[Click eStock] "Lotte Chemical, Business Structure Capable of Hedging Inflation and Interest Rate Hikes"

[Asia Economy Reporter Ji Yeon-jin] Hana Financial Investment evaluated Lotte Fine Chemical on the 24th, stating that it has a business structure capable of hedging against recent sharp price increases and interest rate hike issues.

Yoon Jae-sung, a researcher at Hana Financial Investment, said, "The recent strength of natural gas is stimulating the rise in crude oil prices, an alternative power source, which will also affect coal prices in the future." He added, "The cyclical referencing phenomenon among traditional energy sources due to the counterattack following the decarbonization trend will continue throughout this year, and the supply instability of traditional energy sources is expected to ultimately cause grain price increases through the chain of fertilizer shortages and poor crop yields."

Recently, global biodiesel production has decreased due to the rise in grain prices and Indonesia's palm oil export restrictions. The current global trend is shifting from conventional biodiesel to second-generation biodiesel called renewable diesel (HVO). As a result, the production of glycerin, a byproduct of biodiesel, has sharply declined, causing prices to soar.

Researcher Yoon explained, "Lotte Fine Chemical produces ECH based on propylene, whereas 50% of China's total ECH production is glycerin-based, so there is a high possibility of raw material supply disruptions and profitability deterioration." He added, "The increase in electricity prices in China due to the supply instability of traditional energy sources is a factor lowering the operating rate of caustic soda facilities. However, caustic soda supply pressure has eased compared to the past, and prices are inevitably formed at a higher level than before."

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Lotte Fine Chemical's operating profit in the fourth quarter of last year is expected to increase by 285% year-on-year to 93.3 billion KRW, exceeding market expectations by 13%. This is due to a significant rise in profit margins in the chlorine sector. The equity-method affiliate Lotte INEOS is expected to achieve record-high performance.

This year's operating profit is forecasted to increase by 27% year-on-year to 320.8 billion KRW, setting a new record high. Researcher Yoon said, "Lotte Fine Chemical's price-to-book ratio (PBR) is 0.77 times, indicating absolute undervaluation." He added, "Growth is also expected in alternative meat additives and hydrogen, and with the MOU signing with Aramco and Blue Ammonia and the execution of national projects, the entire value chain from ammonia import, pyrolysis extraction, to distribution and utilization has been completed."

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