Performance to Improve Going Forward
The author is an analyst of KB Securities. He can be reached at yc.baek@kbfg.com. -- Ed.
4Q20 earnings slightly miss market consensus
— Lotte Chemical delivered 4Q20 revenue/OP of KRW3.23tn (-5.7% YoY/+6.1% QoQ)/KRW212.5bn (+40.9% YoY/+9.7% QoQ). OP climbed on both a YoY and QoQ basis but slightly missed the market consensus.
— The 4Q20 earnings results send three positive signals: (1) Olefin is registering profitability growth; (2) Advanced Materials has the potential for earnings improvements in 1Q21; and (3) LC USA has the potential to normalize.
Positive signals
— Olefin revenue/OP came in at KRW1.35tn (-22.8% YoY)/KRW88.8bn (-19.6% YoY). OPM was below our estimate, reaching 6.6%. Excluding opportunity costs related to the Daesan factory, Olefin OP reached around KRW240.0bn with 14% OPM; normally, Olefin profitability is higher than LC Titan profitability, which was 12.8% OPM.
— Advanced Materials revenue/OP came in at KRW885.2bn (+25.9% YoY)/KRW82.7bn (+127.8% YoY). Despite a QoQ rise in ABS price, OP dropped 16.9% QoQ because of a higher sales proportion for ABS compounds; the general-purpose ABS price rose sharply, whereas ABS compounds, whose prices differ by client, saw limited price hikes. We expect the ABS compound price to rise in 1Q21 and 2Q21, which should result in earnings improvements.
— LC USA posted revenue/OP of KRW106.1bn (-16.3% YoY)/-KRW400.0mn (turn to red YoY). The operating loss narrowed QoQ but earnings improvement was undermined by opportunity costs related to the suspension of facility operations. We see a reduction in inventory levels boosting Asian MEG prices. Also, we expect OPM of around 10% in 1Q21 with the removal of hurricane-induced opportunity costs.
1Q21 performance to improve YoY/QoQ
— We forecast 1Q21 revenue and OP to increase on both a QoQ and YoY basis. PE and PP spreads are likely to drop slightly, hindered by rising feedstock prices, but profitability for benzene, SM and MEG should rise.
— We see the following positives: (1) Olefin achieving OPM of over 10% with the normalization of the Daesan factory; (2) Advanced Materials seeing earnings improvement backed by hikes in ABS compound prices; and (3) LC USA OPM reaching around 10% with rising MEG prices as well as the removal of opportunity costs.