[Click eStock] "Daehan Yuhwa, Despite Q3 Earnings Slump, Expected to Benefit from Strengthened Chinese Regulations"

Hana Financial Investment Report

[Asia Economy Reporter Minji Lee] Hana Financial Investment on the 27th maintained a buy rating on Daehan Petrochemical with a target price of 300,000 KRW, lowering it by 25%. This reflects the downward revision of the annual earnings estimates.

Daehan Petrochemical's operating profit in the third quarter was 32.1 billion KRW, down 49% year-on-year, missing market expectations (64.9 billion KRW) by 50%. Despite rising oil and naphtha prices, product prices declined due to sluggish regional demand caused by the resurgence of COVID-19 in Southeast Asia, container shortages, and semiconductor chip shortages, resulting in margin contraction.

Operating profit for the fourth quarter is expected to be 47.3 billion KRW, down 38% compared to a year ago. However, it is forecasted to grow 47% compared to the third quarter. Recently, price rebounds have been observed in key product groups such as PE, PP, EG, and BD due to supply reductions from decreased operating rates of coal-based facilities in China and demand recovery in Southeast Asia. The worst of China's power shortage has passed, and the operating rates of downstream facilities are likely to gradually recover.

Looking at recent stock price trends, weakness was seen due to reduced downstream demand caused by China's power shortage. As of 2022, the price-to-earnings ratio (PER) is 5.6 times, and the price-to-book ratio (PBR) is 0.58 times, indicating undervaluation. Considering the government's order to expand coal production and the increased electricity price hikes for coal power generation, the power shortage is analyzed to have passed its peak, and a gradual recovery in downstream operating rates is expected.

However, as seen in regulations on private oil companies in China, regulations on small-scale, carbon-intensive coal-based chemical facilities are likely to continue. In particular, China has decided not to limit the extent of electricity price hikes for energy-intensive companies, with some provinces seeing increases of 50-80%. Jaesung Yoon, a researcher at Hana Financial Investment, said, "The rise in electricity prices and regulations on coal-based facilities in China could be factors that help resolve oversupply," adding, "In the short term, demand recovery due to the easing of COVID-19 in Southeast Asia and India is also positive."

The company plans to continuously expand separator PE for its mid- to long-term growth. Researcher Yoon said, "PE sales are steadily increasing," and evaluated, "To overcome the undervaluation relative to fundamentals, the company needs to actively pursue shareholder return policies and demonstrate commitment to new businesses."

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