[Click eStock] "Lotte Chemical, Escaping the Worst"…Target Price Upward Revised

Hi Investment & Securities maintained a buy rating on Lotte Chemical on the 24th, stating that the company is gradually recovering from its worst phase thanks to the demand recovery in China, and raised the target price from the previous 210,000 KRW to 230,000 KRW.

Lotte Chemical's operating loss in the first quarter of this year was 193.7 billion KRW, and the deficit was expected to continue. However, the scale of the deficit, which had been expanding every quarter since the third quarter of last year, was forecasted to decrease significantly due to spread improvement reflecting product price increases. This is also based on the expected elimination and reversal of inventory losses incurred in the previous quarter. From the second quarter, it is expected that the effects of production normalization and ethane price stabilization will be fully reflected, enabling a return to profitability for the first time in about a year.

Due to expectations of demand recovery following China's reopening, product prices in the first quarter showed an overall upward trend, while low-priced naphtha, which had plummeted since November, was introduced, positively contributing to the lagging spread. As a result, Lotte Chemical's weighted average spread for the first quarter, based on lagging indicators, was estimated at 315 USD per ton, a 23% increase compared to the previous quarter. Additionally, the spot spread, excluding the lagging effect, also improved by 7% to 287 USD compared to the previous quarter.

Researcher Jeon Yoo-jin of Hi Investment & Securities explained, "This marks a reversal from the downward trend that had continued every quarter since the second quarter of 2021 to an upward trend after about two years," adding, "Cautiously, we believe the market has moved away from the very bottom."

She continued, "The growth target and stimulus measures announced at the recent Two Sessions in early this month fell somewhat short of expectations, and the inventory accumulation movement that was actively carried out at the beginning of the year has somewhat slowed down," but added, "However, domestic macro indicators are very encouraging, so we are not lowering expectations for Chinese demand."

She further stated, "Following the manufacturing PMI surprise in February, which reached its highest point in about 11 years, retail sales and industrial production in January and February this year also increased compared to the same period last year, and China's economic activity index is rapidly improving," adding, "Since positive signals related to Chinese demand continue to emerge, we can expect a full-scale demand recovery from the second quarter."

Meanwhile, Lotte Chemical's operating profit for this year was forecasted at 254 billion KRW. This reflects the reduction in the deficit and the operating profit of Lotte Fine Chemical, which was consolidated in the second half of last year. The figure does not include the performance of Lotte Energy Materials, whose acquisition process was completed on the 14th.