[Click eStock] Lotte Chemical, 1.1 Trillion Won Capital Increase Damages Shareholder Value 'Target Price Down'

[Asia Economy Reporter Lee Seon-ae] Meritz Securities announced on the 22nd that it maintains a buy rating on Lotte Chemical but lowers the target price from 240,000 KRW to 200,000 KRW. This is due to the clear deterioration of shareholder value following the decision on the rights offering. However, it noted expectations for a rebound in the petrochemical market starting next year and optimism regarding mid- to long-term new businesses.

On the previous day, Lotte Chemical held an investor briefing regarding the rights offering worth 1.105 trillion KRW. As the first step toward achieving sales of 50 trillion KRW by 2030, the company decided to acquire Iljin Materials and plans to use 605 billion KRW of the funds raised through the rights offering for the acquisition and 500 billion KRW for operating funds. The acquisition amount for Iljin Materials is approximately 2.7 trillion KRW.

No Woo-ho, a researcher at Meritz Securities, analyzed, "This rights offering is the result of increased financial structure and capital expenditure (CAPEX) instability due to investments in new business sectors and financial support (a loan of 500 billion KRW and participation in the rights offering of 82.7 billion KRW) caused by the business risk highlighted in Lotte Construction, a subsidiary, last October."

He added, "Despite a 20% drop in stock price compared to the beginning of the year amid continued poor business conditions including annual deficits, the company pursued cash support for its subsidiary instead of meeting shareholder dividend guidance, which is judged as an event damaging shareholder value."

However, the petrochemical market situation is expected to gradually improve next year. This is based on improved supply health of major global petrochemical products annually, low inventory levels within Asia, which may prompt inventory accumulation, and easing of input cost burdens. Nevertheless, it was assessed that the sector, sensitive to economic and oil price volatility with limited structural growth, has limited upside potential for multiple expansion.

Researcher No emphasized, "The battery materials business proposed by Lotte Chemical can lead to a stock price revaluation when customer acquisition for organic solvents and cathode foils and the narrowing of profitability gaps with the domestic No.1 battery foil company are confirmed," adding, "The price-to-book ratio (PBR) of 0.5 times applied to the company for 2022?2023 will be maintained."