Mid/long-term Growth Potential Remains Intact
The authors are analysts of Shinhan Investment Corp. They can be reached at jinmyung.lee93@shinhan.com and cgh815@shinhan.com, respectively. -- Ed.
1Q22 preview: OP likely short of consensus at KRW124bn (+47% QoQ)
We now expect Hanwha Solutions to post operating profit of KRW124bn (+47% QoQ) for 1Q22, coming in short of the consensus estimate of KRW143.6bn. Operating losses at Hanwha Q Cells should have narrowed by KRW44.5bn QoQ to KRW108.8bn on partial reflection of 4Q21 cost savings and positive effect of ASP hikes. However, given the rebound in raw material prices seen in 1Q22, the company's cost burden is expected to remain high in the near term.
Operating profit from chemicals is now estimated at KRW224.6bn (-3% QoQ). In our view, a drop in profit was inevitable in 1Q22 with the growing cost burden from oil price hikes causing major product (PVC, LDPE, etc.) price spreads to narrow. Nevertheless, we remain upbeat on strong price trends seen for caustic soda thanks to tight market supply, and expectations for a gradual recovery of PVC market conditions backed by solid demand. Advanced materials and retail businesses likely saw growth in profit, but equity method losses should have widened in 1Q22 due to the rising cost burden and impact from the shutdown of Yeochun NCC's plant.
Improving profits at Q Cells to add to solid main biz earnings from 2H
For 2022, operating profit from chemicals is projected at KRW853.3bn (-19% QoQ) with rising costs and weak 1H22 market conditions expected to weigh on full-year earnings. However, PVC and caustic soda, which account for roughly 54% of overall sales, will likely serve as cash cows for the company on the back of solid market conditions. With 70% of demand coming from construction, PVC suppliers should benefit from tight market supply as increasing investment in infrastructure drives up demand amid limited expansion of global capacity. Strong price trends for caustic soda will likely continue on tight supply and growing downstream demand.
Hanwha Q Cells is expected to swing to profit in 3Q22 with earnings gradually improving every quarter from the bottom recorded in 4Q21. Operating losses should continue through 1H22 with high costs and freight rates remaining a burden, but upstream capacity additions in excess of annual demand growth expected for photovoltaics (PV) should help to gradually ease the cost burden towards 2H22. In addition, with the company likely to book sales from its downstream business from 2Q22, we expect Hanwha Q Cells to post strong erearnings for 2H22 vs. 1H22.
Retain BUY and target price of KRW50,000
We retain our BUY rating and target price of KRW50,000 for Hanwha Solutions, believing the company's mid/long-term growth potential remains intact. Hanwha Q Cells has been posting losses since 4Q20 due to high raw material costs and freight rates, but we find that PV downstream market conditions are now bottoming out and expect the PV subsidiary to report visible improvement in earnings for 2H22.