[Click eStock] "Lotte Holdings, Hotel Lotte's Performance Recovery and IPO Resumption Not Easy"

NH Investment & Securities Report

[Asia Economy Reporter Minji Lee] NH Investment & Securities maintained a neutral investment opinion on Lotte Holdings on the 18th, stating that the formation of an integrated holding company system is expected to be delayed due to Hotel Lotte's poor performance. The target stock price was raised by 29.8% from the previous level to 41,500 KRW, considering the increase in equity-method earnings.

Lotte Holdings is the holding company of the Lotte Group, established in October 2017 through the spin-off and absorption merger of Lotte Confectionery, Lotte Shopping, Lotte Chilsung, and Lotte Foods. Lotte Holdings recorded sales and operating profit of 2.8055 trillion KRW and 159.2 billion KRW respectively in the fourth quarter of last year, estimated to have increased by 24% and 379% compared to the same period last year.

Lotte Shopping is expected to show a significant increase in operating profit compared to the same period last year due to a base effect from large-scale cost recognition last year and gradual performance improvement through cost efficiency efforts. The recognition of equity-method earnings is also expected to have increased due to the additional acquisition of 0.7% stake in Lotte Chemical and 4.7% stake in Lotte Chilsung.

Dongyang Kim, a researcher at NH Investment & Securities, said, “The expansion of major affiliates’ stakes and efforts to enhance shareholder value by Lotte Holdings are positive. However, due to the spread of COVID-19, the poor performance of distribution affiliates, and the decrease in dividend income caused by profit reduction from the Lotte Chemical accident in the first quarter of last year, a decline is inevitable.”

This year, Lotte Holdings is expected to have increased earnings visibility due to the base effect combined with Lotte Shopping’s cost efficiency efforts. The expected operating profit is 361.3 billion KRW, which is anticipated to increase by 14% compared to the same period last year.

However, the recovery of Hotel Lotte’s performance, which is at the top of the Lotte Group’s governance structure, and the resumption of its initial public offering (IPO) are expected to be difficult. Furthermore, the possibility of forming an integrated holding company system between Lotte Holdings and Hotel Lotte, the final stage of the Lotte Group’s governance restructuring, is also estimated to be low for the time being. Researcher Dongyang Kim stated, “We are raising the target stock price reflecting the stock price fluctuations of listed subsidiaries, additional stake acquisitions, and maintaining the target discount rate (45%). For investment sentiment to improve, performance improvement of subsidiaries and a turnaround in Hotel Lotte’s performance are necessary.”