Korea petchem shares shine on China hopes, valuations

South Korean petrochemical companies’ stocks rose as investors bought them at a bargain on expectations for Chinese demand recovery despite rising production costs from soaring oil prices.

Shares in petrochemical producers jumped this month, defying bearish factors such as disappointing earnings for the fourth quarter of 2021 that prompted analysts to cut their profit forecasts.

Hyosung Chemical surged 24.1% in the first 18 days of February, far outpacing the 3% gain of the main Kospi. Korea Petrochemical Ind. Co. (KPIC) jumped 17.8%, while Lotte Chemical Corp. advanced 16.7% during the period. Kumho Petrochemical Co. gained 8.6%.

Those companies have been suffering from rising prices of feedstocks such as naphtha. Oil prices extended gains on risks of a war between Russia and Ukraine this year after surging so-called “greenflation, rising commodities costs due to governments’ eco-friendly policies, in the second half of 2021.

KPIC and Hyosung logged losses in the fourth quarter of the last year. The petrochemical sector’s analysts cut profit forecasts for naphtha crackers operators such as Lotte Chemical.

CHINA, VALUATION

Their stocks defied all of the grim outlooks, powered by hopes for a recovery in Chinese demand. Manufacturers on the mainland were expected to ramp up operating rates as the Beijing Winter Olympics concluded on Feb. 20. Investors also predicted China’s annual parliamentary meetings may unveil stimulus measures for the world’s second-largest economy.

Product prices have already risen. Ethylene prices jumped 6.3%, while propylene and butadiene prices increased 4.1% and 8.1%, respectively, in the third week of this month, outperforming a 2.4% rise in naphtha, feedstock of those chemicals.

“Petrochemical companies went through the worst situation since oil prices hit highs on the Ukraine crisis and Chinese demand tumbled due to the Winter Olympics,” said Jeong Myung-ji, an analyst at Samsung Securities Co.

“But the industry’s shares rose on hopes that the economic reopening may gradually ease those bearish factors, prompting a valuation call,” Jeong said, referring to signals to buy stocks on dips.

The valuations of those stocks remained cheap despite their recent gains and sluggish earnings forecasts, analysts said. Kumho’s 12-month forward price-to-earnings ratio was 4.3 times, while the ratios of Hyosung, KPIC and Lotte were 5.4 times, 7 times and 8.3 times, respectively.

SHORT-TERM INVESTMENT

Analysts, however, recommended investment in these shares only for the short term since their earnings are expected to decline from a year earlier. Crude prices are likely to stay high even if the Ukraine risks are resolved.

Some doubted whether Chinese economic stimulus measures will lead to a significant demand recovery for chemicals.

KB Securities analyst Baek Young-chan advised paying attention to petrochemical manufacturers with future growth engines such as SK Innovation Co. and SKC, rather than pure-petrochemical plays.

Write to Jae-Yeon Ko at yeon@hankyung.com
Jongwoo Cheon edited this article.