▶ LG Chem posted 1Q14 sales of W5.7tn (-0.8% YoY, +0.6% QoQ) and OP of W362.1bn (-11.4% YoY, +14.5% QoQ), in line with our estimates. I&E materials were weaker than expectations, but results were solid, as: 1) petrochemical OPM improved
from 6.1% in 4Q13 to 7.0% backed by higher NCC/PO and ABS/EP product margins, and 2) OPM at the battery division, which posted an operating loss in 4Q13, rebounded to 2.6% on higher mobile-use polymer battery utilization.
▶ A robust petrochemical division performance bolstered 1Q14 results. LG Chem posted petrochemical OPM of 7%, significantly higher than the domestic pure NCC players’ average of 2.5%, backed by a stable product portfolio. Downstream products, including acrylic, SAP and EP comprise 42% of chemical sales, the highest among domestic NCCs.
▶ In 1Q14, the I&E materials division posted sales of W670bn (-9.1% QoQ) and OP of W37bn (-38.9% QoQ), weaker than expected. It was due to a decrease in core polarizer shipments fueled by panel inventory adjustments in early 1Q14. However,
the division should rebound from 2Q14, as: 1) panel prices are rising, and 2) panel shipments at LG Display, the main customer, should increase 10% QoQ, in terms of area.
▶ We recommend LG Chem as our top chemical pick. Our SotP-derived TP is W341,000. Investment points are: 1) robust chemical earnings momentum backed by a high downstream product sales contribution, 2) polarizer business growth fueled
by solid panel ASP at LG Display, and 3) undervalued IT division compared to peers.
*Source: Korea Investment & Securities Co.