[Click eStock] "Lotte Chemical, Profit Turnaround Is Not Far Away"

Yuanta Securities Report

Yuanta Securities maintained a buy rating on Lotte Chemical on the 28th and raised the target price by 7% from the previous level to 310,000 KRW.

Lotte Chemical's first-quarter expected performance is projected to record sales of 5.6 trillion KRW and an operating loss of 117.4 billion KRW. By business segment, Olefins, Aromatics, Titan, and USA are estimated at a loss of 208.7 billion KRW, and Advanced Materials (copper foil, ABS, PC, caustic soda) at 91.2 billion KRW. Although the company has posted losses for four consecutive quarters since the second quarter of last year, the loss in the fourth quarter of last year appears to have narrowed compared to the 400 billion KRW loss in the previous quarter. This is due to the recovery in demand from China's reopening in February and March and the sharp drop in U.S. natural gas prices, which helped the petrochemical sector's profitability recover.

The second-quarter operating profit is expected to turn positive at 135 billion KRW. This is because the profitability of the NCC (Naphtha Cracking Center, a facility that breaks down naphtha to produce basic products) is improving. The operating loss per ton of NCC was 46 USD in the fourth quarter of 2021, recording a loss, and it hit a low of 73 USD loss per ton in the fourth quarter of last year. In the first quarter of this year, the loss narrowed to 25 USD, and from this month, it recorded a profit of 21 USD, turning positive.

Hwang Kyuwon, a researcher at Yuanta Securities, said, "As the effect of China's reopening becomes visible, sequential recovery is being seen starting with propylene (a general-purpose automotive bumper material), followed by butadiene (home appliance exterior material), and ethylene (agricultural film)." He added, "With international oil prices falling, the raw material cost burden for NCC facilities has also decreased."

This year's expected performance is sales of 24.6 trillion KRW and operating profit of 540.8 billion KRW. Operating losses are expected to turn into profits from last year's 762.6 billion KRW loss, and the profit margin is expected to increase further in the second half of the year. Concerns over the high price acquisition following the acquisition of copper foil company Iljin Materials are also expected to ease. Researcher Hwang analyzed, "Production volume is expected to increase from 40,000 tons at the beginning of last year to 80,000 tons by the end of this year, and new large clients besides Samsung SDI are also expected to be secured." He added, "Operating profit for this business segment is expected to increase by 35% year-on-year to 114.4 billion KRW."