[Click eStock] Lotte Chemical Transforms into Comprehensive Battery Material Company 'Target Price Up'

On the 29th, KB Securities maintained its buy rating on Lotte Chemical and raised the target price from 200,000 KRW to 220,000 KRW, based on the judgment that the market recovery is a matter of time. Additionally, the transformation into a comprehensive battery materials company is also a point of focus.

Changes in individual companies over the past six months include: ① Consolidation following the increase of Lotte Fine Chemical's stake to 43.5% in September 2022, ② Acquisition of a 53.3% stake in Iljin Materials in April 2023 (investment of 2.7 trillion KRW, borrowing of 1.3 trillion KRW), ③ A capital increase of 1.22 trillion KRW (for investment and operating funds), and ④ The sale of LCPL (acquired in 2009 for 14.7 billion KRW → sold for 192.4 billion KRW). LCPL is a sole PTA facility in Pakistan, producing an oversupplied product and lacking vertical integration, making it the top candidate for sale.

Wooje Jeon, a researcher at KB Securities, emphasized, "The acquisition of Iljin Materials signifies a transformation into a comprehensive battery materials company," adding, "In addition to existing separator PE/PP, electrolyte organic solvents, and aluminum foil for cathodes, the company has secured the copper foil business for anodes (with a 13% market share), entering all four major materials, which is expected to generate synergy and research opportunities."

Although the operating loss in the first quarter is expected to be 134.5 billion KRW, in line with consensus, the anticipated turnaround to profitability remains in the fourth quarter. The recent sharp drop in naphtha prices over the past two weeks (from $716/ton to $626/ton) and the recovery of NCC margins (from $251 to $322/ton) are positive signs; however, the appropriate margin is $400?600/ton, and the current market still falls below the break-even point. Furthermore, PE/PP capacity expansions centered in China were concentrated at 7%/4% in the first quarter, causing South Korea's PE/PP exports to China to decrease by half. Even considering the additional annual profit of 289.8 billion KRW from the acquisition of Lotte Fine Chemical and Lotte Energy Materials, the turnaround to profitability in the second to third quarters remains uncertain. Should chemical margins rebound further and recover to break-even levels, trading attractiveness could increase. Researcher Jeon stated, "There is no disagreement on demand recovery, but I maintain the view that due to excessive capacity expansion, the chemical industry will reach a mid-cycle point similar to past cycles around 2026?2027."