KTB Investment & Securities said on Nov. 4 that it is concerned about a downturn in business cycles, and lowered its target price for Lotte Chemical to 280,000 won per share from 330,000 won.
"It is expected that the downward trend of the business cycle will increase pressure on Lotte Chemical's major products in the future," said Lee Hee-chul, a researcher at KTB Investment & Securities. "Although a temporary rebound is expected depending on the outcome of the U.S.-China trade agreement, we lowered the profit estimate considering the size of its new expansion in China and the low possibility of the business recovery."
According to KTB Investment & Securities, Lotte Chemical's sales fell 2.3 percent from the previous quarter to 3.9 trillion won in the third quarter of this year, while its operating profit fell 37.5 percent to 314.6 billion won from the third quarter of last year, slightly below the estimate.
Olefin, high-tech materials and Titan were generally in line with expectations, but their overall performance declined due to a sharp drop in aromatics profitability, the researcher said, adding that the margin of most products, including ethylene units, is expected to remain weak in the fourth quarter.
"It is estimated that the amount of opportunity cost will be factored into 50 billion won due to changes in facilities for NCC in Daesan and PTA in Ulsan and that its performance will be poor," he added.
Next year, a massive new expansion of facilities is scheduled for Lotte Chemical in central China. Therefore, it is predicted that pressure on margins will increase centering on olefin (including Titan), and that the oversupply of aromatic will continue, he forecast.
"However, the strategy to strengthen downstream through CF improvement, such as the sale of shares in LACC in the U.S. and the LCUK in Britain, and joint venture can be a factor of downward rigidity. With a strong financial structure, the possibility of re-rising the value exists in case of advancing into high value-added materials through M&A," said Lee.