High Expectations for Turnaround in Market Conditions
The author is an analyst of Shinhan Investment Corp. He can be reached at jinmyung.lee93@shinhan.com. -- Ed.
4Q20 OP to beat consensus at KRW233.3bn (+20% QoQ)
We now expect Lotte Chemical to post operating profit of KRW233.3bn (+20% QoQ) for 4Q20, exceeding the market consensus of KRW220.3bn. Earnings expectations are set to gradually rise in light of the continued uptrend in chemical market conditions and resumed production at Daesan NCC. Olefin operating profit should reach KRW107.2bn (+36% QoQ), with price spreads widening on robust demand from China amid disruption in supply. Despite solid polymer demand, Lotte Chemical Titan will likely report a QoQ decline in operating profit for 4Q20 from the increase in out-of-region supply. Advanced materials earnings should come in near 3Q20 results, with the ABS spread continuing to rise on brisk demand.
2021 OP to surge 275% YoY to KRW1.4tr
conditions for NCCs should turn around in 2021, driven by: 1) cost advantages; 2) recovering demand, led by China; and 3) limited supply. Economic recovery is expected to drive 6.5% YoY growth in global ethylene demand, outpacing the increase in supply. Butadiene (BD) and styrene monomer (SM) spreads will likely continue on an uptrend, backed by recovery in demand from downstream industries including auto and home appliances. Market conditions for ethylene glycol (EG) should improve from sluggish levels, thanks to rising demand from client industries such as textile.
For 2021, we expect Lotte Chemical to report notably stronger YoY growth with operating profit to surge 275% YoY to KRW1.4tr. Operating profit from olefins should jump 385% YoY on resumed production at Daesan NCC, driving overall growth. Lotte Chemical Titan is forecast to record operating profit of KRW157.3bn (+249% YoY) with PE/PP demand to remain solid. Operating profit from advanced materials should reach KRW372.1bn (+38% YoY) on brisk demand from downstream industries such as auto and home appliances.
Retain BUY and raise target price by 17% to KRW385,000
We raise our target price for Lotte Chemical by 17% to KRW385,000, based on the upward revision of target PBR and earnings forecasts for 2021. Overall earnings in 2021 should record a sharper rebound than previously expected, backed by improvement in market conditions and restart of Daesan NCC operations. Our revised target is based on 2021F BPS and a target PBR of 0.93x. With shares trading at a 2021F PBR of 0.67x, we see ample upside on high expectations for a turnaround in market conditions in 2021.