Earnings to Improve after 4Q21
The author is an analyst of KB Securities. He can be reached at yc.baek@kbfg.com. -- Ed.
Lower TP to KRW450,000
We maintain BUY on Lotte Chemical, but lower our TP by 15.4% to KRW450,000. We have cut our 2021E and 2022E NP (attributable to controlling interests) forecasts by 9.6% and 11.4%, respectively, in light of the decline in PE and PP margins following capacity additions.
2Q21E results to satisfy consensus
We expect robust 2Q21E earnings with revenue at KRW4.31tn (+60.6% YoY, +4.6% QoQ) and OP at KRW606.5bn (+1,746% YoY, -2.8% QoQ). OP should be in line with consensus (KRW626.4bn; FnGuide, Jul 5). Earnings on the whole are expected to remain flat QoQ, since despite the decline in prices and spreads for PE and PP, those for BD, SM, and benzene have risen. 2Q21E olefin OP is projected to decline 9.3% QoQ to KRW284.1bn (OPM 14.7%) due to lower PE and PP spreads and opportunity costs arising from regular maintenance at its Daesan plant. Aromatic OP is expected to grow 36.1% QoQ to KRW54.3bn (OPM 9.6%) as seasonal demand for PET chips and better PIA margins should lift earnings. Advanced materials OP is estimated at KRW126.2bn (OPM 11.6%), up 9.1% QoQ, as ABS margins remain robust.
Short-term earnings momentum slowed; Earnings to improve after 4Q21
Shares have been sluggish since June due to slower price growth for mainstay products (i.e., PE, PP) relative to international oil prices. Assuming a rise in naphtha input prices, OP is expected to contract 20.9% QoQ in 3Q21. As such, short-term earnings momentum has clearly deteriorated, but on a longer-term horizon, OP should improve YoY in 2022. Specifically, synthetic resin margins are projected to erode in 2Q-3Q21 amid ethylene cracker capacity additions in China and Korea. However, cracker capacity expansion is likely to slow sharply from 4Q21 to 1H22. In addition, chemical product spreads are expected to rebound in 4Q21, after bottoming in 3Q21. Accordingly, excessive pessimism is unwarranted, in our view.