[Click eStock] "LG Chem, Focus on Accelerating Investment in Petrochemicals and Advanced Materials"

Shinyoung Securities Report
Q4 Expected Operating Profit of 718 Billion KRW

[Asia Economy Reporter Minji Lee] Shin Young Securities maintained a buy rating and a target price of 910,000 KRW for LG Chem on the 22nd. Although there is significant market disappointment due to the spin-off of the battery division, it is expected that accelerating investments in the petrochemical and advanced materials business sectors will lead to additional stock price increases driven by profit growth.

LG Chem's third-quarter sales reached 7.5073 trillion KRW, a 2% increase compared to the same period last year, and operating profit grew by 137% to 902.1 billion KRW. The petrochemical operating profit rose approximately 125% year-on-year to 726.1 billion KRW, showing strong performance. This was due to the input of low-cost naphtha following the decline in oil prices and increased demand for hygiene products and home appliances, which significantly widened the spread of key products such as ABS and PVC. The operating profit margin achieved a record high, rising from 13.1% in the second quarter to 20.1% in the third quarter.

[Image source=Yonhap News]

The battery division's operating profit was 168 billion KRW, a 137% increase compared to the same period last year. This improvement over the second quarter is attributed to the launch of new EV models for the European market and increased shipments of IT products. Although the life sciences sector saw a decline in profitability due to increased research and development expenses compared to last year, profitability improved thanks to the recovery of demand in advanced materials, automotive, and display sectors. Farm Hannong also reduced its deficit due to increased shipments of crop protection products.

Fourth-quarter earnings are expected to turn positive at 718 billion KRW compared to the same period last year, although this represents a decrease of about 21% from the third quarter. The chemical division is forecasted to record 566 billion KRW, down 22% from the third quarter due to the off-season. Researcher Ji-yeon Lee of Shin Young Securities stated, “From the fourth quarter, new cracker capacity in Asia, including China, is expected to increase supply, but new expansions of key products such as ABS and PVC are limited, so spreads are expected to remain higher than the same period last year.”

In the battery division, provisions related to Kona cannot be ruled out. However, the possibility of cell replacement after the BMS update is low, so the provision amount is expected to be small. Although shipments of small batteries are expected to decline in the fourth quarter, operating profit is estimated to increase by 7% from the previous quarter to 181 billion KRW due to increased sales of automotive batteries.

LG Chem plans to actively invest in petrochemicals, which had been delayed due to battery investments. The company shows stable profitability among chemical companies by focusing on differentiated products and plans to further expand the proportion of existing high value-added products such as metallocene PE and SAP. Researcher Ji-yeon Lee explained, “Visibility for new complex investments in Southeast Asia and India can be expected to secure the insufficient basic feedstock,” adding, “In the advanced materials sector, as the internalization ratio increases, if the cathode material capacity expands from 40,000 tons this year to 170,000 tons by 2025, profit growth in the advanced materials division is anticipated.”