Kolon Industries ( KS)

Transcription

1 Company Report Kolon Industries ( KS) BUY (M) / TP: W110,000 Kyu-won Hwang kyuwon.hwang@tongyang.co.kr Oct 9, 2012 KOREA Chemicals Share price (won, Oct 5) 59,500 Paid-in capital (Wbn) 139 Market cap (Wbn) 1,539 BPS (won) 67,700 Net debt to equity (%) 93.9 Shares outstanding 27,823,698 Avg daily T/O (2M, Wbn) 7 Avg daily vol (2M, shrs) 102, week high (won) 79, week low (won) 57,500 Foreign ownership (%) 15.6 Major shareholders (%) Kolon Corp & others 31.6 Stock performance (%) 1M 3M 12M Absolute (1.2) (15.4) (3.9) Relative Abs (US$) 1.0 (13.6) 3.0 (won) (%) 140, , ,000 80,000 60,000 40,000 20, Oct 2010 Oct 2011 Oct 2012 Source: Datastream Kolon Industries (LHS) Rel. to KOSPI(RHS) 0 3Q OP falls on DuPont legal costs 3Q OP likely dropped 17% q-q to W71.7bn We now believe 3Q sales came to W1.29tn, OP W71.7bn, and NPCI W39.5bn. OP likely fell 17% q-q from W85.8bn as strikes at HMC/Kia Motors weakened industrial materials margins. Chem OP likely improved from W25.7bn in 2Q to W28.6bn in 3Q. While petroleum resin price remains at US$2,700/tonne, a 50,000-tpa petroleum resin plant came fully on-stream in 3Q after regular maintenance. An additional 3,500 tonnes completed in May came on-stream in 3Q. Industrial materials OP likely slipped from W20.5bn in 2Q to W20.2bn in 3Q. Amid sluggish tire cord sales on global tire market weakness, strikes at HMC/Kia Motors dragged down airbag sales. PET film OP likely rose from W16.6bn in 2Q to W17.1bn in 3Q. OP has remained weak due to sluggish demand for packaging film (40% of PET film). Demand is sluggish, although 50% of the 15,000 capacity added in June came on stream. We believe fashion OP dropped from W22.1bn in 2Q to W7.1bn in 3Q on sluggish demand amid weak fashion seasonality. While menswear and womenswear sales likely declined, outdoor sales rose around 10% y-y. We estimate legal costs for 3Q related to the DuPont case at W12bn. Legal costs fell sharply from W13.1bn in 2Q, as Kolon Ind cut direct exports of tire cord and PET film to the US, reducing provisional attachment against US accounts receivable. 4Q operating profit likely to recover to W94.4bn We expect 4Q OP to rise W22.7bn q-q to W94.4bn. Amid robust petroleum resin sales, auto material sales (airbags, car seats, POM) should recover as strikes end at HMC. Fashion OP should climb by W20bn q-q on strong fashion seasonality. The US district court in Virginia will deliver a verdict over DuPont s attorney fees and the US court of appeal is set to begin the first hearing. Maintain BUY with target price of W110,000 We advise investors to approach from a mid- to long-term perspective. Forecasts and valuations (K-IFRS) (Wbn) FY ends Dec 2010A 2011A 2012F 2013F 2014F Sales 5,110 5,420 5,542 6,266 6,859 Chg (% y-y) na Reported OP Adjusted OP* Net profit, CI EPS, CI (won) 11,877 13,193 8,559 9,166 11,073 Chg (% y-y) na P/E (x) P/B (x) EV/EBITDA (x) ROA (%) ROE (%) Note: * Adjusted OP = reported OP (K-IFRS) other operating profit/loss. CI = controlling interest TONGYANG Research

2 Kolon Industries ( KS) Table 18. 3Q OP likely came to W71.7bn (vs W85.8bn in 2Q and consensus of W76.6bn) Full-year 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q Capacity Petroleum resin 000 tpa Tire cord 000 tpa Airbag 000 tpa PET film 000 tpa Polyester yarn 000 tpa Nylon yarn 000 tpa Car seat 000 m Polyacetal (POM) 000 tpa Sales Wbn 1,316 1,379 1,278 1,447 1,331 1,352 1,294 1,565 3, ,266 Chemical Wbn ,346 Petroleum resin US$/tonn 2,703 2,826 2,759 2,803 2,855 2,761 2,756 2,786 2,120 2,773 2,790 2,866 Hirenol US$/tonn 2,998 3,064 3,030 3,053 3,124 3,074 3,041 3,088 2,578 3,036 3,082 3,132 Industrial materials Wbn Tire cord US$/tonn 4,136 4,377 4,491 4,464 4,285 4,141 4,119 4,236 3,909 4,367 4,195 4,129 Airbag US$/tonn 11,057 14,220 12,470 11,489 12,430 13,284 13,725 12,288 12,162 12,309 12,932 12,164 Aramid US$/tonn 21,542 21,533 21,669 21,581 21,594 22,056 21,660 21,602 21,447 21,581 21,728 21,543 Film/electronic materialwbn PET film US$/tonn 5,016 4,895 5,138 4,812 4,441 5,064 5,339 5,286 4,202 4,965 5,032 4,881 Fashion Wbn ,461 Other at parent co Wbn Kolon Nanjing Wbn Tire cord US$/tonn 4,136 4,377 4,491 4,464 4,285 4,141 4,119 4,236 3,909 4,367 4,195 4,129 Kol Fash Mat Wbn Polyester yarn US$/tonn 2,129 2,187 1,720 1,668 1,608 1,539 1,400 1,533-1,926 1,520 1,490 Nylon yarn US$/tonn 3,916 4,876 4,317 4,123 3,781 3,698 3,293 3,698-4,308 3,618 3,997 Kolon Glotech Wbn Kolon Plastic Wbn Polyacetal (POM) US$/tonn 2,042 2,171 2,201 2,120 1,976 1,900 1,796 1,791-2,134 1,866 1,876 Polyamid US$/tonn 3,428 3,677 3,624 3,401 3,191 3,137 2,876 2,686-3,533 2,973 3,141 Operating profit Wbn Chemical Wbn Cash margin US$/tonn 1,540 1,577 1,557 1,570 1,557 1,532 1,544 1,583 1,315 1,561 1,554 1,606 Industrial materials Wbn Cash margin US$/tonn 2,781 3,126 3,098 3,127 3,011 3,105 3,079 3,245 2,724 3,033 3,110 2,959 Film/electronic materialwbn Cash margin US$/tonn 2,971 2,903 2,745 2,693 2,501 2,512 2,233 2,336 3,150 2,828 2,396 2,396 Fashion Wbn Other at parent co Wbn Kolon Nanjing Wbn Kol Fash Mat Wbn Kolon Glotech Wbn Kolon Plastic Wbn Net profit Wbn Changes to fundamentals 1Q12: OP W96.1bn. Earnings continued to improve at petroleum resin and industrial materials and one-off expenses declined (DuPont legal cost of W4bn) 2Q12: OP down q-q to W85.8bn; DuPont legal cost of W13.1bn 3Q12E: OP likely came to W71.7bn, down from W85.8bn in 2Q on weak fashion/textile seasonality (1) Chemical OP likely rose from W25.7bn in 2Q to W28.6bn on strong petroleum resin price and 3,500-tpa added capacity in May. (2) Industrial mat OP likely slipped from W20.5bn in 2Q to W20.2bn in 3Q as strikes at HMC/Kia Motors dragged down tire cord and airbag sales. (3) Film OP likely increased from W16.6bn in 2Q to W17.1bn in 3Q. Despite operation of 50% of 15,000-tpa added capacity, prices of packaging materials remained weak due to sluggish demand. (4) Fashion OP likely dropped from W22.1bn in 2Q to W7.1bn on sluggish demand amid weak seasonality. Although Aug domestic sportswear sales fell 4% y-y, Kolon's outdoor sales rose around 10% y-y. (5) Strikes at HMC/Kia Motors weakened earnings at Kolon Glotech (car seats) and Kolon Plastic (rubber for automotive valves). (6) W12bn of DuPont legal costs likely booked (= W8bn as provisioning for provisional attachment + W4bn as lawyers' fees) 2012: In 1Q, China's airbag production capacity to rise from 6mn to 12mn/annum and Korea's from 18mn to 24mn; W10bn provisioning every quarter for DuPont litigation expenses -> In 2Q, optical film capacity expanded by 20,000 tpa -> In 3Q, appeal for DuPont antitrust lawsuit ruling -> In 4Q, tire cord production capacity to rise by 10,000 tpa in China 2013: PV PET film capacity to expand by 15,000 tpa, petroleum resin 30,000 tpa; ruling on 2nd trial of trade secrets violation lawsuit with DuPont to be made in 2Q~3Q 2 TONGYANG Securities Inc.

3 Company Report Table 19. Kolon-DuPont aramid lawsuit history Date Detail 2005 Kolon finishes building 5mn-tpa para-aramid plant 2006 Kolon hires former DuPont engineer Michael Mitchell and launches business in US Feb 2009 Apr 2009 Aug 2009 Mar 2010 Mar 2011 Nov 2011 Mar 2012 Apr 2012 Jul 2012 Aug 30, 2012 Aug 30, 2012 Sep 21, Q12 Nov H13 DuPont files suit against Kolon in US district court in Virginia for theft of trade secrets Kolon files antitrust suit against DuPont in US district court in Virginia Kolon alleges DuPont s practice of long-term contracts for aramid in US blocks other aramid makers from selling there US district court in Virginia finds in favor of DuPont in antitrust case filed against DuPont by Kolon US district court in Virginia sentences Michael Mitchell to 18 months in prison US federal court orders retrial on antitrust case against DuPont US district court in Virginia orders Kolon to pay DuPont US$919.9mn in damages and US$350,000 in punitive damages US district court in Virginia encourages Kolon and DuPont to settle outside court Kolon s antitrust suit against DuPont rejected by US district court in Virginia Kolon and DuPont fail to reach agreement US district court in Virginia orders Kolon to stop producing and selling aramid for 20 years Kolon files an appeal US federal court allows Kolon to continue producing/selling aramid until second trial is complete US district court in Virginia to order Kolon to pay DuPont s attorney fees US court of appeal to begin first hearing US court of appeal to encourage Kolon and DuPont to settle End-2Q13 If the two fail to settle, the court of appeal will deliver verdict Note: Shaded area is our predictions Source: Media, District Court for the Eastern District of Virginia, TONGYANG Securities TONGYANG Securities Inc. 3

4 Kolon Industries ( KS) Kolon Industries ( KS) pro forma financial statements (K-IFRS, consolidated) Statement of comprehensive income Statement of financial position FY ends Dec (Wbn) 2010A 2011A 2012F 2013F 2014F FY ends Dec (Wbn) 2010A 2011A 2012F 2013F 2014F Sales 5,110 5,420 5,542 6,266 6,859 Current assets 1,649 2,238 2,267 2,517 2,757 Cost of sales 3,799 4,036 4,184 4,727 5,159 Cash & cash equiv Gross profit 1,311 1,384 1,359 1,539 1,701 Accts rec & other ,018 1,109 1,235 SG&A ,009 1,155 1,256 Inventory ,050 1,170 Adj operating profit* Non-current assets 2,389 2,559 2,736 2,838 2,924 Other op prof/loss Tangible assets 1,856 1,966 2,054 2,134 2,196 Forex gain/loss Investment in affiliate Net interest income Other non-current Other Total assets 4,038 4,798 5,003 5,355 5,681 Operating profit Current liabilities 1,438 2,057 1,889 1,978 2,058 EBITDA Accts payable & other ,009 Non-op profit/loss ST financial liabilities Forex gain/loss Liquid LT liabilities Net interest inc Non-current liabilities 1, ,177 1,224 1,206 Equity-meth gain/loss LT financial liabilities Other Debentures Net prof before income tax Total liabilities 2,582 3,006 3,066 3,201 3,264 Income tax Equity, controlling int 1,319 1,723 1,843 2,044 2,292 Net profit from cont op Paid-in capital Net profit from discont op Capital surplus Net profit Retained earnings ,045 1,293 NP for controlling int Equity, non-control int Total comprehensive inc Total equity 1,456 1,792 1,937 2,154 2,417 TCI for controlling int Net debt 1,133 1,431 1,731 1,740 1,737 Note: 1. Adjusted op profit = gross profit - SG&A Total debt 1,422 1,681 1,851 1,934 1, EBITDA is based on adjusted operating profit Cash flow statement Valuation FY ends Dec (Wbn) 2010A 2011A 2012F 2013F 2014F FY ends Dec 2010A 2011A 2012F 2013F 2014F Operating cash flow EPS (won) 11,877 13,193 8,559 9,166 11,073 Net profit BPS (won) 50,323 66,952 71,224 78,424 87,340 Depreciation & amort EBITDA/shr (won) 26,325 20,256 18,617 20,032 22,109 Forex gain/loss SPS (won) 239, , , , ,519 Affiliate invest gain/loss DPS (won) 1,200 1,200 1,200 1,200 1,200 Inc(dec) net working cap P/E (x) Other P/B (x) Investing cash flow EV/EBITDA (x) Investment PSR (x) Inc in tangible assets Dec in tangible assets Key financial data Other FY ends Dec 2010A 2011A 2012F 2013F 2014F Financing cash flow Sales (% y-y) Inc(dec) in ST fin liab Operating profit (% y-y) Inc(dec) in LT fin liab Adjusted OP (% y-y) Inc(dec) in equity NP, CI (% y-y) Cash dividend Gross margin (%) Other Operating margin (%) Other cash flow Adj OP margin (%) Inc (dec) in cash & eq NP, CI margin (%) Beginning cash & equiv EBITDA margin (%) Ending cash & equiv ROIC (%) NOPLAT ROA (%) FCF ROE (%) Debt-to-equity (%) Net debt-to-equity (%) OP/financing cost (x) Note: EPS, BPS, P/E and P/B are based on controlling interest For valuation metrics such as P/E, historical figures are based on annual averages, estimates on current price For ROA or ROE, assets and equity are averages of end-of-year figures for given year and year prior Data to 2010 based on K-GAAP and from 2011, K-IFRS 4 TONGYANG Securities Inc.

5 Company Report Kolon Industries ( KS) ratings and target price history (won) 180,000 Current price Target price 160, , , ,000 80,000 60,000 40,000 20,000 0 Oct 2010 Aug 2011 Jun 2012 Date Rating TP (won) 2012/10/08 BUY 110, /07/09 BUY 110, /04/06 BUY 110, /01/31 BUY 110, /01/05 BUY 110, /11/23 BUY 160, /11/15 BUY 160, /10/10 BUY 160, /09/20 BUY 160, /07/05 BUY 160,000 Disclosures & disclaimers This research report has been prepared for informational purposes only; it does not constitute an offer or a solicitation of an offer to buy or sell any securities or other financial instruments. The information and data contained in this report have been obtained from sources we consider reliable; however, we make no representation that the information provided in this report is accurate or complete, and it should not be relied on as such. The recipient of this report should use his/her independent judgment regarding the sale or purchase of any securities or financial instruments mentioned herein. We disclaim any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is for our clients only. It is copyrighted material and may not be reproduced, transmitted, quoted, or distributed in any manner without the prior written consent of TONGYANG Securities Inc. As of the publication date of this report, TONGYANG Securities Inc. does not own a stake in excess of 1%, nor does it have any interest whatsoever, in the subject company (ies). The material contained herein was not disclosed by TONGYANG Securities Inc. to any institutional investors or third parties prior to its publication. The analyst (s) of this report or the analyst (s) spouse does not have any financial interest in the securities of the subject company (ies) mentioned herein, nor financial interest of any nature related to the subject company (ies) (including without limitation, whether it consists of any option, right, warrant, future, long or short position), as of the publication date of this report. Analyst certification I/We, as the research analyst/analysts who prepared this research report, do hereby certify that the views expressed in this report accurately reflect my/our personal views about the subject securities discussed in this report. Stock and sector ratings Stock ratings include an Investment Rating (Buy, Hold, Sell) as well as a Volatility Risk Rating (High, Low) that are based on the expected absolute return of a stock over the next 6-12 months. - Buy: Low Risk if a stock is expected to return 10% or more; High Risk if a stock is expected to return 20% or more - Hold: Low Risk if a stock is expected to return between -10 and +10%; High Risk if a stock is expected to return between -20 and +20% - Sell: Low Risk if a stock is expected to decline by 10% or more; High Risk if a stock is expected to fall by 20% or more Sector ratings suggest 6 to 12 - month forward investment weighting of a given sector compared to its market capitalization weighting. - Overweight: Investment weighting is higher than the market capitalization weighting - Neutral: Investment weighting is equal to the market capitalization weighting - Underweight: Investment weighting is lower than the market capitalization weighting TONGYANG Securities Inc. 5

6 Kolon Industries ( KS) TONGYANG Securities International Network Seoul Head Office TONGYANG Securities Building Euljiro 76 Jung-gu Seoul, Korea Tel: Corporate website: Research Center TONGYANG Securities Building #32 Gookjegeumyoongro 2-gil Youngdeungpo-gu, Seoul, Korea Tel: Hong Kong TONGYANG Securities Hong Kong Limited Unit , 32/F, Alexandra House 18 Chater Road, Central, Hong Kong Tel: New York 150 East 52nd Street 25th Floor New York NY 10022, U.S.A. Tel: Tokyo , Shin-Kokusai Building Maronouchi, Chiyoda-ku Tokyo, Japan Tel: Ho Chi Minh Suite 2905, Saigon Trade Center 37 Ton Dou Thang Street District 1, Ho Chi Minh City, Vietnam Tel: Manila TONGYANG Savings Bank Ground Floor, Chantham House 116 Valero Corner, Herrera Street Salcedo Village, Makati City Metro Manila, Philippines Tel: Phnom Penh #138, Norodom Boulevard Sangkat Tonle Bassac Khan Chamkarmorn Phnom Penh, Cambodia Tel: TONGYANG Securities Inc.