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The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. — Ed. 

AT LXI, E&P business-centered earnings momentum remains valid. Uncertainties over the NPS’s exclusion of coal projects from its investment portfolio should ease gradually, as: 1) business diversification has started with the acquisition of HanGlas and Poseung Green Power; 2) expansion is planned for the firm’s new businesses, including its environmental and wellness ventures; and 3) the elevated DPS level should sustain.

Eco-friendly business transition in progress; expect gradual resolution of undervaluation

In 2023, negatives are expected, including weak freight rates, the application of a progressive tax rate for coal in Indonesia, and adjustments of the dollar/won rate. Nevertheless, LX International (LXI)’s 2023 OP should reach W776.2bn  (-20% y-y), helped by greater coal production in Indonesia and China (15.8mn tons → 20mn tons) and the consolidation of earnings at HanGlas and Poseung Green Power (approximately W50bn).

Positives include a 20% equity investment in a PBAT (eco-friendly plastics) firm (set for production in 2024), the possible acquisition of nickel mines and smelters, and the expansion of LXI’s carbon credit business. The firm’s transition to an eco-friendly & wellness business remains on track. Accordingly, we expect LXI’s share price to move gradually away from its current undervaluation (2023E: DY 7.5%, P/E 3.1x, P/B 0.5x).

4Q22 review: Satisfies consensus when stripping out one-off costs

LXI posted consolidated 4Q22 sales of W4,112.1bn (-10% y-y) and OP of W157.9bn (-24% y-y). Considering the booking of one-off costs of around W40bn, including employee incentives and additional allowances for MPP coal mine recovery, earnings arrived in line with consensus.

The logistics division (OP of W56bn, -35% y-y) partially offset the plunge in freight rates with affiliates’ fixed-margin contract volume (approximately 70%). Earnings at the E&P division (OP of W50.0bn, -56% y-y) and trading/new growth businesses (includes coal trading; OP of W51.9bn; +571% y-y) proved weak q-q, affected by both coal price adjustments (Indonesia +10% q-q (price pass-through effects on progressive tax rate application), Newcastle -10% q-q) and delays in shipments of coal from Indonesia and Australia due to increased rainfall. Poseung Green Power has been included in consolidated financials since Nov 2022 (4Q22 OP of W2bn).

Despite weak freight rates, we forecast overall 1Q23 OP of W199.3bn (down 19% y-y), backed by solid coal prices and increased coal production, as well as the consolidation of Poseung Green Power and HanGlas.

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