Refining/Petrochemical Industry (Overweight) Refer to Important Disclosures at the End of This Report

Regional Industry Focus Refining/Petrochemical Industry (Overweight) Refer to important disclosures at the end of this report

DBS Group Research . Equity 24 Aug 2018

Strong seasonal demand ahead KOSPI: 2,282.6  Despite trade disputes, downstream petrochemical KOSDAQ: 791.3 demand remains solid Analyst  Feedstock and aromatic prices showing clear strength Regional Research Team  Reduction in Chinese teapot refiners’ operation rates [email protected] to help improve refining and aromatic margins Top pick  Top picks: Refining – S-Oil 12-mth Price Petrochemical – Lotte Chemical, Kumho Petrochemical Company Mkt Cap Target 23 Aug (KRW bn) Price Rating (KRW) Petrochemical: Robust seasonal demand yet again. Despite (KRW) concerns over the US-China trade dispute, we expect the S-OIL petrochemical industry to enjoy strong seasonality in Sep-Oct, (010950 KS) 119,000 13,397 160,000 BUY driven by: 1) continuously solid downstream demand; 2) Lotte Chemical accelerated reduction of chemical inventory driven by higher (011170 KS) 311,000 10,660 480,000 BUY demand in China on the RMB’s depreciation, 3) strong Kumho Petrochemical petrochemical product prices; and 4) some supply disruptions in 100,500 3,062 145,000 BUY (011780 KS) Asia. We expect supply-demand conditions to improve in the region on the back of China’s imposition of higher tariffs on US Our coverage chemical imports (effective from 23 Aug). We recently saw the SK Innovation strengthening of ASPs for feedstock, aromatics (paraxylene (096770 KS) 195,500 18,077 280,000 BUY

[PX]/benzene, toluene, xylene [BTX]), PET chain (purified LG Chem terephthalic acid [PTA], monoethylene glycol [MEG]), styrene (051910 KS) 356,500 25,166 470,000 BUY

monomer (SM), acrylonitrile (AN) and bisphenol A (BPA) Korea Petrochemical products. We also expect the polypropylene (PP) and high- 224,000 1,456 315,000 BUY density polyethylene (HDPE) markets to improve. However, (006650 KS) acrylonitrile butadiene styrene (ABS) margin growth should slow Hyosung amid trade disputes. Chemical 162,000 517 235,000 BUY (298000 KS) Refining: Rebound in refining/aromatic margins. The refining market saw margin recovery in 2H18. Refining margins have Source of all data: Company, DBS Bank, Bloomberg Finance L.P returned to levels before a sharp drop from end-May, backed by: 1) decline in utilisation rate at China’s teapot refineries; 2) deceleration of China’s net export growth; and 3) a narrower Dubai-WTI spread. The lower utilisation rates at Chinese teapot refineries are attributable to the consumption tax hike in Mar, which we believe will rein in crude demand growth and petroleum product export growth in China. Meanwhile, the recent strength in aromatics (PX, BTX) prices should have a positive impact on Korean refiners’ earnings, as these products contribute to a large share of their chemical profits. Although massive PX capacity expansion is expected in China in 2019 or thereafter, PX supply is currently tight, with regional supply increase likely to remain at 72% of demand increase in 2018. As such, margin recovery should continue for refiners for some time. To ride on seasonal momentum and harsher sulphur cap rules. We recommend Lotte Chemical and Kumho Petrochemical as our top picks among petrochemical players, considering: 1) low valuation and business momentum improvement (Lotte); and 2) continuously strong market conditions for phenol derivatives (Kumho). Among refiners, S-Oil remains our top pick, in light of its capacity expansion in 2H18 and expected benefits from the International Maritime Organisation’s stricter sulphur cap rules for vessel fuels in 2020.

ed: TH/ sa: LEY, CS Industry Focus Refining/Petrochemical Industry

Korea Kumho Hyosung Company SK Innovation S-Oil LG Chem Lotte Chemical Petrochemical Petrochemical chemical Stock code (096770 KS) (010950 KS) (051910 KS) (011170 KS) (006650 KS) (011780 KS) (298000 KS) Accounting (K-IFRS (K-IFRS (K-IFRS (K-IFRS (K-IFRS (K-IFRS (K-IFRS standards consolidated) consolidated) consolidated) consolidated) consolidated) consolidated) consolidated) BUY BUY BUY BUY BUY BUY BUY Rating Retained Retained Retained Retained Retained Retained Retained Target price 280,000 160,000 470,000 480,000 315,000 145,000 235,000 (KRW) Retained Retained Retained Lowered Lowered Retained Raised Upside (%) 43.2 34.5 31.8 54.3 40.6 44.3 25.3 Revenue 13,798.6 6,323.5 7,233.7 4,426.5 661.4 1,484.4 468.2 3Q18F (KRW bn) OP 710.8 462.5 708.0 716.8 109.1 144.1 44.5 NP 548.9 375.4 485.7 573.4 84.8 123.3 29.2 Revenue 17.3 21.3 13.1 10.9 25.8 23.2 9.9 (YoY, %) OP -26.2 -16.4 -10.3 -6.4 30.2 149.5 6.1 NP -21.2 -5.9 -11.0 -9.1 27.5 117.5 TTB Revenue 53,197.5 24,213.7 27,977.8 17,202.5 2,585.4 5,697.0 1,818.7 2018F 2,997.2 1,677.8 2,672.4 2,694.3 425.1 607.3 135.3 (KRW bn) OP NP 2,074.4 1,176.6 1,945.9 2,149.5 331.4 554.6 75.7 PE 8.8 11.6 13.7 5.2 4.4 5.8 6.8 P/BV 1.1 1.9 1.8 0.8 0.8 1.4 1.3 EV/EBITDA 5.2 8.4 6.4 2.6 2.7 5.2 5.1 Revenue 53,630.7 25,514.5 30,959.2 18,310.3 2,631.3 5,737.7 1,871.7 2019F 3,116.6 2,114.6 2,869.2 2,875.6 424.8 583.4 146.0 (KRW bn) OP NP 2,217.0 1,594.2 2,065.5 2,263.0 331.2 490.5 81.4 PE 8.4 8.5 12.7 4.9 4.4 6.5 6.4 P/BV 1 1.7 1.6 0.7 0.7 1.2 1.1 EV/EBITDA 4.9 6.4 5.8 2.2 2.3 4.8 5.5

Page 2 Industry Focus Refining/Petrochemical Industry

Petrochemical sector likely to enjoy strong seasonality petrochemical market, causing weaker margins. Amid growing uncertainties over the US-China trade dispute, polyolefin While the prices of naphtha, a key raw material, remained (PE/PP) prices have seen a sharper correction on concerns strong until July amid oil price increases since the beginning of about capacity expansion in the US and China. the year, product prices mostly stayed flattish in the Asian

Feedstock price trends PE/PP price trends

(US$/MT) Ethylene Propylene Naphtha (US$/MT) HDPE LDPE PP 1,600 1,500 1,400 1,400 1,200 1,300 1,200 1,000 1,100 800 1,000 600 900 400 800 200 700 15 16 17 18 15 16 17 18 Source: Cischem.com, DBS Bank Source: Cischem.com, DBS Bank

However, the situation has reversed since end-July. While ① Inventory levels have been falling in China ahead of the naphtha prices have decreased to below mid-US$600 levels peak season (Sep-Oct). MEG inventories in East China main amid oil price drops, olefin (ethylene, propylene, butadiene), ports decreased sharply to 517k tonnes in the second week of aromatics (PX, BTX), PET chain (PTA, MEG) and SM products Aug from 950k tonnes at end-May. Polyolefin inventories of have seen their ASPs increases. We expect the petrochemical China’s two major players Sinopec and PetroChina have also market to remain strong going forward for the following dropped from 1m tonnes to 700k tonnes recently. Benzene reasons. inventories, which are still at high levels, plummeted by 10% in the second week of Aug.

MEG inventory (port) and price in China Benzene inventory in China

(k tonnes) MEG Inventory (LHS) (US$/MT) Price (RHS) 1,000 1100

900 1050

800 1000

700 950

600 900

500 850

400 800 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Aug 2017 Nov 2017 Feb 2018 May 2018 Aug 2018

Source: ICIS, DBS Bank Source: ICIS, DBS Bank

Page 3

Industry Focus Refining/Petrochemical Industry

② In China, demand for domestic chemical products has Meanwhile, the polyester production capacity utilisation rate has declined slightly, due to recent increases in raw material increased on the RMB’s depreciation, driving down inventory prices. However, downstream demand still appears strong levels. As a result, chemical product prices have been rising despite the repercussions of trade disputes. sharply in China. This should place upward pressure on prices in the whole Asian region.

Polyester filament yarn inventory in China Polyester production capacity utilisation in China

Source: ICIS, DBS Bank Source: ICIS, DBS Bank

PTA futures price in China SM/PX/BZ price trends in Asia

(US$/MT) SM PX Benzene 1,600

1,400

1,200

1,000

800

600

400 15 16 17 18

Source: ICIS, DBS Bank Source: Cischem.com, DBS Bank

③ Last week, China announced an additional 25% tariffs on from 23 Aug). If a 25% tariff is imposed, chemical product supply in China would tighten during the peak season. With US$16bn worth of US goods. With many petrochemical methanol included in the second 25% tariff list (US$60bn products on the list, concerns are being raised over their worth of goods), the actual imposition of tariffs would lead to supply. China included LPG in its first US$34bn tariff list an additional drop in utilisation for China’s methanol-to-olefins (effective from 6 Jul), and added multiple chemical products (MTO) plants, whose competitiveness has already weakened. (HDPE, LLDPE, PP, SM, AN, terephthalic acid [TPA], ethylene, propylene, benzene, etc.) to the additional tariff list (effective

Page 4

Industry Focus Refining/Petrochemical Industry

Among the product groups described above, acrylonitrile 2018. Total capacity expansion at US ECCs is estimated at showed the heaviest reliance (22%) on US imports, followed 2.4m tonnes for 2017, 3.42m tonnes for 2018, and 4.2m by styrene monomer (9.5%), butadiene (6.2%), HDPE (4.7%), tonnes for 2019. Therefore, a prolonged imposition of higher LLDPE (4.2%), and PP (3.3%) in 2017. To avoid the increase in tariffs by China would make it difficult for US companies to tariff costs, the US is expected to expand its sales to Europe export their surplus production. and Latin America. However, it should find it difficult to secure alternative buyers for HDPE/LLDPE, with China currently As for PP, decreased imports of US propane would weigh on accounting for over half of the increase in global import China’s propane dehydrogenation (PDH) plants. Indeed, PP demand. We also expect supply reduction for acrylonitrile and prices have recently shown a sharper growth than PE prices in styrene monomer in the region. As for PE, concerns about China. A prolonged imposition of higher tariffs on LPG, LNG oversupply should ease for some time, considering massive and ethane could also have a negative impact on US shale capacity expansion by US ethane cracking centres (ECCs) in oil/gas production.

Net imports of PE and share by region Domestic PP price in China

Source: ICIS, DBS Bank Source: ICIS, DBS Bank

④ For China, we expect no massive capacity expansion in tightened in the region, due to: i) the shutdown/restart of Singapore Shell NCC (ethylene 1000k / propylene 500k / 2H18 after the operation of newly-added capacity by CSPC butadiene 185k tonnes) in the second week of Aug after a (CNOOC/Shell) NCC (ethylene 1200/propylene 600/butadiene water pipeline burst; and ii) temporary shutdown of China’s 180/HDPE 400/ LLDPE 300/MEG 400/PP 400/phenol Yangzi Petrochemical. This has led to an uptrend in feedstock 220/acetone 130 thousand tonnes) in June. As such, new and aromatic product prices. supply should be limited for some time. Supply has recently

Page 5

Industry Focus Refining/Petrochemical Industry

LyondellBasell expects tighter global supply of PE/PP main chemical products of Korean companies, LyondellBasell expects a tighter supply with demand growth likely to exceed During its 2Q18 earnings conference call, LyondellBasell, one supply growth by 1.5ppts in 2018. While the PE market is likely of US major chemical companies, provided a positive outlook to see supply-demand balance in 2019, HDPE supply growth for the polyolefin (PE/PP) market. With utilisation rate at a new should lag demand growth, according to LyondellBasel. US PE plant having increased in 2H18, supply growth had been anticipated. However, the company’s management estimated Meanwhile, PP supply has tightened in the North American global PE supply-demand growth gap to be less than 1ppt for market, due to lack of PP production at ethane crackers (ECC). 2018. This indicates that the impact of capacity expansion on As PP capacity expansion should be also limited in the Asian the market would be weaker than feared. Concerns about market, PP margin should improve going forward. We expect oversupply should be concentrated on LDPE/LLDPE, for which margin improvement for LPG (propane)-based PDH/PP plants. capacity expansion was massive in the US. For HDPE, one of

Global LDPE supply-demand outlook Global HDPE supply-demand outlook

Capacity growth Demand growth Capacity growth Demand growth 20% 20% 85% Utilisation rate (RHS) 89% Utilisation rate (RHS)

16% 16% 84% 12% 12% 80% 79% 8% 8% 74% 4% 4% 75%

0% 69% 0%

-4% 64% -4% 70% 09 10 11 12 13 14 15 16 17 18 19 20 21 09 10 11 12 13 14 15 16 17 18 19 20 21

Source: METI, DBS Bank Source: METI, DBS Bank

Global PP supply-demand outlook LDPE/HDPE/PP margins vs. feedstock

LDPE-ethylene HDPE-ethylene Capacity growth Demand growth (US$/MT) 20% Utilisation rate (RHS) 90% PP-propylene 500 16% 400 85% 300 12% 200 80% 100 8% 0 75% 4% -100 -200 0% 70% 09 10 11 12 13 14 15 16 17 18 19 20 21 -300

12 13 14 15 16 17 18 Source: METI, DBS Bank Source: Cischem.com, DBS Bank

Page 6

Industry Focus Refining/Petrochemical Industry

Supply of phenol derivatives to remain tight epoxy. PC resin capacity is expected to increase by over 200k tonnes (mostly by China) in 2H18 and 200k-300k tonnes (per Asia’s phenol prices have declined slightly from their peak, due annum) in 2019-2020. In contrast, there is no capacity to capacity expansion in China and India. However, BPA expansion scheduled for BPA for some time. This should help (phenol derivative) prices have remained at peak levels, backed phenol derivative margin remain strong. by robust demand for BPA-based polycarbonate (PC) and

BPA/phenol price trends Korea’s polycarbonate exports and price

(US$/MT) BPA Phenol PC resin (MT, LHS) Price (US$/MT, RHS)

2,100 70,000 4,000 천 1,900 60,000 3,500 1,700 3,000 50,000 1,500 2,500 40,000 1,300 2,000 30,000 1,100 1,500 20,000 900 1,000 700 10,000 500 500 0 - 09 10 11 12 13 14 15 16 17 18 19 15 16 17 18 Source: Cischem.com, DBS Bank Source: KITA, DBS Bank

Positive on the recent rebound in refining/aromatic margin lead to a slowdown in crude demand growth and petroleum product export growth in China. Meanwhile, recent price The refining market saw its margins recover in 2H18. Refining increases for aromatics (PX, BTX) should have a positive impact margins have recovered to levels before a sharp drop since on Korean refiners’ earnings, considering such products’ high end-May, backed by: i) utilisation rate adjustment at China’s contribution to chemical earnings. Although massive PX teapot refineries; ii) slowdown in China’s net export growth; capacity expansion is likely in China in 2019 or thereafter, PX and iii) a narrower Dubai-WTI spread. We attribute lower supply is currently tight, with the increase in regional supply utilisation rates at Chinese teapot refineries to the expected to remain at 72% of demand increase in 2018. As consumption tax hike in March. We believe that this should such, margin recovery should continue for some time.

Refining margins in Asia Chinese teapot refineries’ capacity utilisation rate

Complex margins (spot) (US$/bbl) (%) Chinese teapot refineries' utilisation rate Complex margins (lagging) 70 16 65 12 60

8 55

4 50

0 45 15 16 17 18 16 17 18 Source: Petronet, DBS Bank Source: ICIS, DBS Bank

Page 7

Regional Company Focus Hyosung Chemical Bloomberg: 298000 KS, Reuters: 298000.KS

Refer to important disclosures at the end of this report

DBS Group Research . Equity 24 Aug 2018

BUY, KRW162,000 KOSPI: 2,282.6 Positive on PDH/PP capacity (Closing price as of 23/8/18) expansion plan in Vietnam Price Target 12-mth: KRW235,000 (prev. KRW220,000)  Earnings typically strongest in 2Q-3Q on low Reason for Report: Update propane prices Potential catalyst: Solid PP supply-demand dynamics Where we differ: We are the only one covering the stock  Rebound in regional PP prices to drive earnings growth in 3Q18 Analyst Regional Research Team  PDH/PP capacity addition in Vietnam to improve [email protected] its sourcing and trading capabilities

Price Relative  Retain BUY, TP raised to KRW235,000

250,000 140 130 Overview. Hyosung Chemical was spun off from Hyosung 200,000 120 Corporation in Jun 2018. Unlike its domestic peers, Hyosung 150,000 110 100 Chemical produces propylene using LPG (propane) as a raw 100,000 90 material and uses propylene to produce polypropylene (PP). It 80 50,000 currently has an annual production capacity of 560k tonnes for 70 0 60 propane dehydrogenation or PDH (propylene) and 700k tonnes 13-Jul-18 20-Jul-18 27-Jul-18 3-Aug-18 10-Aug-18 17-Aug-18 for PP. Most of its earnings come from its PDH/PP business. Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts) Forecasts and Valuation Profitability is visibly improving. Propane prices are typically low in 2Q-3Q, due to weak heating demand. Therefore, the company FY Dec (KRW bn) 2017A 2018F 2019F 2020F delivers its strongest earnings in 2Q-3Q. Although the naphtha- Revenue 1,667.3 1,818.7 1,871.7 2,233.5 LPG spread has recently narrowed slightly, it is still at solid levels. EBITDA 278.8 305.3 318.5 363.4 We project the company to post earnings improvement in 3Q18, Operating profit 108.8 135.3 146.0 183.4 driven by the upturn in regional PP prices. The terephthalic acid Pre-tax Profit 68.1 94.1 105.7 147.6 Net Profit 52.1 75.7 81.4 113.6 (TPA) market has also been recovering. NF3 margins have been Net Pft (Pre Ex.) 52.1 75.7 81.4 113.6 showing clear improvements since the start of 2H18, backed by Net Pft Attributable to ASP increases and the transfer of loss-making NF3 unit in China to Controlling Interest 52.1 75.7 81.4 113.6 Hyosung TNC. Meanwhile, losses are expected to continue for EPS (KRW) n/a 23,732 25,511 35,622 polyketone and triacetate (TAC) film albeit at a reduced level y-o-y. EPS Pre Ex. (KRW) n/a 23,732 25,511 35,622 EPS Gth (%) n/a n/a 7.5 39.6 Stronger sourcing capability on PDH/PP capacity expansion. The EPS Gth Pre Ex (%) n/a n/a 7.5 39.6 company plans to invest KRW1.1tr to construct PDH/PP plants Diluted EPS (KRW) n/a 23,732 25,511 35,622 (capacity of 600k tonnes each) and LPG storage facility in Vietnam Net DPS (KRW) n/a 3,560 7,653 10,687 by end-2020 (with 300k tonnes of PP production capacity to be BV Per Share (KRW) n/a 129,040 152,000 184,060 PE (X) n/a 6.8 6.4 4.5 operated in 4Q19). This should help facilitate the company’s raw PE Pre Ex. (X) n/a 6.8 6.4 4.5 material sourcing and enhance trading conditions. P/Cash Flow (X) n/a n/a n/a n/a EV/EBITDA (X) n/a 5.1 5.5 4.5 Solid PP demand outlook and capacity addition warrant a BUY. Net Div Yield (%) n/a 2.2 4.7 6.6 We estimate Hyosung Chemical’s 2021F ROE at 22%. Reflecting P/Book Value (X) n/a 1.3 1.1 0.9 relatively positive PP supply/demand outlook and its capacity Net Debt/Equity (X) n/a 2.5 2.6 1.9 expansion plan in Vietnam, we raise our TP for the company to ROE (%) n/a 18.4 16.8 19.4 KRW235,000 (based on a target P/BV of 1.5x). Earnings Rev (%): n/a n/a n/a Consensus EPS (KRW): n/a n/a n/a At A Glance Other Broker Recs: B : 1 S : 0 H : 0 Issued Capital (m shrs) 3.19 Mkt. Cap (KRWbn/US$m) 517/461 ICB Industry: Chemicals Major Shareholders ICB Sector: Materials Cho Hyun-jun and 11 others (%) 43.6 Principal Business: Hyosung Chemical Corporation operates as a Free Float (%) 56.39 chemical products manufacturing company. The company produces Avg. Daily Vol. (‘000) 84 and sells optical films, polypropylene, polyester fibres, commercialising polyketone, and other products. Hyosung Chemical markets its products worldwide.

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

ed: TH / sa: LEY, CS Company Focus Hyosung Chemical

Hyosung Chemical: Quarterly/annual earnings forecasts

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18F 4Q18F 2017 2018F 2019F 2020F 2021F Production capacity Propylene (PDH) (k tonnes) 140 140 140 140 140 140 140 140 560 560 560 560 1,160 PP 165 165 165 165 175 175 175 175 660 700 700 1,000 1,300 TPA 105 105 105 105 105 105 105 105 420 420 420 420 420 NF3 (tonnes) 1,138 1,138 1,138 1,138 1,138 1,138 1,138 1,138 4,550 4,550 4,550 5,050 5,550

Prices of key products/ (US$/MT) raw materials

PP 1,030 984 1,049 1,121 1,208 1,225 1,250 1,250 1,046 1,233 1,238 1,233 1,223 TPA 662 626 637 681 757 807 855 855 652 819 814 789 764 NF3 ($/kg) 29 28 28 28 27 28 28 28 28 28 29 29 29 LPG (raw material) (-1M) 442 432 383 543 568 485 565 600 450 555 555 565 575 Revenue (KRW bn) 387.5 416.4 426.1 437.3 440.6 442.4 468.2 467.5 1,667.3 1,818.7 1,871.7 2,233.5 2,616.4 (YoY) 37.9% 36.5% 38.3% 45.8% 13.7% 6.2% 9.9% 6.9% n/a 9.1% 2.9% 19.3% 17.1% OP (KRW bn) 33.4 15.8 41.9 17.7 19.0 37.5 44.5 34.4 108.8 135.3 146.0 183.4 244.6 (YoY) 96.6% -60.5% -0.2% -64.0% -43.2% 137.2% 6.1% 94.7% n/a 24.4% 7.9% 25.6% 33.4% OPM (%) 8.6% 3.8% 9.8% 4.0% 4.3% 8.5% 9.5% 7.4% 6.5% 7.4% 7.8% 8.2% 9.4% (non-operating (KRW bn) 10.1 -14.5 -14.6 -21.7 -8.9 -16.3 -8.0 -8.0 -40.7 -41.2 -40.3 -35.8 -35.8 gains/losses) Pre-tax profit 43.6 1.3 27.3 -4.0 10.1 21.2 36.5 26.4 68.1 94.1 105.7 147.6 208.8 NP 33.3 1.9 23.3 -6.4 8.3 17.7 29.2 20.6 52.1 75.7 81.4 113.6 160.8 Source: Hyosung Chemical, DBS Bank

Page 9 Regional Company Focus Korea Petrochemical Bloomberg: 006650 KS, Reuters: 006650.KS

Refer to important disclosures at the end of this report

DBS Group Research . Equity 24 Aug 2018

BUY, KRW224,000 KOSPI: 2,282.6 Additional upside to earnings on (Closing price as of 23/8/18) tight ethylene supply Price Target 12-mth: KRW315,000 (prev. KRW330,000)  Increased feedstock production capacity to shine amid Reason for Report: Update tight feedstock supply-demand Potential catalyst: Tight supply-demand dynamics for feedstock  Sales of key downstream products are solid Where we differ: We have slightly more conservative estimates for its feedstock sales  With market recovering, earnings are likely to remain robust in 2019 Analyst  Retain BUY, TP lowered to KRW315,000 Regional Research Team [email protected] Beneficiary of tight feedstock supply. Korea Petrochemical has Price Relative an annual ethylene production of 800k tonnes, which makes it 400,000 460 the smallest naphtha cracker (NCC) in Korea. However, 350,000 410 following its capacity expansion in 2017, the company can 300,000 360 now produce more feedstock (ethylene, propylene, C4, etc.) 250,000 310 200,000 260 for sale. It should therefore benefit from tight feedstock supply 150,000 210 (ethylene) in the Asian market. 100,000 160 50,000 110 0 60 Favourable FX impact and better MEG margins are a positive. Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 While ethylene prices are staying at high levels in 3Q18, sales Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts) of C4 (butadiene) have been upbeat. On the back of this, the Forecasts and Valuation company’s 3Q18 earnings are likely to be similar to its 2Q18 results. We also expect relatively solid earnings for its key FY Dec (KRW bn) 2017A 2018F 2019F 2020F downstream products high-density polyethylene (HDPE) and Revenue 1,779.4 2,585.4 2,631.3 2,618.7 polypropylene (PP). Favourable FX rates and improvement in EBITDA 379.3 538.8 537.9 517.6 monoethylene glycol (MEG) margins should also help enhance Operating profit 284.2 425.1 424.8 399.3 Pre-tax Profit 280.1 440.0 441.5 416.8 the company’s overall profitability. Net Profit 214.5 331.4 331.2 312.6 Net Pft (Pre Ex.) 214.5 331.4 331.2 312.6 Valuation multiple at the lowest since 2015. Korea Net Pft Attributable to Petrochemical is currently trading at a 2018F P/BV of 0.8x, at Controlling Interest 214.3 331.4 331.2 312.6 the lowest end of its share price band since early 2015. We EPS (KRW) 32,972 50,980 50,948 48,091 slightly lower our TP for the company to KRW315,000, in light EPS Pre Ex. (KRW) 32,993 50,980 50,948 48,091 of risks such as trade disputes and oil price volatility as well as EPS Gth (%) -21.2 54.6 -0.1 -5.6 domestic/overseas peer valuation correction. Our new TP is EPS Gth Pre Ex (%) -21.4 54.5 -0.1 -5.6 based on a target P/BV of 1.15x, at the lower end of its P/BV Diluted EPS (KRW) 32,972 50,980 50,948 48,091 band for the past 3-4 years. However, we recommend Net DPS (KRW) 4,000 5,000 6,500 6,500 accumulating its shares at current valuation levels, considering BV Per Share (KRW) 225,773 272,857 318,805 360,396 the ongoing recovery in business environment in 2H18 and PE (X) 8.0 4.4 4.4 4.7 PE Pre Ex. (X) 8.0 4.4 4.4 4.7 likely solid earnings in 2019. We also project dividend P/Cash Flow (X) 4.6 3.1 3.3 3.4 expansion for the company upon any earnings improvement. EV/EBITDA (X) 5.1 2.8 2.3 2.0 Net Div Yield (%) 1.5 2.2 2.9 2.9 At A Glance P/Book Value (X) 1.2 0.8 0.7 0.6 Issued Capital (m shrs) 6.50 Net Debt/Equity (X) 0.1 0.0 CASH CASH Mkt. Cap (KRWbn/US$m) 1,456/1,298 ROE (%) 15.5 20.4 17.2 14.1 Major Shareholders Lee Sun-kyu and 12 others (%) 40.2 Earnings Rev (%): 0.0 0.0 0.0 Consensus EPS (KRW): 49,999 51,417 51,695 Free Float (%) 49.37 Other Broker Recs: B : 11 S : 0 H : 1 Avg. Daily Vol. (‘000) 101

ICB Industry: Chemicals ICB Sector: Materials Principal Business: Korea Petrochemical Ind Co., Ltd. manufactures chemical products such as high-density polyethylene and polypropylene. The company also produces basic organic chemicals including ethylene, propylene, and mixed C4s.

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

ed: TH / sa: LEY, CS Company Focus Korea Petrochemical

Earnings preview Unit: KRW bn, % Vs. our previous Our estimates y-o-y q-o-q Vs. consensus estimates estimates ‘18.09F ‘18.09F Diff. (%) ‘17.09A Diff. (%) ‘18.06P Diff. (%) ‘18.09F Diff. (%) Revenue 661.4 661.4 0.0 525.8 25.8 652.8 1.3 665.3 (0.6) OP 109.1 109.1 0.0 83.8 30.2 108.3 0.8 109.2 (0.0) NP 84.8 84.8 0.0 66.5 27.5 83.7 1.3 84.5 0.3 Margin (%) OP margin 16.5 16.5 15.9 16.6 16.4 Net margin 12.8 12.8 12.6 12.8 12.7 Difference (ppts) OP margin 0.0 0.6 (0.1) 0.1 Net margin 0.0 0.2 (0.0) 0.1 Note: Based on consolidated K-IFRS Source: Korea Petrochemical, DBS Bank

Revision to annual earnings forecasts

(KRW bn) Previous Revised Diff. (%, ppts) 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F Revenue 2,585.4 2,631.3 2,618.7 2,585.4 2,631.3 2,618.70.00.00.0 Operating profit 425.1424.8399.3425.1424.8399.30.00.00.0 OP margin (%) 16.416.115.316.416.115.30.00.00.0 EBITDA 538.8537.9517.6538.8537.9517.60.00.00.0 EBITDA margin (%)20.820.419.820.820.419.80.00.00.0 Net profit 331.4331.2312.6331.4331.2312.60.00.00.0 Note: Based on consolidated K-IFRS Source: Korea Petrochemical, DBS Bank

Page 11 Company Focus Korea Petrochemical

BALANCE SHEET INCOME STATEMENT

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRWbn) 2016 2017 2018F 2019F 2020F Current Assets 428.3 411.7 660.2 855.8 1,028.4 Revenue 1,596.4 1,779.4 2,585.4 2,631.3 2,618.7 Cash & Short-term 97.1 9.7 179.4 375.1 549.9 Growth (%) (7.6) 11.5 45.3 1.8 (0.5) investment Accounts Receivable 190.3 223.0 266.8 266.7 265.5 Operating Profit 343.0 284.2 425.1 424.8 399.3 Inventories 138.7 174.2 209.1 209.1 208.1 Growth (%) 26.5 (17.1) 49.6 (0.1) (6.0) Fixed assets 1,335.4 1,558.9 1,618.7 1,696.6 1,768.7 EBITDA 407.4 379.3 538.8 537.9 517.6 Non-operating Investment Assets 168.9 164.0 168.5 175.3 182.5 17.2 (4.1) 14.9 16.8 17.4 Gains/Losses Tangible Assets 1,161.2 1,389.2 1,444.6 1,515.6 1,580.6 Net Interest Income (1.2) (3.0) (4.1) (3.3) (2.7) Intangible Assets 5.3 5.7 5.7 5.7 5.7 Foreign Currency Gains 1.9 (2.6) (0.6) 0.0 0.0 Total Assets 1,763.6 1,970.6 2,278.9 2,552.4 2,797.1 Equity Method Gains 7.5 7.4 10.5 10.5 10.5 Current Liabilities 318.9 260.2 284.1 274.8 264.8 Pre-tax Profit 360.2 280.1 440.0 441.5 416.8 Accounts Payable 111.1 111.2 144.5 144.4 143.7 Net Profit 272.9 214.5 331.4 331.2 312.6 Net profit attributable to Short-term Debts 128.5 80.0 70.0 60.0 50.0 272.1 214.3 331.4 331.2 312.6 controlling interest Non-current Liabilities 151.7 237.2 215.5 199.7 184.0 Growth (%) 35.9 (21.4) 54.5 (0.1) (5.6) Long-term Debts 58.0 141.5 112.8 92.8 72.8 NOPLAT 259.9 217.6 320.1 318.6 299.5 Total Liabilities 470.6 497.4 499.7 474.5 448.8 (+) Dep 64.4 95.1 113.7 113.2 118.3 Capital Stock 41.0 41.0 41.0 41.0 41.0 (-) Wc (7.0) 81.0 44.9 (0.7) (2.2) Capital Surplus 264.3 264.3 264.3 264.3 264.3 (-) Capex 262.7 318.3 168.0 184.2 183.3 Earned Surplus 984.4 1,173.7 1,479.7 1,778.4 2,048.7 OpFCF 68.5 (86.6) 221.0 248.3 236.7 Capital Adjustment (3.7) (5.8) (5.8) (5.8) (5.8) 3 Yr CAGR & Margins Treasury Stock (3.6) (3.6) (3.6) (3.6) (3.6) Revenue growth(3Yr) (6.7) (4.7) 14.4 18.1 13.7 Total Equity 1,293.1 1,473.2 1,779.2 2,077.9 2,348.2 OP growth(3Yr) 167.4 59.6 16.2 7.4 12.0 Invested capital 1,242.5 1,545.0 1,637.9 1,705.0 1,764.4 EBITDA growth(3Yr) 93.6 53.7 17.1 9.7 10.9 Net debt / (cash) 89.4 211.8 3.3 (222.4) (427.1) NP growth(3Yr) 81.2 49.8 18.2 6.7 13.4 ROA 16.6 11.5 15.6 13.7 11.7 OP margin (%) 21.5 16.0 16.4 16.1 15.3 ROE 23.6 15.5 20.4 17.2 14.1 EBITDA margin (%) 25.5 21.3 20.8 20.4 19.8 ROIC 22.9 15.6 20.1 19.1 17.3 NP margin (%) 17.1 12.1 12.8 12.6 11.9

CASH FLOW KEY INDICATOR

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRW,x,%) 2016 2017 2018F 2019F 2020F Operating cash flow 322.6 227.9 398.4 438.7 426.9 Per share Data (w) Net Profit 360.2 280.1 356.3 331.2 312.6 EPS 41,867 32,972 50,980 50,948 48,091 Depr. & Amort. 64.4 95.1 113.7 113.2 118.3 BPS 197,046 225,773 272,857 318,805 360,396 Chg in Working Capital (15.4) (79.9) (70.4) 0.7 2.2 DPS 4,000 4,000 5,000 6,500 6,500 Chg in Accounts (36.1) (36.9) (42.8) 0.1 1.3 Valuation (x,%) Receivable Chg in inventories (2.5) (36.0) (34.7) 0.0 1.0 PER 6.6 8.0 4.4 4.4 4.7 Chg in Accounts Payable 40.0 2.3 (11.6) (0.0) (0.7) PBR 1.4 1.2 0.8 0.7 0.6 Investing cash flow (278.0) (306.3) (165.3) (180.5) (179.9) EV/EBITDA 4.6 5.1 2.8 2.3 2.0 Chg in Short-term (10.0) 10.0 0.0 0.0 0.0 Dividend yield 1.5 1.5 2.2 2.9 2.9 Investments Chg in Long-term 0.0 2.0 3.6 4.6 4.4 PCR 4.1 4.6 3.1 3.3 3.4 Investment Securities Capex (262.7) (318.3) (168.0) (184.2) (183.3) PSR 1.1 1.0 0.6 0.6 0.6 Disposal of Tangible & (2.6) (0.3) 0.0 0.0 0.0 Stabilities (%) Intangible Assets Financing cash flow (91.9) 1.1 (63.5) (62.5) (72.3) Liabilities Ratio 36.4 33.8 28.1 22.8 19.1 Chg in debt (74.0) 35.0 (38.8) (30.0) (30.0) Net debt/Equity 6.9 14.4 0.2 CASH CASH Chg in Equity (18.5) (24.7) (24.7) (32.5) (42.3) Net debt/EBITDA 21.9 55.8 0.6 CASH CASH Dividend Payout 18.5 24.7 24.7 32.5 42.3 Current ratio 134.3 158.2 232.3 311.4 388.3 Chg in Cash (47.3) (77.4) 169.7 195.7 174.8 Interest coverage ratio 282.9 93.8 102.8 127.6 150.2 Gross cash flow 433.5 374.0 470.2 438.0 424.7 Interest/revenue 0.2 0.2 0.2 0.1 0.1 (-) Chg in WC (7.0) 81.0 44.9 (0.7) (2.2) Asset Structure (-) Capex 262.7 318.3 168.0 184.2 183.3 IC 82.4 89.9 82.5 75.6 70.7 (+) Disposal of Assets (2.6) (0.3) 0.0 0.0 0.0 Cash + IC(%) 17.6 10.1 17.5 24.4 29.3 Free Cash Flow 175.1 (25.6) 257.4 254.5 243.6 Capital Structure (-) Other Investments (0.0) (2.0) (3.6) (4.6) (4.4) Debt/Asset 12.6 13.1 9.3 6.8 5.0 Free Cash 175.2 (23.6) 261.0 259.2 248.0 Equity/Asset 87.4 86.9 90.7 93.2 95.0 Source:Source: KTB DBS Investment Bank & Securities *Asset = Equity + Debt, P/E is derived by using diluted EPS. Note:Note: Results Results are are consolidated consolidated This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, KTB Investment & Securities does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. *AssetThe investment = Equity should be+ madeDebt, based P/E on is each derived client's ownby judgment,using diluted and we expressly EPS. disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of KTB Investment & Securities Co. and thus, it may not be reproduced, distributed or modified without the prior consent of KTB Investment & Securities Co. This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, DBS Bank does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of DBS Bank and thus, it may not be reproduced, distributed or modified without the prior consent of DBS Bank.

Page 12 Regional Company Focus Lotte Chemical Bloomberg: 011170 KS, Reuters: 011170.KS

Refer to important disclosures at the end of this report

DBS Group Research . Equity 24 Aug 2018

BUY, KRW311,000 KOSPI: 2,282.6 Strong sourcing capability and (Closing price as of 23/8/18) shareholder-friendly policies Price Target 12-mth: KRW480,000 (prev. KRW530,000)  Operations of newly added facilities using diverse Reason for Report: Update feedstock to boost earnings Potential catalyst: Operation of newly added production capacity  Market conditions for key products improving Where we differ: We have a more conservative view on effects of capacity expansion  TP lowered slightly, but recommend to actively accumulate at current valuation Analyst Regional Research Team Bright earnings outlook on new capacity operation. Lotte [email protected] Chemical, Korea’s largest cracker (3m tonnes of ethylene production by end-2018), plans to build diverse chemical Price Relative facilities like ethane crackers (ECC) and mixed feed crackers (residue, LPG) as well as naphtha crackers (NCC). For Mar-Apr 500,000 260 2019, the company plans to operate its new ECC (joint venture 400,000 210 with a production capacity of 1m tonnes) and monoethylene 300,000 glycol (MEG) plant (wholly-owned subsidiary with a production 160 200,000 capacity of 700k tonnes) in the US. As such, its earnings should 110 100,000 improve going forward.

0 60 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 3Q18 to meet expectations. The company’s 3Q18 earnings are Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts) expected to be similar to its 2Q18 levels, especially for the Forecasts and Valuation olefin business. Although high naphtha input prices may weigh FY Dec (KRW bn) 2017A 2018F 2019F 2020F on earnings, 3Q18 earnings should be in line with market Revenue 15,874.5 17,202.5 18,310.3 19,036.1 estimates, backed by: 1) strong ethylene, butadiene, styrene EBITDA 3,620.9 3,487.5 3,753.0 3,863.9 monomer, and MEG product prices; and 2) favourable FX rates Operating profit 2,929.7 2,694.3 2,875.6 2,934.4 (the KRW’s depreciation). The company’s acrylonitrile butadiene Pre-tax Profit 3,084.7 2,988.4 3,143.1 3,181.3 styrene (ABS) / purified isophthalic acid (PIA) business could be Net Profit 2,284.6 2,149.5 2,263.0 2,290.5 sluggish, but it should see robust paraxylene (PX)-terephthalic Net Pft (Pre Ex.) 2,284.6 2,149.5 2,263.0 2,290.5 acid (TPA) earnings and positive effect of PP capacity expansion Net Pft Attributable to (+200k tonnes) at Lotte Chemical Titan Malaysia. Controlling Interest 2,243.9 2,068.5 2,171.8 2,198.2 EPS (KRW) 65,466 60,349 63,364 64,133 EPS Pre Ex. (KRW) 66,654 62,714 66,025 66,827 Opportune time to accumulate. Lotte Chemical is currently EPS Gth (%) 22.2 -7.8 5.0 1.2 trading at 2018F P/BV of 0.8x, the lower end of the share price EPS Gth Pre Ex (%) 24.4 -5.9 5.3 1.2 band since 2014. Considering the woes over trade disputes, oil Diluted EPS (KRW) 65,466 60,349 63,364 64,133 price volatility and domestic/overseas peer valuation correction, Net DPS (KRW) 10,500 15,000 20,000 20,000 we lower our target multiple slightly to 1.25x 2018F P/BV, its BV Per Share (KRW) 335,215 384,105 432,469 476,601 average level for the past 3-4 years. Nevertheless, we expect PE (X) 5.6 5.2 4.9 4.8 the company to see better market conditions for its key PE Pre Ex. (X) 5.5 5.0 4.7 4.7 products in 2H18 and capacity expansion effect in 2019. There P/Cash Flow (X) 3.5 3.8 3.8 3.7 is also a potential for dividend expansion. We recommend an EV/EBITDA (X) 3.3 2.7 2.2 1.9 Net Div Yield (%) 2.9 4.8 6.4 6.4 aggressive investment strategy towards the company at current P/Book Value (X) 1.1 0.8 0.7 0.7 valuation levels (EV/EBITDA of 3x or below). Net Debt/Equity (X) CASH CASH CASH CASH ROE (%) 21.9 17.4 16.2 14.7 At A Glance Issued Capital (m shrs) 34.28 Earnings Rev (%): 0.0 0.0 0.0 Mkt. Cap (KRWbn/US$m) 10,660/9,505 Consensus EPS (KRW): 61,358 66,285 68,202 Major Shareholders Other Broker Recs: B : 21 S : 0 H : 2 Lotte Corporation and 3 others (%) 53.5 ICB Industry: Chemicals Free Float (%) 46.45 ICB Sector: Materials Avg. Daily Vol. (‘000) 292 Principal Business: Lotte Chemical manufactures petrochemical products such as high-density polyethylene, polypropylene, and ethylene glycol.

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

ed: TH / sa: LEY, CS Company Focus Lotte Chemical

Earnings preview Unit: KRW bn, % Vs. our previous Our estimates y-o-y q-o-q Vs. consensus estimates estimates ‘18.09F ‘18.09F Diff. (%) ‘17.09A Diff. (%) ‘18.06P Diff. (%) ‘18.09F Diff. (%) Revenue 4,426.5 4,426.5 0.0 3,990.2 10.9 4,330.2 2.2 4,400.0 0.6 OP 716.8 716.8 0.0 766.2 (6.4) 701.3 2.2 671.0 6.8 NP 573.4 573.4 0.0 631.0 (9.1) 584.6 (1.9) 554.8 3.4 Margin (%) OP margin 16.2 16.2 19.2 16.2 15.3 Net margin 13.0 13.0 15.8 13.5 12.6 Difference (ppts) OP margin 0.0 (3.0) (0.0) 0.9 Net margin 0.0 (2.9) (0.5) 0.3 Note: Based on consolidated K-IFRS Source: Lotte Chemical, KTB Investment & Securities

Revision to annual earnings forecasts

(KRW bn) Previous Revised Diff. (%, ppts) 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F Revenue 17,202.5 18,310.3 19,036.1 17,202.5 18,310.3 19,036.10.00.00.0 Operating profit2,694.3 2,875.6 2,934.4 2,694.3 2,875.6 2,934.40.00.00.0 OP margin (%) 15.715.715.415.715.715.40.00.00.0 EBITDA 3,487.5 3,753.0 3,863.9 3,487.5 3,753.0 3,863.90.00.00.0 EBITDA margin (%)20.320.520.320.320.520.30.00.00.0 Net profit 2,149.5 2,263.0 2,290.5 2,149.5 2,263.0 2,290.50.00.00.0 Note: Based on consolidated K-IFRS Source: Lotte Chemical, KTB Investment & Securities

Page 14 Company Focus Lotte Chemical

BALANCE SHEET INCOME STATEMENT

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRWbn) 2016 2017 2018F 2019F 2020F Current Assets 5,851.7 8,225.5 9,313.5 9,674.2 9,860.6 Revenue 13,223.5 15,874.5 17,202.5 18,310.3 19,036.1 Cash & Short-term 2,661.5 4,875.9 5,992.1 6,164.1 6,215.8 Growth (%) 12.9 20.0 8.4 6.4 4.0 investment Accounts Receivable 1,551.9 1,667.6 1,610.6 1,705.6 1,773.2 Operating Profit 2,544.3 2,929.7 2,694.3 2,875.6 2,934.4 Inventories 1,477.2 1,536.0 1,563.2 1,655.5 1,721.1 Growth (%) 57.9 15.2 (8.0) 6.7 2.0 Fixed assets 10,015.2 11,325.5 12,075.6 12,693.0 13,317.6 EBITDA 3,173.4 3,620.9 3,487.5 3,753.0 3,863.9 Non-operating Investment Assets 2,673.1 2,895.9 2,961.1 3,081.4 3,206.5 (56.9) 155.0 294.1 267.5 246.8 Gains/Losses Tangible Assets 5,546.7 6,716.2 7,484.6 8,060.2 8,634.4 Net Interest Income (47.0) (43.6) (4.8) 11.1 30.9 Intangible Assets 1,792.4 1,710.6 1,629.9 1,551.4 1,476.8 Foreign Currency Gains (37.1) 36.6 16.9 4.0 4.0 Total Assets 15,866.8 19,551.0 21,389.1 22,367.2 23,178.2 Equity Method Gains 71.4 284.4 318.7 300.0 260.0 Current Liabilities 3,448.8 3,790.9 4,127.6 3,917.3 3,683.7 Pre-tax Profit 2,487.4 3,084.7 2,988.4 3,143.1 3,181.3 Accounts Payable 1,077.4 1,420.8 1,373.8 1,454.8 1,512.5 Net Profit 1,837.2 2,284.6 2,149.5 2,263.0 2,290.5 Net profit attributable to Short-term Debts 1,747.2 1,514.4 1,889.6 1,589.6 1,289.6 1,835.8 2,243.9 2,068.5 2,171.8 2,198.2 controlling interest Non-current Liabilities 3,017.2 3,505.3 3,309.3 2,840.1 2,372.0 Growth (%) 85.5 24.4 (5.9) 5.3 1.2 Long-term Debts 2,444.8 2,752.7 2,552.2 2,052.2 1,552.2 NOPLAT 1,879.2 2,169.8 1,938.0 2,070.5 2,112.8 Total Liabilities 6,466.0 7,296.2 7,436.9 6,757.4 6,055.7 (+) Dep 629.2 691.2 793.2 877.3 929.5 Capital Stock 171.4 171.4 171.4 171.4 171.4 (-) Wc 161.6 (415.5) 10.3 99.0 68.3 Capital Surplus 478.6 880.7 880.8 880.8 880.8 (-) Capex 1,588.1 2,019.9 1,494.8 1,373.3 1,427.7 Earned Surplus 8,487.0 10,582.1 12,300.2 13,957.9 15,470.5 OpFCF 758.6 1,256.5 1,226.1 1,475.5 1,546.2 Capital Adjustment 226.2 (144.6) (187.0) (187.0) (187.0) 3 Yr CAGR & Margins Treasury Stock 0.0 0.0 0.0 0.0 0.0 Revenue growth(3Yr) (7.0) 2.2 13.7 11.5 6.2 Total Equity 9,400.8 12,254.8 13,952.1 15,609.8 17,122.5 OP growth(3Yr) 73.5 102.9 18.7 4.2 0.1 Invested capital 8,487.9 9,003.3 9,722.7 10,299.6 10,847.4 EBITDA growth(3Yr) 47.2 62.6 18.4 5.8 2.2 Net debt / (cash) 1,530.5 (608.8) (1,550.2) (2,522.2) (3,373.9) NP growth(3Yr) 85.9 151.5 29.5 7.2 0.1 ROA 13.4 12.9 10.5 10.3 10.1 OP margin (%) 19.2 18.5 15.7 15.7 15.4 ROE 21.8 21.9 17.4 16.2 14.7 EBITDA margin (%) 24.0 22.8 20.3 20.5 20.3 ROIC 27.3 24.8 20.7 20.7 20.0 NP margin (%) 13.9 14.4 12.5 12.4 12.0

CASH FLOW KEY INDICATOR

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRW,x,%) 2016 2017 2018F 2019F 2020F Operating cash flow 2,682.1 3,097.5 2,765.2 2,680.9 2,831.3 Per share Data (w) Net Profit 1,837.2 2,284.6 2,149.5 2,263.0 2,290.5 EPS 53,561 65,466 60,349 63,364 64,133 Depr. & Amort. 629.2 691.2 793.2 877.3 929.5 BPS 273,173 335,215 384,105 432,469 476,601 Chg in Working Capital (157.2) 38.5 (17.1) (99.0) (68.3) DPS 4,000 10,500 15,000 20,000 20,000 Chg in Accounts (128.1) (172.6) 109.2 (95.0) (67.6) Valuation (x,%) Receivable Chg in inventories (125.8) (101.0) (27.4) (92.2) (65.6) PER 6.9 5.6 5.2 4.9 4.8 Chg in Accounts Payable 153.6 314.2 10.5 81.0 57.7 PBR 1.4 1.1 0.8 0.7 0.7 Investing cash flow (3,578.7) (4,730.9) (1,286.6) (1,326.4) (1,431.0) EV/EBITDA 4.5 3.3 2.7 2.2 1.9 Chg in Short-term 418.4 (2,799.9) 18.6 (131.6) (136.9) Dividend yield 1.1 2.9 4.8 6.4 6.4 Investments Chg in Long-term (124.5) 35.8 162.0 191.2 146.8 PCR 3.9 3.5 3.8 3.8 3.7 Investment Securities Capex (1,588.1) (2,019.9) (1,494.8) (1,373.3) (1,427.7) PSR 1.0 0.8 0.6 0.6 0.6 Disposal of Tangible & 4.0 0.6 5.0 (1.2) (1.2) Stabilities (%) Intangible Assets Financing cash flow 1,133.1 1,159.4 (412.2) (1,314.1) (1,485.5) Liabilities Ratio 68.8 59.5 53.3 43.3 35.4 Chg in debt 1,295.8 234.6 (389.4) (800.0) (800.0) Net debt/Equity 16.3 CASH CASH CASH CASH Chg in Equity (84.2) 78.6 (359.9) (514.1) (685.5) Net debt/EBITDA 48.2 CASH CASH CASH CASH Dividend Payout 84.2 134.8 359.9 514.1 685.5 Current ratio 169.7 217.0 225.6 247.0 267.7 Chg in Cash 260.7 (517.7) 1,065.8 40.4 (85.2) Interest coverage ratio 54.1 67.2 564.6 n/a n/a Gross cash flow 3,212.6 3,649.4 2,793.6 2,779.9 2,899.6 Interest/revenue 0.6 0.7 0.6 0.4 0.3 (-) Chg in WC 161.6 (415.5) 10.3 99.0 68.3 Asset Structure (-) Capex 1,588.1 2,019.9 1,494.8 1,373.3 1,427.7 IC 61.4 53.7 52.1 52.7 53.5 (+) Disposal of Assets 4.0 0.6 5.0 (1.2) (1.2) Cash + IC(%) 38.6 46.3 47.9 47.3 46.5 Free Cash Flow 1,466.9 2,045.5 1,293.5 1,306.4 1,402.3 Capital Structure (-) Other Investments 124.5 (35.8) (162.0) (191.2) (146.8) Debt/Asset 30.8 25.8 24.1 18.9 14.2 Free Cash 1,342.4 2,081.3 1,455.5 1,497.6 1,549.1 Equity/Asset 69.2 74.2 75.9 81.1 85.8 Source:Source: KTB DBS Investment Bank & Securities *Asset = Equity + Debt, P/E is derived by using diluted EPS. Note:Note: Results Results are are consolidated consolidated This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, KTB Investment & Securities does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should *Assetbe made based = Equity on each client's+ Debt, own judgment,P/E is derived and we expressly by using disclaim diluted all liability EPS.for any investment decisions and any results thereof. This report is a copyrighted material of KTB Investment & Securities Co. and thus, it may not be reproduced, distributed or modified without the prior consent of KTB Investment & Securities Co. This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, DBS Bank does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of DBS Bank and thus, it may not be reproduced, distributed or modified without the prior consent of DBS Bank.

Page 15 Industry Focus Refining/Petrochemical Industry

Stock Ratings  The stock investment opinion below is based on the expected return of the recommended stock over the next 12 months relative to the closing price of the day it is recommended.

 STRONG BUY: Expected to produce a return of at least 50% from the closing price of the day the stock is recommended  BUY: Expected to produce a return between 15% and 50% from the closing price of the day the stock is recommended  HOLD: Expected to produce a return between -5% and 15% from the closing price of the day the stock is recommended  REDUCE: Expected to produce a return of less than -5% from the closing price of the day the stock is recommended  RATING UNDER REVIEW: Temporary suspension of recommendation when there is material uncertainty in corporate value. TP is not provided.

 The investment opinion presented in this report is based on the industry’s outperformance relative to the market, and may differ from that of an individual stock.  Overweight: The industry’s return is expected to outperform the average total return of the KOSPI over the next 12 months.  Neutral: The industry’s return is expected to be in line with the average total return of KOSPI, over the next 12 months.  Underweight: The industry’s return is expected to underperform the average total return of KOSPI, over the next 12 months.

 Notes) The industry’s return is on a risk-adjusted basis

Recent 2yr. Rating and TP Change

S-OIL (010950 KS) Date 2016.4.21 2017.2.3 2017.4.18 2017.10.31 2018.3.2 Coverage Rating BUY STRONG BUY BUY BUY Removed from reinstated TP 120,000 130,000 130,000 150,000 coverage Date 2018.4.10 2018.4.26 2018.6.19 2018.7.27 Rating BUY BUY BUY BUY TP 160,000 150,000 155,000 160,000 Source: DBS Bank Analyst Name: Regional Research Team Lotte Chemical (011170 KS) Date 2015.7.31 2016.7.29 2016.11.4 2017.2.3 2017.4.14 2018.3.2 Rating BUY BUY BUY BUY STRONG BUY Removed from TP 340,000 400,000 480,000 600,000 600,000 coverage Date Coverage 2018.4.2 2018.5.3 2018.6.14 2018.8.13 Rating reinstated BUY BUY BUY BUY TP 600,000 570,000 530,000 480,000 Source: DBS Bank Analyst Name: Regional Research Team Kumho Petrochemical (011780 KS) Date 2016.02.04 2016.05.23 2017.11.01 2018.03.02 Coverage 2018.04.30 Rating BUY REDUCE REDUCE Removed from reinstated BUY TP 60,000 50,000 60,000 coverage 130,000 Date 2018.05.14 Rating BUY TP 145,000 Source: DBS Bank Analyst Name: Regional Research Team

Page 16 Industry Focus Refining/Petrochemical Industry

SK Innovation (096770 KS) Date 2016.04.25 2016.05.23 2017.02.06 2017.04.25 2017.11.03 2018.03.02 Rating BUY STRONG BUY BUY BUY BUY Removed from TP 240,000 240,000 230,000 250,000 300,000 coverage Date Coverage 2018.04.05 Rating reinstated BUY TP 280,000 Source: DBS Bank Analyst Name: Regional Research Team LG Chem (051910 KS) Date 2016.04.21 2016.07.21 2017.04.19 2017.07.20 2017.10.10 2018.3.2 Rating HOLD HOLD HOLD HOLD REDUCE Removed from TP 320,000 270,000 300,000 310,000 310,000 coverage Date Coverage 2018.4.5 2018.5.2 2018.6.14 Rating reinstated BUY BUY BUY TP 470,000 440,000 470,000 Source: DBS Bank Analyst Name: Regional Research Team Korea Petrochemical (006650 KS) Date Coverage 2017.11.14 2018.3.2 Coverage 2018.4.2 2018.6.7 Rating initiated BUY Removed from reinstated BUY BUY TP 400,000 coverage 370,000 350,000 Date 2018.7.26 2018.8.13 Rating BUY BUY TP 330,000 315,000 Source: DBS Bank Analyst Name: Regional Research Team Hyosung Chemical (298000 KS) Date Coverage 2018.7.31 2018.8.13 Rating initiated BUY BUY TP 220,000 235,000 Date Rating TP Source: DBS Bank Analyst Name: Regional Research Team

S-OIL (010950 KS) Lotte Chemical (011170 KS)

180,000 700,000 (KRW) Stock price Target price (KRW) Stock price Target price Coverage reinstated 160,000 Coverage reinstated 600,000

140,000 Removed from coverage Removed from coverage 500,000 120,000 400,000 100,000 300,000 80,000

200,000 60,000

40,000 100,000 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18

Source: DBS Bank Source: DBS Bank Analyst Name: Regional Research Team Analyst Name: Regional Research Team

Page 17 Industry Focus Refining/Petrochemical Industry

Kumho Petrochemical (011780 KS) SK Innovation (096770 KS)

170,000 350,000 (KRW) Stock price Target price (KRW) Stock price Target price Removed from 150,000 300,000 coverage

130,000 Coverage reinstated 250,000 Coverage reinstated 110,000 200,000 90,000 150,000 70,000

50,000 100,000 Removed from coverage 30,000 50,000 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18

Source: DBS Bank Source: DBS Bank Analyst Name: Regional Research Team Analyst Name: Regional Research Team LG Chem (051910 KS) Korea Petrochemical (006650 KS)

500,000 (KRW) Stock price Target price 450,000 (KRW) Stock price Target price Coverage reinstated 450,000 400,000 Coverage initiated Removed from coverage 400,000 350,000

350,000 300,000 Coverage reinstated

300,000 250,000

250,000 Removed from coverage 200,000

150,000 200,000 100,000 150,000 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18

Source: DBS Bank Source: DBS Bank Analyst Name: Regional Research Team Analyst Name: Regional Research Team Hyosung Chemical (298000 KS)

260,000 (KRW) Stock price Target price

240,000

220,000 Coverage initiated 200,000

180,000

160,000

140,000

120,000

100,000 13-Jul-18 20-Jul-18 27-Jul-18 3-Aug-18 10-Aug-18 17-Aug-18

Source: DBS Bank Analyst Name: Regional Research Team

Page 18 Industry Focus Refining/Petrochemical Industry

Completed Date: 24 Aug 2018 11:45:27 (HKT) Dissemination Date: 24 Aug 2018 12:00:34 (HKT)

Sources for all charts and tables are DBS Bank unless otherwise specified

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Page 19 Industry Focus Refining/Petrochemical Industry

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1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.

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Industry Focus Refining/Petrochemical Industry

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Industry Focus Refining/Petrochemical Industry

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Industry Focus Refining/Petrochemical Industry

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