Lotte Offers Lotte World Tower as Collateral... Also Selling 4-Star Hotel [Why&Next]

Lotte Group Continues Large-Scale Personnel Reshuffle and Restructuring
Chairman Shin Dong-bin Makes Every Effort to Quell Liquidity Crisis Rumors

Following a large-scale executive reshuffle, Lotte Group has embarked on improving its financial structure through asset sales. Shin Dong-bin, Chairman of Lotte Group, appears to be making every effort to quell recent liquidity crisis rumors through extensive personnel renewal and comprehensive restructuring.

According to industry sources on the 29th, Lotte Group held an investor relations (IR) briefing for institutional investors at the Yeouido Teachers' Credit Union the previous day, announcing plans to improve financial structure through asset optimization by affiliate. On the same day, having announced a high-intensity reshuffle replacing 21 out of 60 CEOs earlier that morning, the briefing reportedly attracted over 300 attendees.

Lotte World Tower panorama.

Lotte Group Accelerates Asset Sales

Through this year's regular personnel changes, all three business division heads of Lotte Hotel were replaced, and the company is conducting intensive restructuring focused on the duty-free and hotel sectors. It is reported that they proposed selling assets of the ‘L7’ and ‘City’ brands, which belong to the 4-star hotel category. Currently, Lotte Hotel operates eight City Hotels and six L7 Hotels domestically and internationally. With growing demand for 5-star luxury hotels, the company is securing liquidity by selling 4-star business and lifestyle hotels. Lotte Hotel is also considering restructuring to reduce hotel operating space within the World Tower to cut operating costs. However, Lotte Group stated, "This is under review and nothing has been finalized."

Lotte Duty Free is set to close underperforming overseas duty-free stores. Lotte Duty Free operates four downtown duty-free stores and ten airport duty-free stores in Japan, Australia, Singapore, and other locations. Although the duty-free division accounts for about 70% of Hotel Lotte's sales, it is eroding the company's profitability. Based on cumulative figures from the first to third quarters, sales amounted to 2.448 trillion KRW, with an operating loss of 92.2 billion KRW. While sales increased by 200 billion KRW compared to last year, operating profit turned negative.

Among overseas duty-free stores, only a few are profitable. As of last year, Lotte Duty Free Kansai store recorded an annual net loss of 3.2 billion KRW, and the joint venture operating duty-free stores in Vietnam, including Da Nang Airport (Lotte Phu Khanh Duty Free), posted a net loss of 24 billion KRW. The entities operating duty-free stores in Melbourne and Brisbane, Australia, also recorded a net loss of 35 billion KRW.

To enforce a rigorous structural reform of the duty-free division, Lotte Group promoted Kim Dong-ha, former head of corporate culture at Lotte Holdings' HR Innovation Office, from managing director to executive director and appointed him as CEO. He is regarded as the right person to strongly reform the business organization with swift execution capabilities.

Lotte Chemical with Mass CEO Replacement Cuts New Investment Plans... Lotte Shopping Revalues Assets Worth 7 Trillion KRW

Lotte Chemical, part of Lotte Group's chemical sector, announced plans to sell low-profit assets to reduce the basic chemical segment's share to below 30% and increase the proportion of advanced materials. They also intend to adjust plans that require high investment costs relative to business profits to reduce expenditures. However, they expect to recover from poor performance only by 2030.

Previously, Lotte Chemical's continuous poor performance led to 2 trillion KRW worth of corporate bonds entering an event of default (EOD) status, triggering a liquidity crisis across the entire group. Consequently, Lotte Group announced plans to bolster corporate bond credit ratings by pledging the group's core asset, 'Lotte World Tower,' valued at 6 trillion KRW, as collateral to banks.

To restructure the chemical sector, including Lotte Chemical, Lotte Group took a drastic step by replacing 10 out of 13 chemical sector CEOs. The new overall head of Lotte's chemical sector, Lee Young-jun, is a former CEO of Lotte Chemical's advanced materials division and is recognized as an expert in chemicals and materials. Lee Hoon-gi, who led Lotte's chemical sector for the past year, retired from frontline duties, taking responsibility for the investments made during his tenure as head of Lotte Holdings' Management Innovation Office and the sector's poor performance.

Lotte Shopping, Lotte Group's distribution division, announced plans to improve financial structure through asset efficiency. Currently, Lotte Shopping is conducting an asset revaluation for the first time in 15 years since 2009. The assets subject to revaluation are land assets worth approximately 7.6 trillion KRW. For example, the value of Lotte Department Store's Myeongdong main branch, based on official land prices, was 304 million KRW per square meter in 2009 but is now estimated to have increased by 90% to 653 million KRW.

Previously, Lotte Shopping explained, "With improved financial structure, we expect to utilize investment funds for overseas business and retail tech. Debt ratio reduction will strengthen credit ratings and reduce cost of capital through capital expansion." Alongside this, Lotte Department Store is proceeding with the sale of underperforming stores, including the Busan Centum City branch.

Lotte On, Lotte Shopping's e-commerce division, also announced plans to turn profitable by 2026. Since last year, with Park Ik-jin, known as a financial expert, appointed as CEO, Lotte On has been undergoing rigorous structural reforms, including cost reduction. Recently, it relocated its headquarters from Lotte World Tower to Samseong-dong to reduce rental expenses.

Chemical Industry Slump... Entire Group 'Wobbles'

This is the first time in its history that Lotte Group has announced a large-scale liquidity improvement plan. Concerns have arisen that the liquidity crisis could spread across the entire group as Lotte Chemical, which had been the group's 'cash cow' generating trillions of KRW in annual profits, rapidly deteriorated in performance.

Two years ago, Lotte Chemical's operating profit on a consolidated basis reached 1.5 trillion KRW, but last year it recorded an operating loss of 350 billion KRW. Due to China's economic downturn causing a sharp drop in material demand, operating losses expanded further this year. The third quarter alone reflected losses of around 400 billion KRW, pushing cumulative losses beyond 660 billion KRW. The costly investments in the Indonesian 'LINE Project' (5.2 trillion KRW) and the acquisition of Lotte Energy Materials (2.7 trillion KRW) amid the sluggish market are considered critical missteps.

Such large-scale investments led to a deterioration in Lotte Chemical's financial soundness. As of the third quarter this year, its short-term debt due within one year reached 8.3 trillion KRW, a 27% increase from 6.5 trillion KRW last year. In particular, short-term borrowings and bonds increased by over 1 trillion KRW, largely due to the surge in long-term borrowings and short-term bonds maturing within one year.

With Lotte Chemical's credit rating (AA) outlook downgraded from 'stable' to 'negative' in June, stable long-term financing became difficult, prompting the company to raise liquidity through short-term markets such as commercial paper (CP).

This financial distress at Lotte Chemical has spread to Lotte Holdings. Lotte Holdings has increased external borrowings to invest in subsidiaries and new businesses (Lotte Biologics). However, the rising financial costs (interest expenses, etc.) continue to burden the company, making support difficult. As of the third quarter cumulative figures, Lotte Holdings' financial costs amounted to 387.3 billion KRW, 40 billion KRW more than last year's 324.2 billion KRW. The increase in financial costs negatively impacts corporate net profit.