[Into the Stock] Why Did Lotte Chemical, the Rescue Pitcher for 'Lotte Construction,' Rise Despite Earnings Shock and Financial Health Concerns?

[Asia Economy Reporter Lee Seon-ae] Despite the increasing financial burden on Lotte Chemical as it steps in to support Lotte Construction, which is facing difficulties in raising funds, the stock price is showing an upward trend. Although concerns about deteriorating financial soundness and stability have emerged, the market appears to be focusing on buying opportunities at low prices, anticipating a turnaround in the business cycle next year.

According to the Korea Exchange on the 17th, Lotte Chemical closed at 181,500 KRW the previous day. It recovered to the 190,000 KRW range on the 15th, closing at 190,500 KRW, but retreated back to the 180,000 KRW range the day before due to market sluggishness and the impact of a credit rating downgrade. However, looking at the past month, the stock price has steadily risen, recovering to the 190,000 KRW range. After plunging to 144,000 KRW on October 21, the stock price soared about 30% in one month. This is interpreted as due to expectations of a turnaround in the 2023 business cycle.

Lotte Chemical recorded a large operating loss in the third quarter, resulting in an earnings shock. Operating profit, which was 82.6 billion KRW in the first quarter, turned into a loss of 21.4 billion KRW in the second quarter, and the loss widened significantly to 423.9 billion KRW in the third quarter. Financial issues also surfaced as Lotte Chemical acted as a 'relief pitcher' to support Lotte Construction. Lotte Chemical, as the largest shareholder holding 43.79% of Lotte Construction, has a certain obligation to support it.

Credit rating agencies expressed concerns. Until the end of last year, Lotte Chemical maintained a debt-free status, but they pointed out that the net debt is rapidly increasing due to weakened operating cash flow from sluggish business conditions and expanded investments.

Korea Ratings stated, "Approximately 900 billion KRW (876 billion KRW from capital increase, about 800 billion KRW in annual loans) was outflowed this year to support its subsidiary Lotte Construction," and said that a credit rating adjustment for Lotte Chemical is inevitable.

Moreover, Lotte Chemical announced last month that it would acquire a 53.3% stake in Iljin Materials for 2.7 trillion KRW. Korea Ratings said, "About 4 trillion KRW in funds will be required, including the Lotte Indonesia New Ethylene Project (3.9 billion USD) and the acquisition of Iljin Materials (about 2.7 trillion KRW), which will increase the financial burden."

Earlier, Korea Credit Rating adjusted Lotte Chemical's credit rating from 'AA+/Stable' to 'AA+/Negative.' The downgrade was due to deteriorating profit-generating capacity caused by the earnings shock and declining financial stability. NICE Credit Rating also placed Lotte Chemical under credit watch for a possible downgrade of its long-term credit rating, citing increased borrowing burden.

The outlook for the fourth quarter performance is also not bright. According to the consensus of financial information provider FnGuide (average of securities firms' forecasts), Lotte Chemical is expected to continue its losses with an operating loss of 83.6 billion KRW in the fourth quarter.

Nevertheless, foreign investors' buying momentum is notable. Their buying has gradually restored investment sentiment toward Lotte Chemical. From the 19th of last month until the day before, foreign investors bought Lotte Chemical shares on all but two trading days, with net purchases totaling 122.3 billion KRW during this period.

Foreign investors seem to be focusing on the fact that the petrochemical business cycle has passed its bottom. Hwang Kyu-won, a researcher at Yuanta Securities, said, "The global petrochemical business cycle has been in a downward phase since mid-2021. However, signals indicate that the cycle has bottomed out, and the ethylene market, a representative petrochemical product, is expected to shift to an upward cycle in 2023 due to supply-demand improvements, so buying is recommended."

Additionally, although concerns about financial soundness have been raised, there is also a view that there will be no problem with liquidity. As of the third quarter, cash and cash equivalents stood at 2.6371 trillion KRW (consolidated basis), an increase of about 1 trillion KRW compared to 1.6028 trillion KRW at the end of last year. The debt ratio is also only 53% as of the third quarter this year, after recording 48% in the first half of last year.

This content was produced with the assistance of AI translation services.