LG Chem Operating Profit Falls Short of 1 Trillion Won... Writes Off Provisions and Invests 6 Trillion Won in Future (Comprehensive Report 2)

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[Asia Economy Reporters So-yeon Park and Yoon-joo Hwang] LG Chem failed to maintain an operating profit of 1 trillion KRW last year due to the deterioration of the oil market and the impact of provisions. It is the first time in 13 years since 2006 that LG Chem's annual operating profit fell below 1 trillion KRW.

◇ 'Record High' Sales... Profitability 'Below Expectations' = LG Chem announced on the 3rd that its consolidated operating profit for last year was preliminarily estimated at 895.6 billion KRW, a 60.1% decrease from the previous year.

However, sales reached a record high of 28.625 trillion KRW, up 1.6% from the previous year. Although sales increased, the slowdown in the oil market and provisions related to energy storage system (ESS) fires hindered performance.

The provision related to ESS amounted to approximately 300 billion KRW. Last year's net profit also sharply declined by 75.2% to 376.1 billion KRW compared to the previous year.

In the fourth quarter of last year, sales grew 1.6% year-on-year to 7.4612 trillion KRW, but operating profit turned negative to -27.5 billion KRW due to the reflection of ESS provisions. Net loss was recorded at 56.8 billion KRW.

LG Chem's Chief Financial Officer, Vice President Dong-seok Cha, explained, "Despite the US-China trade dispute and global economic slowdown, we achieved record-high sales due to the continuous growth of the battery business, but the overall profit was reduced due to one-time costs related to ESS. Especially in the fourth quarter, operating profit turned negative due to the reflection of one-time costs."

He added that meaningful achievements were also made, such as maintaining solid profitability despite the seasonal off-season and market deterioration in the petrochemical sector, and achieving results close to the break-even point (BEP) in the battery sector.

◇ This Year's Sales Target 'Upward Revision'... 6 Trillion KRW Investment for the Future = A strong performance rebound is expected this year through bold business restructuring. First, LG Chem decided to exit the liquid crystal display (LCD) glass substrate business. The company explained that the market continued to deteriorate due to a rapid increase in production facilities in China, and it was judged that the business would have difficulty turning to recovery, leading to the decision to withdraw.

LG Chem will also make bold investments for the future. The company set this year's sales target at 35.3 trillion KRW, a 23.4% increase from the previous year. Capital expenditure (CAPEX) is planned at 6 trillion KRW, a 13.0% decrease from the previous year.

Regarding specific business outlooks by division, the petrochemical sector expects favorable demand for downstream products such as ABS and PVC, while additional market deterioration is expected to be limited due to capacity adjustments and regular maintenance by major companies.

The battery division is expected to continue expanding sales due to increased shipments of automotive batteries, and profitability is predicted to improve through new production capacity and yield stabilization. The advanced materials division will focus on securing mid- to long-term growth engines by upgrading its business portfolio centered on OLED materials, and the life sciences division will strengthen sales of key products and R&D investment for new drug development.

Vice President Cha stated, "Although external uncertainties such as demand contraction in major markets are significant, we will secure a stable profit structure through market stabilization in the petrochemical sector and significant growth in the battery sector."

Kiwoom Securities analyst Dong-wook Lee said, "There will be no additional ESS-related provisions this year, and since the European electric vehicle battery market is improving, LG Chem is expected to benefit. In the petrochemical sector, LG Chem focuses on downstream products, so the margin weakness is expected to be less severe."

◇ LG Chem Battery Division Mentions Possible Spin-off = During the conference call, LG Chem stated, "Regarding the spin-off of the battery business, we are reviewing various ways to enhance not only business value but also shareholder value."

They added, "Although there are many advantages to having the petrochemical and battery businesses, which operate quite differently, under one company, we are considering ways to strengthen the competitiveness of each division, such as investment prioritization, and thus are reviewing the spin-off of the battery division. If it becomes concrete, we will communicate with the market within the scope of related regulations such as disclosures."

LG Chem said, "This year, the automotive battery business aims for sales of 10 trillion KRW," adding, "We are expanding new facilities, so sales are expected to improve quarter by quarter."

They continued, "Although profitability is expected to deteriorate in the first quarter, as new facilities stabilize quarterly, we expect a mid-single-digit profit margin for the year. The facility scale is expected to be about 100 GWh this year, with an additional 20 GWh planned for next year."

Furthermore, "To improve local responsiveness, more than 80% of total battery facilities will be secured in Europe and China," and "We plan to continuously expand strategic alliances and joint ventures (JVs) with customers."

LG Chem stated, "The yield of the battery plant in Poland has been continuously improving since last year," and "In addition to general yield improvement activities, we are investing to increase the automation ratio of production lines for fundamental productivity improvement, so continuous improvement is expected."

They added, "However, this year, since new line capacity expansion is concentrated in the first half, overall yield and productivity will be slightly lower than last year, but it is expected to improve quarterly and normalize in the second half of this year."

Regarding the novel coronavirus, LG Chem said, "We have multiple operators and production bases in China and are reviewing and taking measures for internal and external responses," adding, "Some plants have suspended operations according to local government guidelines." They further explained, "Due to the nature of the petrochemical business, we are adjusting operating rates downward while monitoring the virus situation," and "We are preparing for supply chain disruptions, and considering the difficult logistics situation in China, some impact is inevitable."

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