Feeling the Burden of New Business Investments... LG Chem Also Caught Up by LG Energy Solution

Profitability Declines Amid Business Diversification
Q2 Revenue 15.7419 Trillion KRW, Operating Profit 891.6 Billion KRW
Operating Margin Expected to Remain in 5% Range Following Last Year

LG Chem is struggling with profitability issues during its transitional phase of shifting its business focus to batteries, eco-friendly materials, and new drugs. This is due to the sluggish petrochemical sector, which accounts for the largest portion of its earnings, and there are forecasts that performance improvement will be difficult until the end of the year.

Although the company is increasing investments in next-generation businesses, its debt ratio is also rising. Meanwhile, LG Energy Solution, which was spun off last year, is posting record-breaking earnings.

According to FnGuide's consensus, LG Chem's second-quarter sales are estimated to increase by 28.6% year-on-year to KRW 15.7419 trillion from KRW 12.2399 trillion in the same period last year. However, operating profit is expected to be around KRW 891.6 billion, similar to KRW 878.5 billion in the previous year.

The operating profit margin, a key profitability indicator, is expected to be 5.6% in the second quarter. In the first quarter, it was only 5.4% (sales of KRW 14.4862 trillion, operating profit of KRW 791 billion). LG Chem’s operating profit margin is likely to remain in the 5% range for the second consecutive year, following 5.7% last year.

LG Chem’s operating profit margin was 11.3% in 2017 during the petrochemical boom, dropped to the 3% range in 2019, then rose to the 6% range in 2020. In 2021, due to the COVID-19 special demand, the operating profit margin surged to 11.7%, but it has been on a downward trend since last year.

On the other hand, its subsidiary LG Energy Solution is expected to record second-quarter sales of KRW 8.8901 trillion and operating profit of KRW 702.3 billion, with an operating profit margin of 7.8%. As the battery business has entered its main track, its operating profit margin has surpassed LG Chem’s. The operating profit scale is also expected to soon exceed that of LG Chem. From LG Chem’s perspective, this situation is bittersweet.

The cause of LG Chem’s deteriorating profitability is the downturn in the petrochemical sector. Last year, LG Chem’s petrochemical division posted an operating profit of KRW 1.0745 trillion, down 73.7% from the previous year, and recorded a loss of KRW 50.7 billion in the first quarter of this year.

LG Chem Chungnam Daesan Plant Panorama
[Image source=Yonhap News]

There is a high possibility that the petrochemical sector’s downturn will be prolonged. The ethylene spread (the price difference between naphtha and ethylene), a representative profitability indicator in the petrochemical industry, is below the breakeven point.

As of the 15th, the raw material naphtha price is USD 554 per ton, while the product ethylene is USD 750 per ton, making the spread about USD 200. The ethylene spread represents the margin petrochemical companies earn. The industry generally estimates the breakeven point at USD 300. The larger the price difference between raw materials and the products made from them, the more profit manufacturers make.

Also, prices of petrochemical products polyethylene (PE) and polypropylene (PP) have fallen to their lowest levels since 2020. PE and PP are representative products accounting for 49% of global plastic resin consumption. Since the Chinese economy has not recovered after reopening, demand recovery for major products is sluggish, delaying the sector’s rebound.

LG Chem, which is accelerating investments in next-generation businesses, is increasing external financing. As a result, its debt ratio and reliance on borrowings are rising.

At the end of last year, LG Chem’s debt reached KRW 30.4927 trillion, up 9.2% from the end of the previous year. Long-term borrowings such as bank loans increased by 45%, from KRW 3.6285 trillion at the end of 2021 to KRW 5.2856 trillion at the end of last year. Korea Ratings highlighted investment burden trends and changes in financial burdens as key monitoring points in its early-year evaluation report on LG Chem.

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