Chemicals
The author is an analyst for Shinhan Securities. He can be reached at jinmyung.lee93@shinhan.com -- Ed.
1Q23 falls short at an operating loss of KRW21.7bn (RR QoQ)
SKC posted an operating loss of KRW21.7bn (continued loss QoQ) for 1Q23, faring worse than market expectations for a KRW2.9bn loss. Sales of rechargeable battery materials came in at KRW180.4bn (-1% QoQ), with the recovery in shipments limited from inventory adjustments carried out by major client companies through early-2023. The division reported a steep drop in operating profit to KRW0.3bn (-98% QoQ) from unfavorable copper price trends and electricity cost hikes, and a decline in operating margin to 0.2% (-6.4%p QoQ) from a weaker sales mix.
The chemicals division recorded an operating loss of KRW6bn (continued loss QoQ) in 1Q23. Losses continued from sales of propylene oxide (PO) and styrene monomer (SM) due to sluggish market conditions, but an upturn in sales volume helped to narrow losses from propylene glycol (PG) and polyol. The semiconductor materials division, despite slowing client demand, secured decent margins in 1Q23 following the reshuffle of operations.
Operating loss to narrow to KRW4.6bn in 2Q23
We expect operating loss to narrow to KRW4.6bn (continued loss QoQ) in 2Q23. Secondary battery materials sales are forecast at KRW229.9bn (+27%QoQ) and operating profit at KRW4.8bn (+1,509% QoQ), with copper foil sales volume to jump more than 20% QoQ on the recovery in shipments to normal levels. Growth in sales share of extra-wide copper foil should drive margin gains, but overall improvement will be limited due to unfavorable market conditions. In 2H23, however, we expect to see significant improvement in profitability from the commercial ramp-up of the Malaysian plant in 3Q23 and diversification of client base.
The chemicals business should continue to operate in the red with operating loss to reach KRW2.1bn in 2Q23. Spreads will likely remain weak due to sluggish demand and hefty supply, but earnings are expected to improve each quarter on positive effects of China’s economic reopening. Meanwhile, the semiconductor materials division should secure solid sales in terms of volume, but will likely see a decline in margins with weak demand to continue from client companies.
Retain BUY and target price of KRW140,000
We retain our BUY rating and target price of KRW140,000 for SKC. Amid continuing weakness through 1H23, earnings should steadily improve from 1Q23 bottom for chemicals on the reshuffle of the SM business and gradual recovery led by PG, and for copper foil on sharp top-line growth and margin gains following the ramp-up of the cost-competitive Malaysian plant. We believe now is the time to focus on stronger earnings expected in 2H vs. 1H and new businesses that will take shape in 2024.