

So as a result of that, at the company level, based upon our own accounting standards, we have actually recognized a valuation loss on our inventory assets. And if you look at the overall reserves that we have set aside for the valuation as of the end of 2023, that was approximately KRW 160 billion.

[Unknown Executive]

In addition, if we look at the first half, after setting aside our reserve for inventory valuation, we actually have used or sold out the inventory assets. So as a result of that, we recognized a reversal in that reserve of around KRW 90 billion.

Towards the second half of the year, again, as we sell out our inventory, we do believe that there will continue to be a reversal that we would be able to expect. In addition, if we look at the recent metal price, market price, after showing a rebound in May, the prices have stabilized. So as a result, we don't believe that there will be additional inventory-related losses, that would be an issue.

[Unknown Executive]

So this again is [ Kim Jang Woo ], CFO of EcoPro BM and maybe I can address your last question which was addressing the low end, the EV market in terms of why the overall sales has been more sluggish than we had expected and what is necessary to see a rebound within the EV market.

So focusing on the global OEMs, recently within the market space, as you have mentioned, there are new mid to low-end cars that have been launched. However, when you compare these cars to the traditional ICE vehicles that are out within the market, I do believe that there is a recognition that it lacks cost competitiveness.

In addition, because of the high interest environment, if you look at the purchasing power of consumers, I do think that, that has also weakened, which is leading to a lot of consumers being hesitant to purchase new EV vehicles.

However, that have been said, in the U.S. and also key countries around the globe, there are some signs that we may be able to see rate cuts going forward. That should actually recover or lead to stronger purchasing power by consumers. And gradually, over time, I do think that this will have a positive impact on the overall rebound in EV market demand.

However, in addition to that, if we look at the metal price situation, it has been at a lower level, which has lowered the cost of batteries as a result of that, and we do think that, that shall also contribute to strengthening the price competitiveness of EV vehicles.

So to overcome these externalities that exists within the market and also address the issues that we see in the market backdrop, recently we have taken -- in the domestic market, we were one of the first to actually launch an LFP pilot plant and complete the construction of that.

So right now, we are in the process of looking for customers. And in addition to that, in the case of our cathodes for sodium ion batteries, we have been able to secure an energy density that would be on par with those of LFPs.

In addition, if you look at the charging speed and also safety-related issues, which has been somewhat of a hurdle for the popularity of EV vehicles, I do believe that by developing next-generation products such as silicon anodes, cathode material for full solid [ state ] batteries and solid electrolyte, we are continuously trying to make progress to also deal actively -- proactively with the changes that are taking place in the EV market.

[Operator]

The next question will be provided by [indiscernible] from Kim Securities.

[Unknown Analyst]

There are 2 questions that I would like to ask you. The first is that, in light with the government's currently corporate value offer initiative and program, I do believe that there are a lot of companies that are engaging in total shareholder return program. So what would be the plans of the company?

The second question that I would like to ask you is that, within the local cathodes market, recently we do see a lot of competition surrounding the single crystal cathodes. So for the company, what do you believe would be your point of differentiation versus the others? And if you could elaborate about that in detail, that would be appreciated.

[Unknown Executive]

So this is [indiscernible], the CFO at EcoPro. And maybe with regards to our TSR program, on behalf of the group, maybe at the holding company level, we can provide you with an answer. Currently, under the leadership of the government, for listed companies in Korea, there are value programs that are being announced. And I do believe that many companies are actively engaging in total shareholder return policies as a result of that.

So specifically, if you look at the announced changes to the Tax Act that the government released on July 25th, with regards to total shareholder return, that is initiatives that are used, the government is proposing that there would be some tax benefits in terms of the corporate income tax. So this, of course, is a key area of interest for us. So as a result, in terms of the quality the company and also shareholder value, we are looking into a structure that would be able to balance the two. And as of now, we are actively reviewing various options.

However, that have been said, for the tax changes to actually be legislated, we do think that, that process in itself will take a bit of time. And recently, if we look at the slowdown in terms of growth in the EV market, we do think that a more detailed review is necessary, taking our time doing so. So as a result of that, of course, the company will continue to put top priority on continuous growth and also enhancing shareholder value.

So therefore, if there are any plans, that would be engaged upon by our group affiliates with regards to any share buybacks and eliminations. In addition to that, maybe expanding the dividend levels and other measures in which shareholder value couldn't be enhanced. As these plans are determined in more detail, we will make sure to actively engage with the market and communicate.

[Unknown Executive]

So this is [ Choi Yoon Young ], the Development Team 2 Leader at EcoPro BM, and maybe I can address your question about how our single crystal cathodes are different from our peers. In developing single crystal cathodes, I do believe that the key issue is securing both performance and price and being able to do both at the same time.

So if you look at the technology that we are currently using in terms of the performance and properties that we are able to present versus the competition, I do believe that there is no large difference and that it would be on par. However, at the end of the day, in terms of what puts us different is who is able to achieve cost efficiencies and what supplier is able to present these products at a lower price and able to deliver that to our customers.

So in the case of our point of differentiation for our single crystal cathodes, I do believe that the key technology would be the mass production technology that enables us to increase production volume. So by doing that, we are able to reach the lowest level of cost savings. And I do believe that this is one of the biggest benefits that we have.

[Operator]

The next question will be provided by Chang Min Lee from KB Securities.

[Chang Min Lee, analyst]

There are 2 questions that I would like to ask you. First to EcoPro Materials, if you look at the current situation, Chinese precursor manufacturers such as CNGR are making investments into Korea right now. So how does the company view the situation? And how are you looking at it?

The second question is also for EcoPro Materials. If you look at the second half in terms of the downstream demand, do you believe that there is a possibility of demand improving? And if so, how is the company preparing for such a situation?

[Unknown Executive]

So this is [ Ji Sun Chung ], the Strategic Planning Team Leader of EcoPro Materials and maybe I can address your question about the Chinese precursor manufacturers making investments into Korea and what our view about the situation would be.

The most buys are in Chinese companies such as CNGR. To move away from China, I believe, is a natural phenomenon due to the USIRA, the European CRMA and also the tax policies that we see taking place in the U.S. and Europe. However, maybe to cautiously share our view, we believe that it will not be easy for these Chinese companies to do business in Korea, because these companies in China enjoyed government subsidies, low CapEx and advantages in fixed costs such as labor costs. But these factors would not be valid in the Korean market.

So in addition, if you also take into consideration environment regulations such as wastewater treatment, even if the business margins in China were good, it would be difficult to guarantee that it would be profitable in Korea.

In addition, if you look at the authorization process used to [ refine ] precursor raw material, there are also technical differences. So for example, in RMP process, it is a wet [ softwarization ] process. And this wet process when compared to the dry processes, that is used by some Chinese companies in Korea. Our process is superior in terms of both cost competitiveness and carbon emissions.

So as the only non-Chinese precursor company, we are able to strengthen our cost competitiveness and also quickly adapt to the overall initiatives or momentum that we see to move away from China. And we think that this will be an opportunity to further solidify our market position.

[Unknown Executive]

So this is [indiscernible], the Managing Director of Purchasing and Sales at EcoPro Materials and maybe I can address your question about what type of downstream demand we see from our customers and how we are preparing for such a situation.

So from 2023, we have continuously engaged in trying to develop and broaden customer base in the non-captive area. So right now, not only in the North American region, but in all areas outside of China, so including Japan and Europe. We are currently engaging with a wide variety of customers to discuss various business cooperation opportunities.

And as a result of such efforts, from the second half of last year, for some customers we have been developing new precursors. And from the first half of this year, we will be starting mass production for some supply. At the company level, if you look at the number 1 and number 2 factory, which represents 50,000 tons of precursors, that are currently in operation.

In addition to that, we're also planning to complete the construction on our number 3 and 4 factories, which would represent around 66,000 tons next year. And by doing that, we do think that we can satisfy the demands that we see from our non-captive customers.

So in terms of raw material sourcing also, we are trying to diversify our sourcing locations or where we source from and in particular, to enable -- to ensure that we can secure material that is IRI compliant. We are currently in discussions with parties that are not only -- that are outside of the existing Australian and also Indonesian suppliers that we are currently working with.

So to be able to ensure and strengthen the overall stability of our business and to secure new growth drivers for the future, we will continue to broaden and expand our new customer base and also make sure that we are fully prepared to deal with any customer demand that we see in the future.

[Operator]

[Operator Instructions] The next question will be provided by Minwoo Ju from NH Securities.

[Minwoo Ju, analyst]

I would like to ask one question to corporation about the new business and then the second question about to the hold-co. So in the case of the new business development at EcoPro HN, I would like to ask you about what is happening and if there is any update that you can provide?

And towards the holding company, with regards to the investment that you have made in Indonesia, with regards to nickel supply, if you could elaborate a bit more about your intentions, that would also be appreciated.

[Unknown Executive]

So this is [indiscernible], the [ RMBD ] team leader at EcoPro HN and maybe I can address your question about how -- what progress has been made for our new business development at the [ Shenzhen ] factory. So if you look at the [ Shenzhen ] factory right now, we are engaging in construction to build out our facilities for secondary battery materials production and also other auxiliary facilities. So as of now, the target is to reach completion as of the end of August. And as of the second quarter end, right now, we have seen around 80% to 85% progress with regards to the construction.

On safeguards right now, the company is currently developing NCA, RHK safeguards, which represent the most severe conditions. And we are planning a test run in the third quarter to verify the equipment. And in the fourth quarter, we will complete the prototype testing with the customer with the final target of entering mass production in early 2025.

Due to the [ chasm ] phase in the secondary battery market, customer use of [ dopants ] is less than expected. However, we have succeeded in developing an additional product in addition to the original [ dopant ] plant, which means that we have 2 dopants in our portfolio. By this, we are trying to minimize the business risk due to a decrease in volume by our customers.

In addition, because these products are classified as critical materials and are subject to FEOC regulations, as a company with no FEOC risk, we are currently being assessed by our customers. And we are in contact with one other non-captive customer. In the third quarter, we will be conducting the facility verification. And in the fourth quarter, we are targeting customer approval and mass production.

And for electrolyte additives, we are currently developing 3 products, which -- the target of commercialization would be to take them one by one across the end of 2024 up to 2026. For 2 of the 3, we have already completed the development of the product in itself and we are planning to supply to customers from July from the small-scale production facility that will be completed in no time.

Currently, we are discussing a sample test an auto schedule. And the full commercialization is expected to start in 2025. For the remaining product, this is in pilot testing. And once the results are available, we will be -- we are planning to ground break on our mass production facilities in [ Shenzhen ] in the second half with the target of completing construction in the second half of 2025 and to start commercialization in 2026.

[Unknown Executive]

So this is [indiscernible], the Managing Director at Global Research Department of EcoPro and maybe I can discuss our Indonesia nickel resource project. So from 2022, in the Indonesian region to secure nickel MHP, we acquired initially a 9% stake in the QMB project and since then, have been continuously expanding our investments.

For the QMB project, if you look at the actual [ full ] production, it started in 2023. And based upon that yearly total production volume was 25,000 tons. If you look at the overall production expectations for this year, we do expect that it will reach 40,000 tons. So currently, in addition to the QMB project, we are also looking into our --and in the process of investing into 3 additional new projects with a stake of 9% plus.

And we have completed if -- once the overall investments are completed, then we would be able to have a production capacity of 150,000 tons per year based upon the nickel produced. And we would be able to offtake from the refineries. By doing this, we would secure our MHP and also be able to expand our gains.

So as nickel prices have fallen recently, if we do look at the general situation for the nickel market, it does seem to be somewhat in a sluggish situation. So for example, in Australia, large nickel mines have actually closed down their refineries due to worsening profitability. And certain refineries in New Caledonia also have -- are currently in a challenging situation, because profitability is weak and also because of various political confusions and issues that are taking place within that region.

So as a result of that, that has been leading to a difficult situation for the market as a whole. However, if you look at the Indonesia project in which we have actually invested, because it is very cost competitive, even within this challenging backdrop, we have continuously been able to generate profits. And if nickel prices rebound going forward, we do think that we would be able to expect even higher margin levels.

In addition to that, for each of the projects, we are looking to secure offtake volume that would represent larger portions than the stakes that we have invested. So by doing this, we would be able to increase the efficiencies of the investments that we have made and at the same time strengthen our competitiveness of the precursor business.

[Operator]

So with this, we would like to conclude our earnings conference call and again, take this opportunity to thank everyone who has participated. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]