The author is an analyst for NH Investment & Securities. He can be reached at yk.choi@nhqv.com -- Ed.
We lower our TP on Hyosung TNC to W440,000 to reflect both a slower-than-expected spandex industry recovery and underperforming fiber division earnings. But, we still see clearly improved fundamentals for spandex, differentiating it from general purpose petrochemicals. We expect spandex spreads to re-strengthen upon escaping off-seasonality.
Recovery delay disappointing, but spandex still differentiates
Although adhering to a Buy rating, we lower our TP on Hyosung TNC by 15% to W440,000, noting: 1) a 12% y-y cut to our 2024 OP forecast made in light of both a slower-than-expected recovery in spandex spreads and widening losses for nylon and polyester; and 2) a reduction in our target multiple (5.7x → 5.4x) in reflection of peer share price decline.
The spandex price is temporarily weak at present due to steep upstream price drops. A look at q-q changes in average product prices during 4Q23 shows: BDO -12%, PTMEG -1.8%, MDI -2.7%, and spandex -0.9%. We estimate that spandex spreads during the quarter increased 5.7% q-q on a spot basis and 2.5% q-q on a 1-month lagging basis.
But, our key investment point remains intact—spandex still strongly differentiates from general purpose petrochemicals. We draw attention to a favorable supply-demand situation, a decreasing self-sufficiency rate in China, and the fact that the BDO price (US$1,300/ton) is reaching the production cost level (US$1,200~1,500/ton). The fiber division needs to weather off-seasonality in 1Q24, but spreads are to recover in earnest upon the arrival of peak seasonality over 2Q24~3Q24.
4Q23 preview: Earnings to arrive below consensus
We expect Hyosung TNC to post consolidated 4Q23 sales of W1.8tn (-6.3% q-q) and OP of W36.7bn (-27.5% q-q; OPM 2.0%), with both figures missing consensus. [Fiber] We estimate OP of W31.3bn (-23.8% q-q; OPM of 4.0%), with operating losses for nylon, polyester and other fiber products likely have widened amid only modest improvement in spandex spreads. [Trade/other] We see OP of W5.3bn (-43.8% q-q; OPM 0.5%), observing that trade volume was negatively impacted by off-seasonality.