[Click eStock] "Lotte Chemical, Asian Petrochemical Market Improvement... Investment Rating Up"

Investment Rating Upgraded from 'Neutral' to 'Buy'

On the 3rd, KB Securities upgraded its investment opinion on Lotte Chemical from 'Hold' to 'Buy,' citing signs of improvement in the Asian petrochemical market. The target price was maintained at 155,000 KRW.

Jeon Woo-je, a researcher at KB Securities, explained, "The upgrade in investment opinion is due to the detection of signs of improvement in the Asian petrochemical market amid a decline in stock prices, and the target price is maintained because the combined earnings per share (EPS) estimates for 2024?2026 have changed minimally." He added, "If the trend of ultra-low price overconsumption (general chemical demand) and traditional demand (economic and industrial production) improvement continues, further increases in the operating rate of Asian naphtha cracker complexes (NCC), as well as recovery in Korean NCC export volume and margins, are expected."

Recently, China's ultra-low price distribution innovation has led to increased consumption, which is expected to improve the Asian market. Researcher Jeon said, "Although a long-term downcycle in petrochemicals has been forecast based on excessive capacity expansion from 2020 to 2023, China's recent ultra-low price distribution innovation is generating significant overconsumption." He continued, "The annual parcel volume of Temu, Xiyin, Ali, and TikTok reaches 4 million tons, with most consumer goods, textiles, and packaging materials made from local petrochemical products, accounting for 1.5% of petrochemical demand." China's chemical production capacity accounts for 22% of the global market share, and a 1.5 percentage point increase in global demand corresponds to a 6.8 percentage point increase in China's operating rate. Researcher Jeon analyzed, "In fact, when the global operating rate in January 2024 (70%) improved by 5.5 percentage points compared to the previous year, the Northeast Asia operating rate (78%) improved by 14.5 percentage points." He added, "Since the Northeast Asia operating rate is approaching its previous peak (80%), additional demand will likely lead to the operation of marginal plants and the resumption of imports." The Purchasing Managers' Index (PMI), which gauges traditional chemical demand, is also in an expansion phase.

Lotte Chemical's first-quarter performance this year is expected to improve compared to the previous quarter. Researcher Jeon estimated, "An operating loss of 144.6 billion KRW is expected in the first quarter, which is below consensus (average securities firm forecast) but an improvement of 156.7 billion KRW compared to the previous quarter." He explained, "The reduction in losses is based on Lotte Chemical's weighted average margin slightly improving from 217 USD per ton in the fourth quarter of last year to 238 USD per ton in the first quarter of this year, and a cost increase effect of about 100 to 150 billion KRW compared to the previous quarter."