Top Picks: LG Chem, Hanwha Solutions, SKC
The authors are analysts of Shinhan Investment Corp. They can be reached at jinmyung.lee93@shinhan.com and cgh815@shinhan.com, respectively. -- Ed.
Earnings passing the trough in 2Q22
The combined price spread of chemical products, which has been on a downtrend since early this year, fell further in 2Q22 to levels seen during the COVID-19 outbreak in 1Q20. Chemical market conditions were hit hard by: 1) cost burden from oil price hikes; 2) weak demand caused by China’s lockdowns; and 3) increase in supply from capacity additions. We believe domestic chemical companies inevitably saw a decline in 2Q earnings, weighed down by sluggish demand except PX, butadiene, and caustic soda. Declines were stark in synthetic resins (PE, PP, ABS, PVC).
Despite concerns over global economic slowdown, demand for chemicals is expected to recover gradually in 2H22 on fiscal stimulus measures in China, the largest consumer of chemicals. Price spreads should also improve in the second half if oil prices stabilize at lower levels and industry bottlenecks ease going forward. However, improvement in market conditions will likely be limited by continuing capacity expansion through 2023.
Complex chemicals to beat or meet consensus, pure chemicals to fall short
In 2Q22, LG Chem’s earnings should have exceeded the market consensus, while those of Hanwha Solutions, SKC, Kolon Industries, and Hyosung Advanced Materials likely came in line with expectations. LG Chem is projected to have seen earnings from basic petrochemicals fall, but those from advanced materials expand thanks to increases in cathode materials shipments and selling prices. As for Hanwha Solutions, gains in caustic soda earnings likely offset weaker earnings from chemicals. Operating losses at Hanwha Q Cells should have narrowed on rising ASP of photovoltaic modules. Despite a drop in chemical profit amid sluggish PO market conditions, we believe SKC’s mobility materials division registered solid numbers thanks to copper price increases and cost declines. Kolon Industries is expected to have seen a rise in profit from industrial materials, backed by price hikes for tire cord and aramid fibers, and continuing growth at the fashion division. Hyosung Advanced Materials should have enjoyed improvement in mainstay earnings and strong growth of super fibers (carbon fiber, aramid fiber).
We believe Lotte Fine Chemical met market expectations, while Lotte Chemical, Korea Petrochemical Industrial, Hyosung Chemical, and Hyosung TNC fell short of consensus estimates. Lotte Chemical’s 2Q earnings should have been weighed by regular maintenance works and decline in the price spreads of products. Korea Petrochemical Industrial appears to have suffered bigger losses due to negative lagging effect and unfavorable market conditions. Hyosung Chemical is projected to have remained in the red with spreads narrowing with the surge in propane prices and maintenance works at its Vietnam plant. Operating losses will be inevitable for Hyosung TNC with spreads down sharply on lackluster spandex market conditions in China. We expect Lotte Fine Chemical to record a new quarterly high in 2Q owing to brisk demand for chlorine and higher ASP for green materials.
Top picks are LG Chem, Hanwha Solutions, SKC; Hyosung Chemical in favor
Our chemical sector top picks are LG Chem (cathode materials), Hanwha Solutions (solar solutions), and SKC (copper coil). Amid continuing market uncertainties, high value-added chemicals (caustic soda, PG, POE, etc.) should help prop up earnings in adverse market conditions. The rising growth potential of non-chemical businesses will also add a boost to the share performance of complex chemical companies vs. pure chemical companies. Hyosung Chemical suffered an earnings shock in 1H22, but remains in our favor as earnings should improve sharply in 2H22 given the decline in propane prices and its Vietnam plant returning to normal operations.