LG Chem – Tried And Trusted Versus New Businesses

 

By John Richardson

THE potential returns from LG Chem’s electric battery and electronic materials are tremendous and are leading to some bullish forecasts from analysts as to future earnings.

What will be interesting, though, is what will be the main driver of profitability for the South Korean major over the next few years – its newer businesses or good old-fashioned petrochemicals.

LG is now the biggest polyvinyl chloride (PVC) and acrylonitrile butadiene (ABS) player in China, and is set to raise its ABS capacity at its Ningbo site in China by 100,000 tonne/year.

“China has closed down a lot of its less efficient carbide-based PVC plants during a period when demand growth has remained exceptionally strong,” an industry source told the blog today.

“The closures had been on the cards for a long time, but were delayed by at first vested local interests and then the economic crisis. But now they have happened, and with the economics of the carbide process always questionable, the ethylene-based producers have a big opportunity.”

Adding further petrochemicals capacity might seem more of a sure-fire bet – especially given all the talk of a supercycle - compared to the constantly shifting world of electric batteries and IT-related materials.

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And so it will be interesting to see how the company, which won our Top 100 award for 2009, will develop over the next few years. (The blog met with Peter Ban-suk Kim, LG Chem CEO and vice-chairman, last week to present the award).

Analysts at South Korean-based Shinhan Investment Corp take a positive view of the companies’ prospects in all its business areas.

In an investment note released late last week, Shinhan wrote:  “LG Chem’s operating profit is forecast to increase 6.5% YoY to W2.9548tr for 2011. The petrochemical division will continue to expand on favourable market conditions.

The information and electronic material business, which turned sluggish in 2H10, will regain momentum in 2011.

The IT industry is showing signs of bottoming out in 4Q10 and smart phone market growth will boost the demand for LG Chems’ small-size rechargeable batteries.

High expectations for mid- and large-size rechargeable batteries LGChem is strengthening its position in the EV (electrical vehicle) battery market after a battery supply deal with Renault. Its guidance for 2015 sales of rechargeable batteries has been revised up from W2tr to upwards of W3tr.

The company is also making a push into the energy storage system (ESS) market by winning contracts from the U.S. utility industry. Rechargeable battery earnings growth will likely outpace the market’s expectations.

Commercialization of LCD glass plates LG Chem’s LCD glass circuit board business will soon begin to make earnings contributions. The company’s No. 1 glass circuit plant is scheduled for completion in 2H11 and will begin commercial production within the year. LCD glass circuits will contribute more to earnings than mid- and large-sized rechargeable batteries.

LG Display, a captive customer, is expected to purchase W4tr worth of glass circuits in 2010. If 70% of

LG Display’s glass circuit demand is supplied by LG Chem, similar to its polarizing film supply to LG Display, it alone generates W3tr in sales and W1.2tr in operating income with an operating profit margin of 40%.”



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