Chemical Market Conditions Continuing on an Uptrend
The author is an analyst of Shinhan Investment Corp. He can be reached at jinmyung.lee93@shinhan.com. -- Ed.
1Q21 OP to beat consensus at KRW422.8bn (+99% QoQ)
Lotte Chemical is expected to post operating profit of KRW422.8bn (+99% QoQ) for 1Q21, exceeding the consensus estimate of KRW363.7bn. Olefin operating profit will likely soar 181% QoQ to KRW249.8bn, with cost reduction from resumed production at Daesan NCC and uptrend in spreads continuing into this quarter. Lotte Chemical Titan is projected to report strong earnings thanks to widening PE and PP spreads amid tight supply.
Advanced materials operating profit should climb 29% QoQ to KRW106.6bn with prices raised for ABS compounds after delays. Lotte Chemical USA is forecast to turn black QoQ with operating profit of KRW10.8bn (operating margin of 8.8%)despite a temporary suspension of operations, backed by improvement in MEG spreads.
2021 outlook: Turnaround with OP of KRW1.74tr (+393%YoY)
Chemical market conditions are continuing on an uptrend due to: 1) massive supply disruptions in the US caused by power outages amid historic cold weather; and 2) recovery in demand from China following the Lunar New Year’s holiday period. Even after considering forecasts for normalization of supply and capacity additions, we believe demand will strengthen on overall economic recovery and outweigh supply. This should provide upward momentum for chemical product spreads.
Lotte Chemical is forecast to post operating profit of KRW1.74tr (+393% YoY) for 2021. Olefin operating profit is likely to reach KRW1.0tr (+535% YoY) thanks to improvement in market conditions and resumed production at Daesan NCC. Lotte Chemical Titan should see operating profit grow 267% YoY to KRW286.8bn with PE and PP spreads remaining strong. Advanced materials are projected to deliver continued profit growth on brisk demand from downstream industries. Lotte Chemical USA is expected to stage a sharp turnaround driven by recovery in MEG spreads.
Retain BUY and raise target price by 17% to KRW450,000
Our target price for Lotte Chemical is raised by 17% to KRW450,000 on the upward revision of our target PBR and earnings forecasts for 2021. Overall earnings should increase sharply in 2021, backed by recovering market conditions. We expect structural growth in ethylene market conditions, as demand improves and capacity additions slow after reaching a peak in 2020. Our revised target is based on 2021F BPS and a target PBR of 1.1x (PBR average recorded during the past market boom). Shares are currently trading at a mere 0.74x 2021F PBR. With earnings expected to turn around from 1Q21 amid burgeoning economic recovery, we believe now is the time to accumulate shares in Lotte Chemical.