Spotlight on Growth Potential of LiBS-use PE
The author is an analyst of Shinhan Investment Corp. He can be reached at jinmyung.lee93@shinhan.com. -- Ed.
Initiate coverage with BUY for a target price of KRW340,000
initiate our coverage of Korea Petrochemical Industrial with BUY for a target price of KRW340,000. Our target price is based on 2021F BPS of KRW325,446 and a target PBR of 1.0x (PBR average recorded during the previous market boom). Despite the recent rally, we see further upside for Korea Petrochemical Industrial shares given: 1) forecasts for earnings improvement in 2021 on the upturn in market conditions; and 2) strong growth potential of LiBS (lithium-ion battery separator)-use PE. The shares are still trading at undemanding valuations (2021F PBR of 0.8x,PER of 7x).
Spotlight on growth potential of LiBS-use PE amid market recovery
We expect NCC operations to remain cost-competitive in 2021, backed by the rise in ethane prices amid continued weakness in oil prices. Global ethylene demand will likely increase 6.5% YoY on a rebound in worldwide GDP growth, while supply is set to grow more slowly by 4.5% YoY. This should drive up the ethylene-naphtha spread by 40% YoY in 2021.
We project demand for PE and PP to climb 6.2% and 6.0% YoY, respectively, in 2021, with packaging materials consumption continuing to rise amid the COVID-19 pandemic. Another boost should come from the upturn in market conditions for construction and auto driven by economic stimulus efforts in China and developed countries. PE and PP spreads are thus expected to increase 33% and 20% YoY, respectively, in 2021.
Meanwhile, global LiBS demand is likely to grow at a CAGR of 35% from 4.26bn square meters in 2020 to 19.26bn square meters in 2025. Korea Petrochemical Industrial holds the largest share in the global market for LiBS-use PE. The company should see its LiBS-use PE sales and operating profit increase at a CAGR of 37% and 34%, respectively, through 2020-2023.
2021operating profit forecast at KRW312.8bn (+87% YoY)
Operating profit is forecast to surge 87% YoY to KRW312.8bn in 2021, with: 1) feedstock prices to remain competitive for NCC operations; and 2) market conditions to rebound on recovery in global chemicals demand amid limited supply. PE and PP spreads will likely widen this year on global economic recovery. BD and EG spreads should also gradually improve, backed by rising demand in downstream industries (auto, textile, etc.). We expect to see an additional boost to earnings from LiBS-use PE, with operating profit from the business to jump 42% YoY in 2021 on growing LiBS demand.