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The author is an analyst of NH Securities and Investment. He can be reached at — Ed.

While we lower our 2023 OP estimate for SK On, steep top-line growth should continue, and margins are likely to improve gradually each quarter thanks to improving utilization rates and production yield.

Focus on mid/long-term growth potential, profitability improvement

The supply burden in Northeast Asia due to China’s increased petroleum product exports is expected to ease as domestic demand in China recovers this year. In particular, demand for transportation fuel, such as gasoline and jet fuel, which account for more than half of oil demand, should gradually expand on China’s reopening. We expect supply in the refinery industry to remain tight.

For SK On, SK Innovation expects sales to double y-y thanks to ongoing shipment growth, and annual EBITDA to turn to profit. However, annual operating income is unlikely to turn positive until 2024. We cut our 2023 operating income forecast for SK On from W107.5bn (OPM of 0.8%) to -W153.7bn (OPM of -1.0%), considering higher-than-expected initial operating costs and slower profitability improvement. However, we still expect to see gradual earnings improvement each quarter in 2023. As no additional facility expansion is planned for 2023, initial operation costs should peak out, and fixed-cost burden is expected to ease on improving utilization rate and production yield.

4Q22 review: Results come in below consensus

SK Innovation booked 4Q22 sales of W19.1tn (-15.9% q-q) and an operating loss of W683.3bn (TTL q-q; OPM of -3.6%), missing consensus and our estimates.

The petroleum division recorded an operating loss of W661.2bn (TTL q-q; OPM of -5.4%) due to negative lagging effects from oil price and dollar weakening, greater inventory valuation losses, and higher OSP. The chemical division saw an operating loss of W88.4bn (TTL q-q; OPM of -3.7%), dampened by a downturn in product spreads. The lubricant division registered OP of W268.4bn (-20.1% q-q; OPM of 20.7%) as sales volume contracted on low seasonality.

The battery division booked sales of W2.9tn (+31.1% q-q) and an operating loss of W256.6bn (RR; OPM of -8.9%). Margins deteriorated as depreciation and initial operation costs rose on the earlier-than-planned commercial operation of Georgia plant #2 (originally planned to start in 1Q23).

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