Growth Potential to Boost Enterprise Value
The author is an analyst of NH Securities and Investment. He can be reached at yk.choi@nhqv.com. -- Ed.
LG Chemical confirmed its growth potential with full-fledged sales growth and increased profitability at the advanced materials division. The increase in profit at the division, which receives higher valuations than the petrochemical division, should boost the firm’s EV over the mid/long term.
Growth potential to boost EV
We maintain a Buy rating on LG Chem and raise our TP by 10% from W690,000 to W760,000 as we hike our sales and OP estimates for the advanced materials division.
Despite sluggish petrochemical market conditions, LG Chem’s growth potential has been confirmed through external growth and qualitative profit growth at the advanced materials division, which exceeded expectations. Increasing profit contributions from the advanced materials division, which receives high valuations, should boost the company’s EV.
2Q22 review: Earnings surprise at advanced materials division
LG Chem registered 2Q22 sales of W12.2tn (+6.8% y-y) and OP of W878.5bn (-59.0% y-y; OPM of 7.2%), slightly below consensus. However, an earnings surprise at the advanced materials division resulted in qualitative profit growth.
At the advanced materials division, sales of W2tn (+29% q-q) and OP of W335bn (+118% q-q; OPM 16.6%) were recorded on price hikes and expanded shipments of cathode materials. The portion of battery materials sales out of total advanced materials sales rose 14%p q-q to 57%. The petrochemical division registered sales of W5.9tn (+0.4% y-y) and OP of W513bn (-19% q-q; OPM 8.6%). Sales of high value-added products were sound, but overall profitability for such products was lackluster due to negative lag effects for naphtha and increased butadiene prices.
We forecast 3Q22 sales of W13.9tn (+31.3% y-y) and OP of W1tn (+41.7% y-y; OPM 7.4%). Amid difficult market conditions for petrochemical products, OPM at the advanced materials division is likely to stabilize downwards on fading low-cost inventory effects in 2H22. However, thanks to shipments of cathode materials to GM and the expansion of production facilities, the firm should continue to grow rapidly and maintain high profitability compared to the past.