[Click eStock] "Daehan Yuhwa, Worst Market Conditions Passed Due to Ethylene Price Rebound"

[Asia Economy Reporter Oh Ju-yeon] NH Investment & Securities stated on the 29th that Daehan Petrochemical recorded a monthly loss in December due to the dual adverse effects of rising costs and a sharp drop in demand in the latter part of the fourth quarter last year. However, they expect operating profit to recover in the quarter as costs rapidly declined in January this year.

Researcher Hwang Yoo-sik said, "The operating profit for the fourth quarter was 11.8 billion KRW, which was lower than expected. This was because costs sharply increased in the latter part of the quarter, while product prices did not reflect the cost increase due to weak demand." He added, "We estimated the average naphtha price for the quarter at 510 USD per ton, but due to continued price increases, the average price rose about 5.5% to 538 USD per ton. In particular, the average naphtha price in December was 566 USD, significantly increasing cost burdens, but product prices fell, leading to an estimated monthly operating loss."

As of the end of January, the naphtha price fell to 532 USD, and ethylene prices, which showed the most weakness, recovered to 835 USD (December low of 720 USD). Researcher Hwang said, "Many companies in the region are adjusting operating rates due to operating losses, and it is estimated that the worst market conditions are behind us." Although the impact of the novel coronavirus from China is expected to delay further spread rebounds, a gradual recovery in quarterly operating profit is anticipated due to low inventory levels of products in China, increased industrial production activities following the US-China trade agreement, and entry into the seasonal peak period.

Researcher Hwang maintained a 'Buy' investment rating but lowered the target stock price to 130,000 KRW.

He explained, "The ethylene and HDPE spreads contracted more than expected, and demand is expected to recover slowly. Therefore, the target price was lowered from 170,000 KRW to 130,000 KRW in line with a 26% adjustment to the 2020 annual earnings per share (EPS) estimate."