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[Lotte Chemical]Operating profit improving, but valuations remain burdensome

February 09, 2015 15:37lFebruary 09, 2015 15:38
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While Lotte Chem’s 4Q14 operating profit met our estimate, its net income (down W17.3bn) fell short. Backed by a likely upswing in the olefin market, we forecast 2015 operating profit of W554.9bn (up 58% y-y). That being said, the firm’s valuations (its shares are currently trading at a 2015E P/B of 0.9x (ROE 5.9%)) appear somewhat demanding.

4Q14 results: Operating profit meets our estimate; however, net income misses

-Lotte Chemical posted 4Q14 sales of W3.5tn (down 14% y-y), operating profit of W55.4 (down 57% y-y), and a net loss (excluding minority interests) of W17.3bn (RR y-y), with operating profit meeting our estimate but net income falling short.

-We attribute the lower-than-expected net income to: 1) impairment losses of W36bn (related to the company’s domestic PET film lines and its UK PET facilities); and 2) higher corporate taxes at subsidiary Lotte Chem UK (LCUK).

Olefin market to improve, but valuations appear somewhat demanding

-Lotte Chem should witness 1Q15 sales of W3.1tn (down 19% y-y, down 11% q-q) and operating profit of W97bn (up 42% y-y, up 75% q-q), with operating profit rising q-q on the absence of one-off expenses (regular maintenance at LCUK; blackout at Titan plant). However, sales will likely slip on weak chemical product prices.

-Turning to full-year 2015, we forecast sales of W12.5tn (down 16% y-y) and operating profit of W554.0bn (up 58% y-y). Although sales will likely narrow y-y on weak chemical product prices, we believe that the olefin spreads (ie, the PE and PP spreads) will improve thanks to: 1) deferred CTO projects in China; and 2) lower raw material costs (in the wake of the plunge in global oil prices).

-The company’s shares have rallied 8.4% thus far this year, outperforming the Kospi by 6.5%p on the enhanced cost-competitiveness of NCC (compared to ECC) in response to olefin market improvement and the drop in oil prices. However, with Lotte Chem’s valuations still appearing somewhat demanding (the firm’s shares are currently trading at a 2015E P/B of 0.9x (ROE 5.9%), we adhere to a Hold rating and our target price of W160,000 for now.

*Source: NH Securities Co.