Oversupply Concerns Provide Attractive Entry Point
The author is an analyst of KB Securities. He can be reached at yc.baek@kbfg.com. -- Ed.
Revising up TP to KRW504,000
We reiterate BUY on Lotte Chemical and raise our TP to KRW504,000 (+37.0%) as we reflect upward revisions to our 2021E and 2022E EPS estimates by 34.5% and 14.9%, respectively. Revisions to our earnings estimates are based on upward revisions to 2021E spread estimates for benzene/SM/MEG by USD80/USD100/USD49 per tonne. We expect demand to grow once the economy recovers from the pandemic, with earnings set to turn around beginning in 1Q21.
1Q21 preview: Turnaround to begin
We forecast 1Q21E revenue of KRW3.88tn (+18.5% YoY, +20.1% QoQ) and OP of KRW411.5bn (TTB YoY, +93.7% QoQ), with OP beating market consensus (KRW353.7bn; FnGuide, Feb 19) by a large margin. We expect such improvement in earnings, given: (1) product price hikes induced by a decrease in influx of products from the U.S. and Europe and an increase in restocking demand; (2) a rise in prices for ABS compounds; and (3) a decline in costs upon normalization of operations at Lotte Daesan Petrochemical. As of the third week of February, MEG prices have jumped 29.4% YTD to USD705/t, and SM prices 49.1% YTD to USD1,208/t. HDPE prices are also up 9.1% YTD, while BD prices have reversed into an uptrend since the beginning of February. Such upward momentum in prices is being fueled by a decline in influx of products from the U.S. and Europe (attributable to increases in transportation costs) as well as an increase in restocking demand from China.
Oversupply concerns provide attractive entry point
Although cyclical stocks like Lotte Chemical tend to garner attention upon a share-price rebound following a slowdown in the economy, we believe investor attention has not been as high as it should be due to: (1) the absence of notable improvements in earnings; and (2) concerns related to the global chemical industry. We expect earnings for Lotte Chemical to exceed expectations in 1Q21, and for the rally in cyclical stocks to gain additional momentum following the release of 1Q21 results. Global ethylene capacity additions (excluding those of China coal chemicals) of 8.41mn/7.7mn tonne per annum are expected for 2021/2022—on the surface pointing to a supply glut, considering that the figure has averaged 6.12mn for the past five years. We expect supply to tighten, however, since: (1) demand tends to grow by more than 7mn tonne per annum upon a rebound in the economy; and (2) some of the capacity additions may be delayed. We believe oversupply concerns provide an attractive entry point for Lotte Chemical.