[Why&Next] Lotte Shaken by Liquidity Crisis Rumors

"Excessive Concerns" Securities Firm Reports Follow One After Another

The liquidity crisis rumors surrounding Lotte Group, the 6th largest conglomerate in Korea, appear to be entering a lull phase. Recently, as the poor performance of Lotte affiliates continued, unidentified 'jirashi' (rumors) spread, dragging down the corporate value of Lotte affiliates. However, as analyses emerged describing these concerns as "excessive," the situation calmed down within a day. Nonetheless, the group's cash cow, Lotte Chemical, needs to prove its performance in new businesses, while the food and distribution sectors face the challenge of finding breakthroughs amid population decline and sluggish domestic demand.

According to the Financial Supervisory Service's electronic disclosure system on the 20th, Lotte Holdings' consolidated sales for the third quarter of this year reached KRW 4.143 trillion, a 3.5% increase compared to the same period last year, but operating profit dropped by 25.9% to KRW 179 billion. Net loss also turned to a deficit of KRW 21.6 billion from a net profit of KRW 14.9 billion last year. The cumulative net loss up to the third quarter of this year amounts to KRW 187.1 billion.

Lotte World Tower Mall. Provided by Lotte Corporation

Lotte Crisis Rumors Triggered by Poor Performance

The core food business saw operating profit decrease by 3.2% year-on-year, and the distribution sector turned to an operating loss of KRW 8.7 billion. Lotte Chemical, regarded as the group's cash cow, posted an operating loss of KRW 413.6 billion in the third quarter, worsening from the previous quarter's loss of KRW 111.2 billion. Net loss during the same period also increased by over KRW 400 billion to KRW 513.8 billion. Before COVID-19, Lotte Chemical used to generate operating profits in the trillion-won range, but it recorded a cumulative operating loss of KRW 660 billion up to the third quarter this year.

For Lotte Wellfood, overseas sales increased, but domestic food ingredient structural improvements caused sales (KRW 1.0785 trillion, -0.7%) to slightly decline, and operating profit (KRW 76 billion) fell by 5.7% due to increased cost burdens following Kakao price hikes. Lotte Chilsung's sales (KRW 1.065 trillion) rose by 28% due to the consolidation of overseas subsidiaries, but profitability (KRW 78.7 billion) decreased by 6.6% as material and fixed costs continued to weigh down.

Korea Seven, which acquired Ministop, reduced low-profit stores, resulting in a 0.6% decrease in sales (KRW 1.3898 trillion) and an operating loss of KRW 8.7 billion, turning to a deficit.

New growth businesses also showed poor performance. Innovate's sales (KRW 288 billion) fell by 2.3%, and operating profit (KRW 8.3 billion) plunged by 48.5%. Lotte Biologics experienced a 47.9% drop in sales (KRW 46.7 billion) compared to the same period last year due to facility inspections and operational halts. Operating loss reached KRW 27.8 billion, turning to a deficit.

Only Lotte GRS saw sales (KRW 260.7 billion) increase by 4.8% and operating profit (KRW 12.9 billion) surge by 50.3% thanks to growth in major brands like Lotteria.

Lotte's Borrowings Increase... "Liquidity Concerns Are Excessive"

Following the announcement of such poor performance, rumors spread yesterday in securities circles and online that Lotte's borrowings reached KRW 39 trillion, and that the group would declare a moratorium (default) early next month due to liquidity problems, cutting more than 50% of employees mainly in distribution affiliates. However, the financial conditions of the affiliates mentioned as problematic are generally considered exaggerated by the industry.

According to Korea Ratings, the total borrowings of major Lotte affiliates increased from KRW 41.148 trillion at the end of 2021 to KRW 48.825 trillion at the end of 2022, KRW 50.843 trillion at the end of last year, and KRW 51.827 trillion at the end of the first quarter this year. The claim that the group would declare a moratorium early next month due to borrowings of KRW 39 trillion is inaccurate.

However, it is true that concerns about financial soundness arise as total borrowings increased by more than KRW 10 trillion during this period. In June, Korea Ratings and Korea Credit Rating changed the outlooks of Lotte Holdings and Lotte Chemical from 'stable' to 'negative,' signaling potential credit rating adjustments.

Nonetheless, as of the third quarter, Lotte Chemical holds over KRW 9 trillion in liquid assets that can be converted to cash within a year, exceeding its borrowings, and its debt ratio during this period was 75.4%, which is not a level of concern. Lotte Holdings' debt decreased by about KRW 280 billion from last year to KRW 13.211 trillion. Its debt ratio slightly declined from 139.4% last year to 134.6%. Although this is higher than the generally stable debt ratio of below 100%, it is not considered a dangerous situation.

Reports denying Lotte Group's liquidity crisis have also been continuously released in the securities industry. Lee Dong-wook, a researcher at IBK Investment & Securities, said, "Lotte Chemical's net debt ratio rose from -5.3% in 2021 to 36.1% in the third quarter of this year," noting, "Considering that the appropriate net debt ratio for a typical company is below 20%, it is true that it has increased compared to the past." However, he added, "The company holds KRW 3.6 trillion in cash and cash equivalents (cash, cash equivalents, and short-term financial instruments) as of the end of the third quarter, and considering that the net debt ratios of the KOSPI chemical sector and KOSPI 200 energy & chemical sector were 62.0% and 105.2%, respectively, as of the end of the third quarter, concerns about the company's liquidity are excessive."

KB Securities also stated, "Since 2021, Lotte Chemical's borrowing increase is due to the Indonesia LINE project (KRW 3.1 trillion) and the acquisition of Iljin Materials (KRW 2.7 trillion), causing a temporary surge in investment costs in 2023-2024." They added, "Considering Lotte Chemical's fundamentals excluding affiliates, cash flow is better than concerns suggest," and "The estimated debt ratio for Lotte Chemical this year is 78.6%, which is not high, and from a cash flow perspective, worries about a liquidity crisis are premature."

Meanwhile, Lotte Group's stock prices, which plunged sharply on the 18th, slightly rebounded yesterday but have been declining again since the early trading session today.