20170601-三星证券-Rerating_triggers_edge_into_sight_13页_606kb

Lotte Chemical Summary

Core Content

Lotte Chemical (011170) is currently trading at a forward P/B of 1x, which is significantly lower than the valuation multiples seen during previous industry upturns (2x in 2007 and 2.6x in 2011). Despite the chemical industry experiencing an upturn since 2015, the company's valuation remains low, primarily due to concerns over the sustainability of its current ROE levels and the potential for oversupply in the industry. The report suggests that the current upturn is supply-driven, unlike previous demand-driven cycles, and that the market is skeptical of its long-term viability.

Main Points

• Valuation Context: Lotte Chemical's current forward P/B of 1x is much lower than the 2x and 2.6x multiples seen in prior upturns.
• Rerating Potential: The company's valuation could improve if any of the following trigger events occur:
  • A rebound in product prices and spreads, which could signal the end of destocking.
  • Limited impact from massive ethylene production capacity expansions.
  • A successful IPO of its subsidiary, Lotte Chemical Titan, in 3Q 2017.
• Current Performance: The company has shown consistent revenue and net profit growth over the past few years, with a forecasted EPS of KRW70,284 for 2018. However, its P/E and P/B multiples are still relatively low.
• IPO Impact: If Lotte Chemical Titan lists at a forward P/B of 2x, the implied P/B of Lotte Chemical would drop to 0.78x, potentially pushing the company into a more attractive valuation range.

Key Information

• Target Price: KRW500,000 (up 8.7% from previous estimates).
• Valuation Basis: The target P/B multiple is maintained at 1.34x, but the basis is now the average of 2017 and 2018 BVPS forecasts.
• Market Cap: KRW12.4t/USD11.1b (as of May 25).
• Current Price: KRW360,500.
• Upside Potential: 38.7% based on the new target price.
• Trigger Events:
  • Product Price Rebound: Expected to occur in 2Q 2017, as destocking winds down.
  • Ethylene Capacity Expansion Impact: May not significantly affect supply-demand dynamics.
  • LC Titan IPO: Scheduled for 3Q 2017, potentially improving the parent company's valuation.

Valuation Analysis

• Forward P/B: 1x currently, with potential to drop to 0.78x if LC Titan IPO is successful.
• ROE Trends: Lotte Chemical's ROE has been strong, but the market lacks confidence in its sustainability.
• Peer Comparison: Petronas Chemicals (PCG), a similarly-sized peer, trades at 2x forward P/B and 16.7x forward P/E, suggesting that Lotte Chemical could benefit from a similar valuation if its subsidiary performs well.

Financial Highlights

Rerating Scenarios

Conclusion

Lotte Chemical remains the analyst's top pick, with the potential for rerating based on the three trigger events outlined. The report highlights that the current low valuation is primarily due to market concerns about the sustainability of the upturn and the potential for oversupply. However, if these concerns are alleviated, the company's valuation could improve significantly, making it an attractive investment opportunity.