[Into the Stock] Kumho Petrochemical's 'Peak Out' Controversy and Short Selling

[Asia Economy Reporter Junho Hwang] Kumho Petrochemical has become the center of the Peak-Out controversy due to an unexpected Sell report. On the 9th, the US investment bank JP Morgan issued a sell opinion, stating that "Kumho Petrochemical's profit peak period (Peak-Out) is approaching," causing Kumho Petrochemical's stock price to drop by 7.62%. However, on the 10th, a domestic securities firm raised a rebuttal, warning to "be cautious of stock analysis based on intuition," and Kumho Petrochemical's stock price has shown a slight upward trend.

Is the demand for medical gloves decreasing?

JP Morgan set Kumho Petrochemical's fair stock price at 180,000 KRW, down by half from the previous target price of 360,000 KRW. On the other hand, Hana Financial Investment maintained a buy opinion and set a 12-month target price at 600,000 KRW. Kiwoom Securities also set it at 550,000 KRW. The difference in target prices due to the Peak-Out controversy has become quite large.

The center of this 'Peak-Out' controversy is NB latex. This material is one of the chemical rubbers used in medical and cooking gloves. Kumho Petrochemical is the global No.1 NB latex company with a 35% market share. In fact, NB latex was not considered a core product in the chemical industry, but after the outbreak of COVID-19, it emerged as a high value-added product. According to the Korea International Trade Association, domestic NB latex exports in December last year reached 154 million USD, a 161% increase compared to January (59 million USD) at the beginning of the year.

To discuss whether NB latex has peaked out, it is necessary to look at the situation of Top Glove, the world's largest glove company based in Malaysia. Looking at Top Glove's Q3 (March-May) results announced on the 9th, sales and EBITA (earnings before interest, taxes, and amortization) decreased by 22% and 30%, respectively, compared to the previous quarter.

The decline in performance can be seen as evidence supporting the Peak-Out argument. This company achieved sales of 5.36548 billion ringgit (1.4538 trillion KRW) in the previous quarter (December 2020 to February 2021), which was 4.4 times higher than the same period last year. Net profit also increased 24.8 times to 2.86898 billion ringgit (77.4751 billion KRW).

At first glance, it seems possible that the Peak-Out JP Morgan pointed out might occur. JP Morgan stated in its report, "Concerns that NB latex demand will peak in Q1 are reflected in forecasts that this year's and next year's earnings per share (EPS) will be 12% and 28% lower than current consensus, respectively."

However, Hana Financial Investment focused on Top Glove's EBITA margin, which reached 64%, concluding that it is too early to talk about the Peak-Out controversy. In particular, the Q3 sales decline was largely due to a decrease in sales to the US, which has a high selling price, caused by investigations into forced labor in the US, making it difficult to call this a Peak-Out. Rather, it should be seen as a factor that removes the justification for price reduction pressure on NB latex.

Researcher Jaesung Yoon of Hana Financial Investment Research Center said, "Since the expansion speed of glove supply is faster than that of NB latex, the price negotiation leverage will be with NB latex companies," and "In 2023, when Kumho Petrochemical's NB latex production capacity expands, it will be able to sufficiently defend against downward pressure on prices or margins."

Is Bisphenol also peaking out?

The price decline of bisphenol (BPA) is also a part of this Peak-Out controversy. JP Morgan said, "The price of BPA in China has fallen about 33% due to decreased demand," and predicted, "The BPA spread peaked in Q1 and started to decline, and the first half of this year will be the peak of profits."

However, Kiwoom Securities expects that operating profit in the phenol derivatives sector, including BPA, will reach 260.9 billion KRW in Q2 this year, an increase of 651.9% compared to the same period last year. This is the result of a sharp rise in the prices and spreads of BPA and epoxy resin. Meanwhile, in May, domestic prices of BPA and epoxy resin rose by 250.8% and 115.1%, respectively.

Amid the heated controversy over Peak-Out, Kumho Petrochemical's short-selling balance has increased sharply. The average balance in May (3rd to 30th) was 20.7838 billion KRW, but the average this month rose significantly to 40.14774 billion KRW. In particular, on the 7th, two days before JP Morgan's report was released, the balance reached 45.1 billion KRW, marking the highest level since the resumption of short selling.