NH Investment & Securities said on the 5th that while cost savings from business restructuring with HD Hyundai Chemical are expected for LOTTE Chemical, there will be limits to an earnings recovery without a fundamental improvement in the petrochemical industry. It maintained a buy rating and a target price of 80,000 won. The previous trading day's closing price for LOTTE Chemical was 73,400 won.
Choi Young-gwang, an analyst at NH Investment & Securities, said, "LOTTE Chemical's ethylene production capacity at the Daesan plant is 1.1 million tons, and HD Hyundai Chemical's ethylene production capacity is 850,000 tons," and noted, "The plan is to halt one of the two facilities over the long term and raise the utilization rate of the other to improve operating efficiency."
LOTTE Chemical plans to spin off the Daesan plant as a physical division and merge it with HD Hyundai Chemical. The equity ratio in HD Hyundai Chemical will be adjusted from the current LOTTE Chemical 40% and HD Hyundai Oilbank 60% to LOTTE Chemical 50% and HD Hyundai Oilbank 50% after the merger.
Choi said, "Restructuring can be expected to reduce fixed costs, but sustained improvement in profit generation will be difficult unless the petrochemical industry improves." Here, improvement in industry conditions means a widening gap between ethylene prices and naphtha prices.
Choi also said, "With supply excessive due to China's large-scale capacity expansion cycle, product spread weakness is likely to persist for a long time," and forecast, "As weak results continue, impairment losses from fair value remeasurement may also occur during the consolidation and closure process, so LOTTE Chemical's book value per share (BPS) is likely to keep falling."
At the same time, Choi estimated LOTTE Chemical's consolidated fourth-quarter revenue this year at 4.529 trillion won and an operating loss of 202.7 billion won. The operating loss was seen widening by 70.2 billion won from a year earlier.