The authors are analysts of KB Securities. They can be reached at firstname.lastname@example.org and email@example.com, respectively. – Ed.
Upgrade to BUY and raise TP by 38.2% to KRW94,000
We upgrade to BUY and raise our TP by 38.2% to KRW94,000. 2020/21 EPS was raised 30.9%/30.5% on adjustments to 2020E prices for NB Latex (USD810 → USD870) and BPA (USD1,060 → USD1,138). Our new TP holds 29.7% upside, justifying the rating upgrade. NB Latex margins will remain high until 2022 because of tight supply, and recently narrowing BPA margins have been met with falling in feedstock prices and rising primary demand (e.g., polycarbonates).
NB Latex to support uptrend in profit margins
The Synthetic Rubber division’s profit margins are expected to maintain uptrends until 2022, supported by high NB Latex margins. Synthetic Rubber OPM came in at 14.0% in 1Q20 (highest since 2012) thanks to low feedstock prices and rising LB Latex capacity utilization rates and spreads. NB Latex supply should remain tight until 2022, as anticipated capacity increases (+160,000t in 2021; +115,000t in 2022) will be unable to keep up with demand growth.
ROE to increase with growing output share of specialty rubber
Past concerns over plunging NB Latex demand post-COVID-19 seem to have been overblown. The global NB Latex capacity utilization rate should remain above 95%, even with demand growth slowing in 2021-22. Unlike universal-use synthetic rubber, NB Latex requires unique technology for facility conversion; Kumho Petrochemical has been increasing specialty rubber’s share of output since 2016. Average ROE is expected to rise from 7.9% in 2015-17 (43.1% specialty-rubber share) to avg. 9.6% in 2020-22 (60.4% share). The concurrent decrease in low-margin universal-use synthetic rubber’s share is a positive development.