[Into the Stocks] Undervalued Eco-Friendly Growth Stock 'Lotte Jeongmil Hwachem'... Institutions Are Gradually Buying

[Asia Economy Reporter Lee Seon-ae] If you want to buy eco-friendly growth stocks at a low price, the answer is 'Lotte Fine Chemical.' As rosy forecasts predict that earnings will grow stepwise, investors' buying love calls for Lotte Fine Chemical continue. Institutions, mainly pension funds and investment trusts, are buying intensively, expecting qualitative growth in the second half of the year and next year.

On the 5th, Lotte Fine Chemical closed trading at 71,300 KRW. Although securities firms continue to raise their target prices, the stock price has yet to break out of the box range. Since rising to 71,100 KRW on April 22, Lotte Fine Chemical's stock price has been hovering in the high 60,000s to low 70,000s for over three months.

This is due to concerns about peak-out (high point). In the second half, demand is expected to decrease due to a slowdown in the chemical industry, while supply is expected to increase. However, experts are focusing on individual stock trends. They emphasize the need to concentrate on individual stocks. The dominant view is that Lotte Fine Chemical will be free from peak-out concerns. The supply-demand environment is also favorable. Over the past month (July 5 to August 5), institutions have net purchased a total of 29.18 billion KRW worth of shares. Pension funds bought as much as 9.767 billion KRW. Investment trusts, which pursue absolute returns, also net purchased 12.5 billion KRW.

◆Record Quarterly Earnings= Lotte Fine Chemical recorded its highest quarterly sales ever in the second quarter this year, driven by increased demand and price hikes for major chemical products. The second-quarter sales (consolidated basis) and operating profit were preliminarily estimated at 421.7 billion KRW and 53.9 billion KRW, respectively, up 43.8% and 59.0% year-on-year. The sales figure is the largest on a quarterly basis. With the economic recovery and increased demand for major chemical products, both sales volume and prices rose simultaneously, leading the chemical division to record sales of 325.8 billion KRW, a 55.4% increase compared to the same period last year, driving solid performance. The green materials division also recorded 95.8 billion KRW, up 14.6% during the same period.

A Lotte Fine Chemical official said, "Sales of cellulose-based products increased due to the global recovery in the construction market and growth in the plant-based food and pharmaceutical markets."

Lotte Fine Chemical completed a 140 billion KRW scale expansion investment in the eco-friendly cellulose business as planned by the second quarter and plans to complete a 37 billion KRW expansion of the food and pharmaceutical factory by the first half of next year.

◆Rosy Outlook for the Second Half= Securities firms forecast that Lotte Fine Chemical's future earnings will improve further.

In the second half, ECH and eco-friendly materials are expected to lead earnings improvement next year. Hana Financial Investment forecasted that Lotte Fine Chemical's third-quarter operating profit will improve further to 61 billion KRW (QoQ +13%, YoY +131%). However, the decline in green materials' profit (QoQ -23%) due to additional depreciation from expansion and increased logistics costs is regrettable. But the chlorine operating profit is expected to increase by 27% quarter-on-quarter, sufficiently offsetting this. This is because ECH and caustic soda are expected to rise again due to tight supply and demand.

Yoon Jae-sung, a researcher at Hana Financial Investment, explained, "In the second half, strong demand for ECH continues due to the construction boom and increased ship orders, while regional supply is insufficient due to operational issues in China. If raw material prices and shipping rates normalize in the first half of next year, the profitability of the eco-friendly materials business will improve significantly."

According to FnGuide, the annual operating profit consensus (average estimate by securities firms) for Lotte Fine Chemical this year is 204.9 billion KRW, a 47.22% increase compared to the previous year. Lotte Fine Chemical's annual operating profit showed negative growth from 210.7 billion KRW in 2018 to 189.7 billion KRW in 2019 and 139.2 billion KRW in 2020 but is expected to rebound this year.

◆Green Materials Next Year= In the mid-to-long term, Lotte Fine Chemical's expansion into new business areas as a hydrogen carrier within the hydrogen business value chain of the Lotte Group (centered on Lotte Chemical) is anticipated. Lotte Chemical announced plans to produce 440,000 tons of green hydrogen using liquefied ammonia by 2030. Currently, it trades up to 900,000 tons of ammonia annually and has secured related infrastructure and technology, making it highly likely to demonstrate capabilities as a hydrogen carrier using ammonia. For reference, considering only the ammonia trading volume for Lotte Chemical's 440,000 tons of green hydrogen, the ammonia division is estimated to generate sales of about 1 trillion KRW and operating profit of 73 billion KRW in the future.

Jeon Yoo-jin, a researcher at Hi Investment & Securities, said, "In the short term, strong performance continues centered on key products such as ECH, caustic soda, and Hecellos used as industrial intermediate materials. In the mid-to-long term, it is positive that the business area can expand to hydrogen power generation based on the ammonia division," maintaining a buy rating and a target price of 100,000 KRW.

Hana Financial Investment also emphasized that Lotte Fine Chemical's ammonia is key in the hydrogen supply chain (value chain) of its parent company, Lotte Chemical. Lotte Fine Chemical is the number one company in the domestic market distributing 900,000 tons of ammonia annually. Yoon Jae-sung, a researcher at Hana Financial Investment, said, "Lotte Fine Chemical's role in Lotte Group's hydrogen business is still underestimated," adding, "We can expect valuation (stock price level relative to earnings) to rise through future earnings improvement." Hana Financial Investment maintained a target price of 100,000 KRW, expecting future earnings improvement and valuation rerating.