As Samsung Construction and Trading (C&T) and Samsung SDI are moving to sell their stakes in Hanwha Group’s chemical unit worth 1 trillion won (US$914.16 million), global big players starts biting. This shows a high profile in the petrochemical business, which has entered the “super cycle” along with memory chips.
According to investment banking (IB) industry sources on December 12, Samsung C&T and Samsung SDI, which own a 25.1 percent stake in Hanwha General Chemical, are planning to carry out a preliminary bid through Citigroup Global Market Securities that leads the sale on December 20. Virtually, all the pension and funds around the world, including global private equity firm TPG Capital, are expected to join the race for the stake in Hanwha General Chemical.
The major shareholder of Hanwha General Chemical changed from Samsung Group to Hanwha Group in 2015 through the mega deal between the two groups. After the mega deal, Samsung C&T has owned a 20.05 percent stake in Hanwha General Chemical, while Samsung SDI has held a 4.05 percent stake in the same chemical business. This was to lighten Hanwha Group’s huge financial burden in the process of the mega deal and to share the growth outcome in the future.
Samsung C&T has decided to sell its stake in Hanwha General Chemical before the initial public offering (IPO). The company believes that it is right time to secure financial resources for investment in next-generation growth engines, though the petrochemical business has entered the super cycle and is expected to see its value go up further. An official from the IB industry said, “Samsung Group decided to sell the stake considering opportunity costs for various investment alternatives, though it thought that the petrochemical market conditions were at the bottom when the mega deal was discussed. When the group secures more than 1 trillion won (US$914.16 million) of funds through the sale of the stake in Hanwha General Chemical, it will be able to gain a new driving force.”
In fact, Samsung C&T focused on making an investment in new businesses, including Samsung BioLogics, based on funds acquired in the process of the mega deal and created the company with over 23 trillion won (US$21.05 billion) of market caps in just two years. This is why it is a narrow- minded view that some market watchers say the company is selling the stake in Hanwha General Chemical at the high point.
In addition, the super cycle in the petrochemical industry, which has continued for the last two years, is expected to last for longer periods, along with semiconductors.
“Thanks to global economic expansion and China’s stricter regulations on the environment, the domestic chemical industry will continue to see its upward cycle next year,” Cho Hyun-ryul, an analyst from Samsung Securities, said in a recent report. Generally, the demand for petrochemical and oil products is relative to the rate of the gross domestic product (GDP) growth. The International Monetary Fund (IMF) recently revised upward its forecast for the global economy next year from 3.6 percent to 3.7 percent, heralding the biggest economic growth since 2011.
In particular, China, which leads the global economic growth, depends on imports for domestic demand as its local petrochemical companies has shrunken in production owing to stricter environmental regulations. With the inspection on environmental protection which has been strengthened from last year, a number of local plants were ordered to halt operations or were imposed fine. It follows that the supply and demand imbalance is getting worse. Furthermore, the demand for petrochemical products will go up as China plans to ban the import of waste plastics next year. In the end, domestic petrochemical firms are expected to benefit from it.
Global market research firm IHS believes that aromatic products will keep supply and demand in balance in the medium and long term among petrochemical products. Aromatic products, such as pxylene (PX) and benzene, are expected to see their demand increase in emerging countries based on China.
The target stock prices of Lotte Chemical and Korea Petrochemical IND., the two listed competitors of Hanwha General Chemical, are 475,000 won (US$435) and 358,750 won (US$328), respectively. The figures are up 30.32 percent and 39.05 percent, respectively, from the closing prices on the 11th.