Hana Securities said on the 18th that LOTTE Fine Chemical's operating profit this year and next year will exceed previous estimates on the back of strength in epichlorohydrin (ECH). It maintained a Buy rating and raised the target price to 60,000 won from the previous 50,000 won. LOTTE Fine Chemical's previous day's closing price was 45,750 won.
Yoon Jae-sung, a Hana Securities researcher, explained the reason for the target price hike, saying it was because "we raised our operating profit estimates for this year and next year by 20%–30% due to ECH strength."
With expenses from large-scale scheduled maintenance in the first half removed and the ECH market improving, operating profit in the second half is expected to surge 102% from the previous half, showing a sharp improvement.
The core driver of the operating profit improvement is ECH, it said. Since early July, China's ECH price has risen 35%, up 50% from the start of the year. This is because glycerin, an alternative materials and supplies, climbed 30% since early July and 58% year to date, increasing cost burdens for China's glycerin-based producers, which account for half of global ECH capacity.
The strength in glycerin has emerged as bio-diesel output in the United States and Europe has decreased, reducing production of glycerin, a byproduct. In addition, there is talk that crude palm oil (CPO), a feedstock for bio-diesel, could strengthen next year, feeding through to continued strength in glycerin.
Yoon said, "China's epoxy prices made from ECH have also rebounded recently, and domestic epoxy makers are seeing profit improvements, so the environment around ECH is moving in a favorable direction," adding, "Moreover, the global ECH capacity expansion cycle, which had been centered on China, is expected to peak out this year, so there will be no supply burden for the next several years."