[Click eStock] "Lotte Holdings, Increased Earnings Visibility... Limited Valuation Merit"

[Asia Economy Reporter Ji Yeon-jin] NH Investment & Securities announced on the 4th that it maintains a neutral investment rating and a target price of 41,500 KRW for Lotte Holdings, stating that the current stock price is discounted by 40% compared to its net asset value, lacking valuation merits compared to major holding companies.

Kim Dong-yang, a researcher at NH Investment & Securities, explained, "Lotte Holdings is expected to have increased earnings visibility this year due to the base effect and cost-efficiency efforts, but the continued poor performance of Lotte Hotel, at the top of the group's governance structure, is likely to delay the resumption of the initial public offering (IPO) and the formation of an integrated holding company system."

Lotte Holdings is expected to see gradual earnings recovery alongside the restructuring of Lotte Shopping due to the COVID-19 base effect, and earnings visibility is recovering thanks to the normalization of Lotte Chemical's facilities and benefits from the global economic recovery. However, Lotte Hotel, located at the top of the Lotte Group's governance structure, is expected to face difficulties in earnings recovery and IPO resumption due to the continued unfavorable business environment. The possibility of forming an integrated holding company system between Lotte Holdings and Lotte Hotel, the final stage of the Lotte Group's governance restructuring, is also expected to remain low for the time being.

Lotte Holdings is strengthening its control over major subsidiaries. Following the acquisition of a 0.3% stake in Lotte Chemical in the second quarter, it participated in the paid-in capital increase of Lotte Chilsung, Lotte Food, and Lotte Trading through equity contributions in July. The shareholding ratios increased by 1.9 percentage points, 4.0 percentage points, and 3.5 percentage points, respectively. Along with the recovery of subsidiary earnings, dividend income is expected to increase for the first time in three years. Additionally, with the listing of affiliate Lotte Rental (public offering band of 1.7 trillion KRW to 2.2 trillion KRW), the asset value of Lotte Hotel, in which it holds shares, is expected to be highlighted.

Lotte Holdings' estimated sales and operating profit for the second quarter are 2.2762 trillion KRW and 83.4 billion KRW, up 9% and 75% year-on-year, respectively. The strong performance is attributed to the base effect and the turnaround of major subsidiaries Lotte Shopping and Lotte Chemical. Lotte Shopping is expected to exceed market consensus on operating profit due to continued department store sales growth and reduced fixed costs from restructuring, which lowers losses in other business units. Lotte Chemical is expected to slightly miss market consensus due to regular maintenance at the Daesan plant and a reduced product spread compared to the previous quarter.

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