November 21, 2024

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General view of Lotte Group's iconic Lotte World Tower in Seoul from the west in this picture taken in May 2024. (Getty Images)

Lotte Group's stock plummeted to record lows on rumors of a liquidity crisis, but experts claim these concerns are overstated and emphasize the need for better debt control.

The holding company’s stock closed at 20,550 won ($14.80) on Monday, down 6.6 percent from the previous day, while Lotte Chemical saw the sharpest decline among its subsidiaries, falling 10.22 percent to 65,900 won and reducing its market capitalization to 2.82 trillion won, a 15-year low.

Both stocks hit 52-week intraday lows during the session, with the holding firm reaching 20,050 won and Lotte Chemical dipping to 64,800 won. Lotte Shopping also hit a 52-week intraday low at 56,100 won.

The stock price declines followed rumors circulating online and within financial circles that Lotte Group was facing a liquidity crisis and would declare a moratorium next month, along with a 50 percent workforce reduction.

As share prices continued to fall, Lotte Group issued a statement denying the rumors and warning of potential legal action.

The company admitted it had implemented emergency measures at struggling affiliates, including Lotte Chemical and Duty Free, and had offered voluntary retirement to improve workforce efficiency.

"However, rumors of a liquidity crisis are completely unfounded. We are considering legal action, including identifying the sources of these rumors," the statement said.

Despite such efforts to refute the rumors, skepticism about its profitability and that of its key subsidiaries persisted, hindering a price recovery. On Tuesday, stock prices showed slight recovery, with Lotte Group’s stock up 0.7 percent, while Lotte Chemical’s share price rose by 2.3 percent.

Market analysts generally agree that Lotte and its subsidiaries are not facing an immediate liquidity crisis but stress that debt control remains necessary.

"The sharp decline in stock price appears to be a noise-driven overreaction," said Meritz Securities analyst Roh Woo-ho. "However, with signs of a prolonged petrochemical downturn, coupled with Lotte Chemical's earnings outlook and financial stability, stronger risk management, including credit reliability, is necessary."

KB Securities analyst Chun Woo-je also dismissed the liquidity crisis claims, noting that Lotte Chemical's debt had increased temporarily due to peak capital expenditures in 2023-2024.

"The core fundamentals of Lotte Chemical suggest healthier cash flows than expected," Chun said, adding, "For the year, we estimate a debt ratio of 78.6 percent, which is not excessively high. With capex tapering and annual depreciation at 1.3 trillion won, liquidity concerns appear premature."

Reports say the 39 trillion won debt cited in the rumors refers to the total debt of Lotte Group's 11 listed subsidiaries, including loans, trade payables and overdue amounts. After accounting for cash and short-term financial assets, the net debt is much lower.

IBK Securities analyst Lee Dong-wook also confirmed that Lotte Group's debt levels remain manageable.

"Lotte Chemical's net debt-to-equity ratio rose to 36.1 percent in the third quarter. While this is higher than the below-20 percent levels seen in most companies, Lotte Chemical holds 3.6 trillion won in cash deposits, and its estimated debt-to-equity ratio for the year is a relatively low 78.6 percent," Lee said.

"Given that the net debt-to-equity ratio for Kospi 200 energy and chemical stocks stands at 62 percent and 105.2 percent, respectively, concerns over a liquidity crisis appear exaggerated," added Lee.

By Choi Ji-won (jwc@heraldcorp.com)