Spandex Market Conditions Remain Bullish
The author is an analyst of Shinhan Investment Corp. He can be reached at jinmyung.lee93@shinhan.com. -- Ed.
3Q21 operating profit forecast at KRW433.9bn (+12%QoQ)
Hyosung TNC’s operating profit is expected to climb to KRW433.9bn (+12% QoQ) to hit another quarterly high in 3Q21. Operating profit from spandex/PTMG should reach KRW397.7bn (+13% QoQ) with an operating margin of 40.2% (+1.7%p QoQ). Spreads will likely remain strong given increasing sales volume from the ramp-up of the Turkey plant (August) and continued tight supply. Spandex spreads (lagging) are estimated to increase 17% QoQ on ASP hikes and a decrease in some costs.
Spandex market conditions remain bullish despite concerns
Spandex supply remains tight in September. Capacity utilization in China stands at 97% and inventory is running at six or seven days of supply. Concerns over demand have been raised with capacity utilization falling in downstream industries in August. Such concerns have slowed down the uptrend in spandex prices and slightly increased the number of inventory days. We believe spandex market conditions are still bullish given last year’s average capacity utilization rate of 83% and average inventory days of 39 days.
The market is now concerned about a possible decline in spandex margins due to capacity expansion plans. New capacity of 140,000 tons is planned for 2021 (mostly completed at the year-end) and 130,000 tons in 2022. However, we expect spandex demand to increase 15% YoY (150,000 tons) this year thanks to recovery of apparel demand and rising spandex blend ratios. Demand is estimated to grow at a CAGR above 8% going forward. Concerns over a market downturn seem overblown.
Retain BUY with target price lowered by 8% to KRW1,200,000
We revise down our target price for Hyosung TNC by 8% to KRW1,200,000 due to a change in the target PBR. The share price is down 26% from the peak on concerns over spandex market downturn. We believe the recent correction is excessive considering forecasts for solid earnings streak stretching into 3Q21 and structural growth of the spandex market. Hyosung TNC is poised to further strengthen its presence as a global leader through enhanced earnings fundamentals and steady overseas capacity additions. With shares trading at 2021-2022F PER of just 4x, the company’s valuation merit should increase going forward.