[Click eStock] Huchems, Carbon Emission Rights Fundamentals Remain Unchanged

[Asia Economy Reporter Lee Seon-ae] Kiwoom Securities announced on the 10th that it maintains a 'Buy' rating and a target price of 30,000 KRW for Huksems, stating that the fundamentals remain unchanged as the company plans to focus on selling carbon emission permits with high profit margins in the second half of the year.

Recent weakness in the announced carbon emission permit prices and Huksems' exclusion from the Carbon Efficiency Green New Deal Index seem to have caused significant disappointment among investors regarding Huksems' carbon emission permit business. However, the recent weakness in carbon emission permit prices is unrelated to Huksems' carbon permit performance. The currently announced carbon permit prices reflect last year's market conditions. The carbon permit prices reflecting this year's supply and demand are expected to be officially applied to the market starting from the second half of this year. Additionally, Huksems is expected to concentrate its carbon permit sales more in the second half than in the first half to maximize shareholder profits amid expectations of a price rebound in the latter half of the year. Huksems' carbon permits are accounted for as off-balance-sheet transactions, so there are no costs related to storage or other expenses. The existing view that Huksems holds the key to the domestic carbon permit market remains unchanged. Meanwhile, in the mid to long term, it is expected that the gap between offshore carbon permit prices and domestic prices will gradually narrow due to the expansion of CO2 reduction policies by governments worldwide. Furthermore, if the introduction of carbon border taxes by the US and the EU becomes a reality, the possibility of a rebound in domestic carbon permit prices should also be considered. For reference, a 10,000 KRW change per ton in carbon permit prices results in more than a 10 billion KRW fluctuation in Huksems' operating profit. Due to these factors, about 65% of this year's operating profit is expected to be concentrated in the second half of the year.

Huksems plans to invest 150 billion KRW to expand its Nitric Acid Plant 6 (400,000 tons) by the first half of 2023 to strengthen its market dominance in nitric acid and its downstream products. This is presumed to be in preparation for the anticipated plant scrapping of domestic nitric acid producers and the supply shortage of domestic nitric acid due to expansion considerations by upstream companies. With this expansion, Huksems' nitric acid (including agricultural nitric acid) production capacity will increase to 1.73 million tons, maintaining its position as the number one industrial nitric acid producer in the region. Additionally, economies of scale such as reduced fixed costs per unit due to the expansion will further enhance its scale and plant competitiveness.

Researcher Lee Dong-wook of Kiwoom Securities explained, "Considering Huksems' past long-term supply contract patterns, recent production capacity increases, the scale of nitric acid expansion, domestic competitors' nitric acid production capacity, and downstream competitive dynamics comprehensively, it is expected that not only nitric acid but also derivative production capacity expansion will follow."

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