One of the world’s largest electric vehicle battery companies goes public. South Korean company LG Energy Solution, which makes power supplies for companies like General Motors Co., seeks to raise nearly $ 11 billion on a list that could value the company at nearly $ 60 billion . As big, bold and promising as it is, investors need to watch carefully.

For fund managers with deep pockets, especially those hoping to fulfill their ESG mandates, LG Energy’s IPO has all the strengths of the perfect investment. It is backed by one of South Korea’s well-established chemistry to electronics conglomerates, securing its place in a world with tight supply chain. It has a long list of captive customers (mostly automakers), a huge order book and, most importantly, battery technology. LG Energy has more than a fifth of the global market in terms of production capacity, just behind Chinese battery giant Contemporary Amperex Technology Co., or CATL.

It’s worth injecting some skepticism, though. A big advantage for LG is its grip on technology and its ability to quickly ramp up production. Unlike CATL, however, it has yet to be able to convert this into significant margins. The company, which posted a loss in 2019 and 2020, posted an operating margin of just over 5% in the first nine months of this year, compared to 12% to 15% for CATL. Its consumer batteries – the nickel-cobalt-manganese variety, or NCM712 – are more energy dense and more expensive than the now widely used lithium-iron-phosphate power pack, one of the main types produced by CATL. Still, the company has not been able to take full advantage of its benefits. This raises questions about its ability to execute its business plans and steer the rapidly evolving electric vehicle market.

Then there is the chemistry of the battery. As modern as LG’s are, the less advanced but safer LFP batteries have taken market share from the NCM variety this year, lowering the medium-term outlook for the one LG is making. The company does not yet manufacture the other variety, unlike CATL which does both. It was only in recent months that there have been reports that it may start manufacturing LFPs as well. Investors associate their expectations with the explosive growth of batteries in general, but at this point in the cycle, type matters.

Part of the doubt cast on certain types of NCMs is due to LG’s own problems: faulty batteries that can cause fires have forced GM and Hyundai Motor Co. to recall recently launched EVs. These are now some of the costliest incidents for EVs and have focused on battery safety.

Along with the fear surrounding dense nickel batteries, there is also the cost of LG’s massive recall and the over $ 1 billion that it will have to digest. Just because the story is no longer in the news and it is a one-time charge doesn’t mean the problem has been solved. As Smartkarma analysts noted, putting it on the books will not “make the controversy over the appropriate level of recall provisions … go away.” There is a significant difference in the amount of provisions GM has already announced, analysts wrote. It will be an overhang.

It all comes down to whether the business can organize itself and effectively take advantage of future demand. Investors base their expectations on what the company should be able to do in the future. It’s worth remembering, though: having all the ingredients is essential, but the way you put them together is what makes the difference.

Bloomberg