LG Chem’s Q1 OP beats market expectation on 74% on-year jump

2017.04.20 08:34:49 | 2017.04.20 08:35:33

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South Korea’s leading chemical and battery making company LG Chem Ltd. raised 796.9 billion won ($698.9 million) in operating income in the first quarter of this year, beating the market expectation on brisk sales in basic materials.

LG Chem said on Wednesday that its operating profit for the first three months of this year surged 74.1 percent to 796.9 billion won year on year, the highest quarterly profit since the first quarter of 2011 when it earned 831.3 billion won. The result was higher than the market consensus of 690.2 billion won. Net income came at 548 billion won compared to a profit of 338 billion won a year earlier.

LG Chem’s sales for the first quarter reached 6.49 trillion won, up 33.1 percent from a year ago, marking the first time for the company to raise over 6 trillion won in its quarterly sales. Such a recovery in sales suggests that the company did not rely heavily on belt-tightening for higher profits.

The better than expected earnings have been largely attributed to an increase in demand for its basic materials, according to the company. Operating profit of LG Chem’s basic materials division reached 733.7 billion won on sales of 4.5 trillion won. Demand for basic materials rose as its customers have chosen to stock up materials to cope with rising international oil prices. A spread, the price difference between the price of finished product and raw materials, was also improved by the balanced supply and demand condition in the market.

Over the cited period, LG Chem’s information and electronics materials business raised 29.3 billion won in operating income on sales of 762.0 billion won, generating profit for the first time in four quarters. For full 2016, the company posted an operating loss of 54.9 billion won. A rise in income was mainly driven by an overall boost in demand for its polarizers, organic light emitting diode-use films and semiconductor materials, the company said.

LG Chem’s life science business also raised 20.6 billion won in operating profit on sales of 129.4 billion won, thanks to solid demand for fillers and new diabetes treatment.

The company’s secondary battery business, however, remained in red, reporting an operating loss of 10.4 billion won despite sales of almost 1 trillion won mainly lifted by brisk electric vehicle sales. The business failed to improve profitability as the small battery and energy storage system (ESS) battery market entered a slow season for sales.

Jeong Ho-young, president and chief financial officer of LG Chem, noted in a conference call that the company has been making money from the small battery and ESS business while losing in the EV battery operation, but he believed that the company’s overall battery business has hit the bottom in the first quarter.

Regarding to LG Chem’s battery business in China, the company said that it is currently coping with China’s strict rules to qualify subsidies for electric vehicle battery production by producing low pressure batteries, hybrid electric vehicle batteries or products bound for Korea at its plants in China. It also noted that its plant that churns out polarizers - a key material in the information and electronics sector - is being fully operated at a level above 90 percent. LG Chem and several other foreign battery making companies failed to join the group of permitted car battery suppliers picked by the Chinese government last year. Since then, operation ratio of its battery making plant in China has remained low.

Following the earnings surprise in the first quarter, LG Chem’s earnings estimate for full 2017 is expected to be revised upward. In a previous forecast, the company’s operating profit was projected to reach 2.39 trillion won this year, up 17.2 percent from a year ago. Shares of LG Chem on Wednesday closed 2 percent, or 5,500 won, lower at 270,500 won from the previous session.

By Lee Yong-gun

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