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Watch for paradigm shift

2Q23 preview

OP of W151.7bn; steady profits expected despite slowing economic growth

• For 2Q23, we forecast LX International to post revenue of W3.79tr (+2.6% QoQ). Despite lower pricing, revenue should hold up well.
- Logistics: Although shipping freight rates remain subdued, we forecast revenue to grow 6% QoQ on a slight pickup in volume.
- Trading/new biz: We expect revenue to slip 3% QoQ, hurt by weaker coal prices. Still, we believe revenue from oil products will remain resilient.

• We look for operating profit of W151.7bn (-6.2% QoQ), in line with the consensus (W149.2bn).
- Logistics: We expect operating profit of W52.3bn (OP margin of 2.9%). Despite seasonal weakness, margins should hold steady thanks to affiliate volume.
- Trading/new biz: We expect operating profit of W52.6bn (OP margin of 3.2%). Trading margins were likely weighed down by lower coal prices.
- Resources: We expect operating profit of W46.8bn (OP margin of 13.7%). Indonesia coal prices fell 10% QoQ to the mid-US$60/tonne level.

• We expect pretax profit of W130.2bn (-39% QoQ), below the consensus (W158.1bn).
- Equity-method profits should decrease due to weaker output caused by construction at the
Shenzhen mine.


Business profile is changing

Seeking a paradigm shift from coal to nickel

• LX International is expected to increase spending on eco-friendly projects following its acquisition of renewable energy firm Poseung Green Power.

• In 2023, we expect the company’s nickel value chain (mining, smelting, and trading) in Indonesia to take shape.

• Meanwhile, the company is likely to scale down some of its coal mining operations or limit further coal investments over the long term.

• If the company secures around 5-10mn tonnes of annual nickel capacity, we believe it can transition its business portfolio from coal to nickel.

• The company is part of an electric vehicle (EV) value chain consortium that also includes affiliates LG Energy Solution and LG Chem. We expect the company to strengthen its position as an EV battery material provider.


Recommendation

Maintain Buy and TP of W43,000

• In our view, the stock’s current valuation (P/E of 3.8x) assumes a significant decline in profits (due to weaker coal prices and freight rates). Once downside support to earnings is confirmed, we expect the stock to rebound further. Dividend yield (6%) also remains attractive.