How will Songwon Industrial’s stock perform? The hidden gem of the chemical industry

Songwon Industrial is a fine chemical company that specializes in polymer stabilizers. Polymer stabilizers are industrial chemicals that protect the durability and appearance of plastic products, and are used in various fields such as automobiles, electronics, construction materials, etc. Songwon Industrial is the second largest market share holder in the world after BASF in Germany, and supplies its products to major domestic companies such as LG Chem, Lotte Chemical, Kumho Petrochemical, etc.

Advantages and disadvantages of Songwon Industrial

The advantages of Songwon Industrial are as follows.

• Technical skills to produce high-value-added products: Songwon Industrial produces high-quality products based on its 50 years of history and experience in the field of polymer stabilizers. Polymer stabilizers have a great influence on the quality and lifespan of plastic products, so customers prefer reliable companies. Songwon Industrial has recognized technical skills and quality both domestically and internationally, and produces high-value-added products.
• Competitiveness in the global market: Songwon Industrial has sales networks not only in Korea but also in China, India, the United States, Europe, etc. Especially in the Chinese market, it has established local subsidiaries since the early 2000s and continuously expanded its investment to increase its market share. The Chinese market is the largest market for polymer stabilizers, and Songwon Industrial is well utilizing it.
• Diverse product lines and new business development: Songwon Industrial has various product lines besides polymer stabilizers, such as polymer additives, functional resins, environmentally friendly bio-plastics, etc. In addition, as a new business, it is participating in the development of optical transmission equipment with quantum cryptography technology introduced, which is expected to have a positive impact on profitability in the future.

The disadvantages of Songwon Industrial are as follows.

• Vulnerability to changes in market conditions: Songwon Industrial’s main source of revenue is the polymer stabilizer market, so it is vulnerable to changes in market conditions related to it. For example, due to the COVID-19 pandemic, the demand for plastics decreased, which had a negative impact on Songwon Industrial’s sales and profits. In addition, environmental regulations on plastics or price competition intensification can also act as long-term threat factors.
• High foreign ownership ratio: The foreign ownership ratio of Songwon Industrial is 19.16%, which is quite high. A high foreign ownership ratio can increase price volatility and pose a risk of foreign investors’ capital outflow. Especially recently, foreign investors have been selling domestic stocks due to the depreciation of the won/dollar exchange rate or global stock market adjustment, which has increased price pressure.

Stock price outlook and target price of Songwon Industrial

The stock price outlook for Songwon Industrial is as follows.

• It is likely to be sluggish in the first half of the year: Songwon Industrial is expected to have weak demand in the first half of this year due to the aftermath of COVID-19. Especially in the Chinese market, sales and margins are expected to decrease due to price cuts by competitors or rising raw material prices. In addition, price volatility may increase due to exchange rate fluctuations or foreign capital outflows.
• It is likely to show a recovery trend in the second half of the year: Songwon Industrial is expected to see an increase in demand in the second half of this year as the global economy recovers along with the expansion of COVID-19 vaccination. Especially in the Chinese market, demand for polymer stabilizers is expected to increase due to government’s infrastructure investment expansion or 5G network construction. In addition, the optical transmission equipment business with quantum cryptography technology that entered as a new business is also expected to contribute to sales from the second half.

The target price for Songwon Industrial is as follows.

• Target price: 20,000 won: The target price for Songwon Industrial is 20,000 won. This means an upside potential of about 23% compared to the current price. The target price was derived by applying a PER of 13 times to the estimated EPS of 1,500 won for 2023. The PER was applied lower than the industry average PER to reflect risk factors related to changes in market conditions or external factors.