Hyosung Chemical: PP/DH Business Driving Earnings Growth
The author is an analyst of NH Investment & Securities. He can be reached at ys.hwang@nhqv.com. — Ed.
Backed by increased demand for premium products in the US and Europe, Hyosung Chem’s petrochemical business looks set to enjoy significant earnings improvement moving ahead. In 2H21, the firm is to secure a strengthened base for future growth via both completion of Vietnamese projects and NF3 business expansion.
Earnings improvement centering on petrochem business
We maintain a Buy rating on Hyosung Chemical in light of its robust growth potential, including 2H21 prospects for completion and normalized operation of Vietnamese projects and NF3 business expansion. We raise our TP to W520,000 by applying a 10% discount to the Kospi average P/E of 13.5x to Hyosung Chem’s 2021E EPS. In 2H21, while the completion of Vietnamese projects is anticipated, the firm’s petrochem business (a major contributor to OP) is likely to stagnate. Accordingly, a discount has been applied in our calculations.
Hyosung Chem reported 1Q21 OP of W61.1bn (+392.5% y-y, +204.1% q-q) and pre-tax profit of W53.5bn (+3,714% y-y, TTP q-q), far exceeding the market projections. In particular, we note that OP at the PP/DH division (ie, petrochemical business) jumped by W34.2bn q-q to W43.7bn, with OPM reaching 12.2%. Also contributing to the OP surprise were reduced losses at the TPA division and increased earnings at other businesses (including NF3 and TAC film operations).
Vietnamese PP/DH business to normalize in 2H21
Looking at the PP/DH division, both shipments and spreads have expanded as of late on reduced global supply (due to a US cold snap) and greater demand from major consumers (including the US and Europe) for premium products. At its Vietnamese subsidiary, operating losses continued in 1Q21 ahead of the completion of PDH facility projects, but quarterly operating losses narrowed greatly on increased PP profitability. Of note, the Vietnamese subsidiary has shown a turnaround since March of this year. Additional profitability improvement is expected upon the commencement of PDH facility operations in 2H21.
Elsewhere, profitability enhancement at the NF3 and TAC film businesses is noticeable. In the case of the NF3 business, OP rise is being driven by strong conditions for the downstream industry (ie, IT) and increased sales volume of F2N2. Moving ahead, further OP improvement is likely upon Hyosung Chem’s anticipated acquisition of Hyosung TNC’s Chinese NF3 business. At the TAC film business, OP expansion likely stemmed from a robust display business environment and increased productivity.
(BUSINESS KOREA)