[Click eStock] "Lotte Jeongmil Hwachem, Expected to Break Record 1Q Operating Profit"

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[Asia Economy Reporter Lee Jung-yoon] Hana Financial Investment maintained a buy rating and a target price of 120,000 KRW for Lotte Fine Chemical on the 5th, expecting the company to deliver earnings that exceed consensus estimates for the first quarter of this year.

Lotte Fine Chemical's operating profit for the first quarter of this year is forecasted at 101 billion KRW, up 19% and 184% compared to the previous quarter and the same period last year, respectively. This marks the fifth consecutive quarter of record-high earnings, surpassing estimates by 17%. Jaesung Yoon, a researcher at Hana Financial Investment, explained, "The quarter-on-quarter profit increase is thanks to further margin improvements in chlorine-based caustic soda, ECH, and urea solution." He added, "In particular, ECH's profit improvement is expected to be remarkable as the international price increase from the previous quarter was reflected with a lag in the first quarter's selling price."

Operating profit for the second quarter of this year is also expected to reach 100.9 billion KRW. Researcher Yoon stated, "Due to fertilizer shortages driving up grain prices, China's ECH facilities continue to face cost disadvantages, highlighting the relative advantage of propylene-based ECH."

A decline in profit is anticipated in the second half of this year due to the downward stabilization of chlorine-based products. However, the operating profit of chlorine-based products in the second half is expected to be similar to the existing up-cycle and approach the annual profit levels before the COVID-19 pandemic. Lotte Fine Chemical's chlorine business, centered on caustic soda, is analyzed to gradually ease its cyclical characteristics and generate high profit levels. Especially for caustic soda, it is expected to be influenced by the expansion of new demand sectors such as batteries, China's restructuring driven by decarbonization policies, production capacity reductions in the U.S. and Europe, and limited plans for new capacity expansions.

Furthermore, significant growth in the green materials segment is also anticipated. Researcher Yoon said, "From the second half of this year, green materials will take over the performance rally from the chlorine segment," adding, "Green materials' profit in 2023 is expected to increase by 59% compared to the previous year, raising its profit share to 27%."

He continued, "Especially, the food and pharmaceutical line will lead profit growth," explaining, "This is due to the reflection of the expanded food and pharmaceutical line from May this year and strong sales of Anycoat (pharmaceutical coating and capsules) driven by growth in the Indian pharmaceutical market, the main market."

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