Chemicals
The author is an analyst for Shinhan Securities. He can be reached at jinmyung.lee93@shinhan.com -- Ed.
Market correction nearing an end
Hyosung TNC shares enjoyed a rally early this year on hopes for China’s economic reopening and robust earnings, but pared all their gains during the steep correction that started in June. High earnings expectations were dampened by deteriorating supply-demand conditions and price declines in the Chinese spandex market. Investors lost interest in chemical stocks as a whole. However, we have recently picked up positive signals that correction is nearing an end.
Picking up positive signals
China’s spandex prices continued to fall until June and began to rise slowly from August. The price recovery is not yet significant, but appears to be driven by cost hikes and inventory restocking expectations. Hyosung TNC’s in- house production of polytetramethylene ether glycol (PTMEG), a raw material of spandex, has allowed it to deliver relatively high margins unlike its peers, and should add a boost to earnings in 3Q23.
Spandex capacity utilization in China dropped to low-70% levels in 2Q23 due to weak demand. It has now recovered to high-70% levels, and will likely continue rising in 2H23 alongside demand growth. Inventory days, which shot up to 42 days in 2Q23 from 30 days in 1Q23, have been reduced from July down to 33 days in early September thanks to rising capacity utilization rates at downstream clients. Despite concerns over China’s spandex market conditions, bottom-up indicators are improving gradually.
The apparel industry, a major consumer of spandex, should see demand expand in 2H23 on reopening effects and shopping events (National Day in October, Singles’ Day in November) in China. Inventory restocking demand should also start to increase. In the absence of capex spend since massive capacity additions in 1H23, supply-demand conditions are forecast to improve in 2H23.
Retain BUY for a target price of KRW500,000
We retain our BUY rating on Hyosung TNC for a target price of KRW500,000. Spandex price hikes have driven up shares of Hyosung TNC and Chinese peers. Adding to heightened expectations for China’s economic recovery, additional stimulus measures in the country should help to bring investors back to the chemical sector. We have yet to see visible improvement in market conditions, but expect a re-rating of shares on strengthening fundamentals and rising demand in China.