[Into the Stocks] "Target Price Lowered Again" Lotte Chemical Faces Profitability Challenges in the Second Half

Q3 Expected Operating Profit of 492 Billion KRW
Second Half Major Product Spread Expected to Slow
Ebest Securities Sets Target Price at 242,000 KRW

Green Business Promotion Requires Long-Term Approach

[Asia Economy Reporter Minji Lee] The securities industry's outlook on Lotte Chemical is being revised downward. This is due to expectations that the profitability of major general-purpose products will significantly decline with the influx of additional production capacity in the second half of the year, coupled with a slowdown in demand caused by the spread of the Delta variant in Southeast Asia. It is anticipated that the green business, which the company has presented as a new growth strategy, will require more than five years before it is reflected in the stock price.

How long will the sluggish stock price last?

As of 11:40 AM on the 10th, Lotte Chemical's stock price stood at 260,000 KRW, down 1.33% from the previous day. Since the beginning of this month, the stock has fallen about 2.5% from 266,500 KRW to 260,000 KRW. Looking at the stock price trend this year, it surged to 338,000 KRW in March before sharply declining. After hitting a low of 250,000 KRW on the 9th of last month, it has been hovering between 250,000 and 260,000 KRW. The decline is interpreted as being suppressed by concerns over reduced demand due to COVID-19 and profitability deterioration from the influx of additional production capacity in the second half of the year.

Second-quarter operating profit meets market expectations

Lotte Chemical's operating profit in the second quarter was 594 billion KRW, meeting market expectations (599 billion KRW) and representing a 1705% increase compared to the same period last year. Sales reached 4.352 trillion KRW, a 62.3% increase from a year earlier. Even considering a one-time cost of 60 billion KRW due to a minor maintenance at the Daesan plant, the overall rise in chemical product prices due to oil price increases and strong demand were positive factors.

Examining operating profits by major business segments, the olefin segment posted 271 billion KRW, a 7223.3% increase year-on-year. This was influenced by reduced opportunity costs related to crackers compared to the same period last year and sustained high profitability in PE, PP, EOA, and BD due to increased demand. However, due to one-time costs from scheduled maintenance at the Daesan plant, operating profit fell 13.4% compared to the first quarter.

The aromatics segment's operating profit was 52.3 billion KRW, a 1767.9% increase compared to the same period last year. Profitability improved at the Pakistan TPA facility, and the peak season effect for PET used in beverage and food packaging helped maintain high profitability for the main product PIA, resulting in a 31% growth compared to the previous quarter. The advanced materials segment recorded an operating profit of 126 billion KRW, a 418.5% increase year-on-year, driven by strong demand for electrical and electronic products since last year. However, a sharp rise in phenol prices increased PC raw material costs, partially damaging profitability.

LC Titan's operating profit was 119.9 billion KRW, a 252.6% increase year-on-year. Despite relatively strong margins for key products in Southeast Asia compared to Northeast Asia, profits declined about 10% from the previous quarter due to demand slowdown caused by the full lockdown in Malaysia at the end of June. LC USA's operating profit was 38.1 billion KRW, turning to a large profit compared to the same period last year. Despite the MEG plant shutdown caused by flooding, profitability improved due to increased ethylene sales.

Securities firms lower target prices again... "Recovery difficult in the second half"

Looking at the target prices presented by securities firms along with this earnings announcement, they are in the mid-to-high 300,000 KRW range. Securities firms that lowered their June target prices from the 500,000 KRW range to the mid-400,000 KRW range have further reduced their target prices following the second-quarter earnings announcement.

Lotte Chemical's expected operating profit for the third quarter is 492 billion KRW, estimated to decline about 17% compared to the second quarter's 594 billion KRW. This is due to anticipated difficulty in recovering the market conditions for major chemical products, leading to narrower spreads. Accordingly, the annual operating profit estimate has also been lowered compared to the previous month. While the annual operating profit was projected at 2.7368 trillion KRW last month, it has been revised down by about 15% to 2.319 trillion KRW this month.

By segment, the decline in profits is expected to be significant in the olefin and LC Titan divisions. Jinmyung Lee, a researcher at Shinhan Financial Investment, forecasted, "Due to demand slowdown in Asia in the second half and the impact of new capacity additions, spreads for major chemical products such as PE/PP are expected to narrow." Ianna Lee, a researcher at Ebest Securities who presented the lowest target price of 242,000 KRW, estimated, "The advanced materials segment is also expected to see reduced profitability due to demand decline and increased freight costs caused by the resurgence of COVID-19 in Southeast Asia," adding, "LC Titan will reflect opportunity loss costs due to capacity additions in Asia and scheduled maintenance of 3 million tons."

Green business promotion... "At least 5 years, a long-term approach needed"

Lotte Chemical plans to invest in new businesses over the next 10 years, including the hydrogen business value chain and organic solvents for secondary battery electrolytes, moving away from traditional petrochemicals.

For the hydrogen business, the company plans cumulative investments of 2 trillion KRW by 2025 to achieve annual sales of 600 billion KRW, and a total investment of 4.4 trillion KRW by 2030 to reach annual sales of 3 trillion KRW. NH Investment & Securities researcher Yusik Hwang said, "Sales proportions will be 40% each for hydrogen charging stations and power plants, and 20% for hydrogen tank business," adding, "To this end, we are strengthening cooperation with companies such as Air Liquide and SK Gas, as well as developing technology in-house."

However, as for new businesses, it is expected to be difficult for them to be fully reflected in sales within the next five years due to the long-term growth plan. Dongjin Kang, a researcher at Hyundai Motor Securities, analyzed, "It will take more time for growth business momentum to be reflected, and the stock price can change only when concrete results appear," adding, "Considering the net cash financial structure, there is sufficient capacity for investment in future growth, and more aggressive growth investments would be positive."

This content was produced with the assistance of AI translation services.