[Click eStock] "Lotte Chemical Needs Recovery in Petrochemical Industry"

On December 5, NH Investment & Securities maintained its 'Hold' investment rating and target price of 80,000 won for Lotte Chemical, stating that a recovery in the petrochemical industry is necessary for the stock price to rise.

Choi Younggwang, a researcher at NH Investment & Securities, explained, "While business restructuring with HD Hyundai Chemical may lead to fixed cost reductions, it will also result in a decrease in sales and a decline in book value per share (BPS). Fundamentally, a recovery in the petrochemical industry is needed for the stock price to rise."

Lotte Chemical is currently pursuing business restructuring with HD Hyundai Chemical. The plan is to spin off the Daesan plant and merge it with HD Hyundai Chemical (currently owned 40% by Lotte Chemical and 60% by HD Hyundai Oilbank). After the merger, the ownership of HD Hyundai Chemical will be adjusted to 50% for Lotte Chemical and 50% for HD Hyundai Oilbank. Choi noted, "The ethylene production capacity of Lotte Chemical's Daesan plant is 1.1 million tons, while that of HD Hyundai Chemical is 850,000 tons. The plan is to permanently shut down one of the two facilities and increase the operating rate of the remaining one to improve operational efficiency. Although fixed cost reductions can be expected from the restructuring, without an improvement in the petrochemical market, it will be difficult for the company’s profit-generating ability to show sustainable improvement. With poor performance continuing, impairment losses due to fair value revaluation during the consolidation process are also expected, which will likely lead to a continued decline in Lotte Chemical’s BPS."

NH Investment & Securities forecasted that Lotte Chemical would post an operating loss of 202.7 billion won in the fourth quarter of this year, falling short of the consensus (the average forecast of securities firms). Choi commented, "In the fourth quarter, product prices are declining along with falling oil and naphtha prices. Furthermore, due to additional deterioration in market conditions, such as severe oversupply and slowing demand, the drop in product prices is even greater, resulting in a narrowing spread and an expected increase in operating losses."