4Q22E OP to Turn to Black, with OPM of 0.9%
The author is an analyst of KB Securities. He can be reached at wchun@kbfg.com. -- Ed.
Initiate coverage with BUY and TP of KRW200,000
We initiate coverage of Lotte Chemical with a BUY rating and target price of KRW200,000 (24.6% potential upside). We have used the P/B-ROE model in deriving TPs for Korea Refineries & Chemicals, since the sector is: (1) highly cyclical in nature, with technological innovations having been fully realized, allowing for high visibility on long-term ROA; and (2) also sensitive to near-term economic cycles, with tendency for shares to move in line with 12m fwd earnings forecasts. Our TP for Lotte Chemical is based on 10.6% COE and 3.3% TGR, and implies 14.6x 12m fwd P/E and 0.5x P/B.
3Q22E OP to come in below consensus
For 3Q22, we forecast operating loss of KRW188.1bn (TTR QoQ, TTR YoY), below the market consensus (operating loss of KRW12.7bn). The shortfall should be attributable to declines in NCC margins, as well as lagging effect associated with declines in naphtha/product prices. Spot NCC margin has dropped from USD368/mt in 2Q22 to USD294/mt in 3Q22, remaining below the 10y band of USD400-600/mt.
4Q22E OP to turn to black, with OPM of 0.9%
For 4Q22, we forecast OP of KRW46.2bn (TTB QoQ, +56.4% YoY; 0.9% OPM); the turnaround should be attributable to the absence of the lagging effect seen in 3Q22.
2023E OP to turn to black, with OPM of 2.5%; Earnings to top BEP despite worst market conditions in 10 years
With a supply glut coinciding with contracting demand, the chemicals sector is facing the worst market conditions in a decade. Yet, this should provide an attractive buying opportunity for long-term investors as margins should improve from 2024, given that the supply glut should gradually ease after hitting its peak in 2022-2023, while demand is likely to see an upturn in 2022-2023 along with the global economy. In the short/mid-term, momentum will arise if the economy recovers as Russia resumes/normalizes shipments as gas/oil price undergo sharp corrections and NCC market conditions rebound on the back of demand recovery.
For 2023, we forecast OP of KRW502.3bn (TTB YoY; 2.5% OPM). Despite market conditions, earnings at the global top-tier chemical company should top BEP thanks to economies of scale and high value-added products. The inclusion of Lotte Fine Chemical as a consolidated subsidiary (43% stake) should also provide a boost from 2023.