Lotte Chemical
The author is an analyst of NH Investment & Securities. He can be reached at yk.choi@nhqv.com -- Ed.
The impacts of China’s economic reopening are unfolding slower than expected. But, with the direction of a gradual strengthening in demand remaining intact, we foresee a modest earnings recovery for Lotte Chem.
Demand improvement story to be slow, but steady
Petrochemical product spreads are showing slight improvement, but we view this widening as being more the temporary result of increased stockpiling demand amid an eased supply burden (in response to lowering cracker operating rates) rather than coming from an economic recovery. Standing out, the ethylene-naphtha spread has upped from an average of US$197/ton in 1Q23 to an average of US$255/ton in April, recording a BEP of US$250/ton for Lotte Chemical (Lotte Chem)’s integrated Naphtha Cracking Centers (NCC) facilities.
The pace of improvement in demand stemming from China’s economic reopening is proving slower than hoped, with downstream chemical product spreads continuing to wane. However, buying demand should strengthen as the month-long Ramadan holiday wraps up at end-April. Moreover, considering better-than-predicted GDP growth and retail sales in China, a recovery story for chemical products is still set to unfold gradually over time. Although the speed of this rebound will likely be moderate due to the lingering presence of supply burden, we view expectations toward an improved business environment for the company as remaining valid.
1Q22 preview: Size operating losses at W153.9bn
For 1Q23, we expect Lotte Chem to post consolidated sales of W5.5tn (+0.6% q-q) and operating losses of W153.9bn (RR q-q; OPM of -2.8%).
[Basic Materials] We see operating losses of W136.8bn (RR q-q; OPM of -4.2%). Overall, chemical product spreads improved q-q in 1Q23, so we expect to see a q-q reduction in operating losses. [Advanced Materials] We estimate OP of W33.2bn (+3.7% q-q; OPM of 3.2%). ABS spreads are looking sluggish, but PC spreads likely waxed amid falling BPA prices. [LC Titan] The subsidiary will likely show operating losses of W56.5bn (RR q-q; OPM of -8.9%). As with basic materials, the extent of deficit was likely trimmed by slightly improved chemical spreads. But, due to the influence of the timing of the Ramadan holidays from March to April, the pace of profitability recovery will likely be slower than that for the Olefin division through 2Q23. [LC USA] We estimate operating losses at W12.9bn (RR q-q; OPM of -7.9%). A winter cold wave in the US caused a month-long shutdown of Lotte Chem’s Ethane Cracking Center (ECC) facilities, but we believe that operating losses narrowed on improved MEG-ethane spreads thanks to ethane price drops. [Fine Chemical] Affected by ECH and caustic soda price decreases, OP likely slipped q-q to W39.1bn (-11.3% q-q; OPM of 7.4%).