Vietnam PP/DH Facilities to Increase Profits
The author is an analyst of NH Investment & Securities. He can be reached at ys.hwang@nhqv.com. -- Ed.
Despite various one-off costs (such as inventory valuation losses), OP beat consensus thanks to solid PP demand and cost reductions at the other division. After the completion of Vietnam PP/DH facilities at yearend, Hyosung Chemical’s OP should further increase.
One-off costs (including inventory valuation losses) reflected
In 1H20, OP is predicted to decline at the chemical division, owing to: 1) the Covid-19 crisis; and 2) a relatively strong LPG price versus oil and naphtha. We cut our average OP estimate for 2020~2021 and lower our TP by 24% from W210,000 to W160,000. However, we maintain a Buy rating, as we expect DH/PP facility expansion in Vietnam to bolster OP.
OP recorded W12.4bn (-50.3% y-y, -49.0% q-q) in 1Q20, affected by an W8.5bn cost increase, including inventory valuation losses for LPG (raw material), PP process overhaul costs, and Vietnam SG&A expense growth. PP sales headed to China declined, but ASP remained unchanged due to an increased portion of premium products. The other division (NF3, film, TPA, etc) turned to profit on lower costs and improved production yield.
Earnings to level up after completion of Vietnam PP/DH facility
We forecast 2Q20 OP of W15.6bn (-68.5% y-y, +26.0% q-q). In the case of PP, supply volume has decreased due to a drop in utilization at global refining facilities, while supply-demand conditions have stayed healthy on higher demand for mask filters and packing materials for daily necessities. However, with LPG prices dropping slower than oil prices, additional inventory valuation losses are expected, and PP spreads should expand further to a limited extent.
Hyosung’s Vietnam PP facility will need to use propylene procured from outside sources until its DH facility starts operations at end-2020. Due to recent strong propylene prices, operating losses are inevitable at the Vietnam PP/DH business over the near term. However, the DH facility with annual capacity of 600,000 tons should commence operations at yearend. Also, having already started operations for 300,000 tons capacity, the PP facility will add an additional 300,000 tons capacity at yearend. Profitability should improve on the vertical integration of the basic chemicals value chain, and PP sales volume should rise. Once the PP/DH facilities to be completed at yearend operate normally, W250bn pa should be contributed to sales (total contribution of W500bn pa reflecting existing PP capacity), allowing the Vietnam PP/DH business to turn to profit.