Conglomerates

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

Lotte Group seemed to be getting back to business after a rough year of court battles, family feuds and strained relations with China. 

Not so fast.

Believers in South Korea's fifth-largest conglomerate were hoping for a much-needed win with Lotte Chemical Titan Holding Bhd., the petrochemical unit that began trading in Malaysia Tuesday. Revival of the long-delayed 3.77 billion ringgit ($877 million) initial public offering, Malaysia's biggest since 2012, caps a period that has seen the group also take steps to settle family disputes and boost corporate debt sales.

But in the opposite of a typical IPO bump, shares of Lotte Chemical Titan fell below the opening price pretty much immediately -- and that was after the company cut the bottom of its price range to 6.50 ringgit a share, from 7.60 ringgit. By midday in Kuala Lumpur, the shares were down 2 percent.

Inauspicious Start
Shares in Lotte Chemical Titan sank below the IPO price on their first day of trading in Malaysia
Source: Bloomberg

Investors are right to bet against the newly listed company. The reason the Malaysian chemical maker cut its IPO price and trimmed the number of institutional shares has little to do with macro issues like equity demand and more to do with how Lotte missed a fundamental shift in the petrochemicals market.

While Lotte was hell-bent on getting the flotation done after taking the company private more than six years ago, it miscalculated in betting that the market would be willing to overlook the business's problems just because of a dearth of IPOs for large investors.

Back when Lotte took the unit private, the global economic recovery was driving strong demand for the raw materials used to make plastic and synthetic fibers used in everything from appliances to automobiles.

But as the years went on, Lotte Chemical did almost nothing to expand capacity -- unlike its global competitors -- despite having ample cash,  according to Smartkarma analyst Toh Zhen Zhou.

In the absence of investment, revenue growth slowed. Lower prices for inputs such as oil have helped prop up profit but as the sales outlook for products like cars weakens, demand for Lotte's offerings has waned. Meanwhile, raw material prices have declined and overcapacity in China is further pressuring the industry.

Bad Chemistry
Sales have declined at Lotte Chemical Titan as growth in global demand for plastics slows
Source: Bloomberg

In other words, the future of Lotte's petrochemicals business looks a lot less promising today. And as the sector consolidates, the company will only lose more market share if it continues to struggle to get deals done.

Plastic Wrap
Prices of ethylene, a chemical used in plastics and fertilizers, have come down in recent years because of overcapacity and slower demand growth
Source: Nexant Inc. and Bloomberg Intelligence

In a separate investor relations session in Tokyo Monday, Lotte Group Chairman Shin Dong-bin gathered analysts to assure them the conglomerate was moving past the flurry of legal and family obstacles that distracted its business in recent years. A plan to restructure the way the group is run and provide more transparency to investors is well underway, he said. 

Assurances are always nice, especially when they come directly from the top. But as the botched chemical IPO shows, reviving the Lotte Group after management took its eye off the family empire for so long will be a lot easier said than done.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in Hong Kong at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net