Kolon Industries ( KS)

Transcription

1 (1211 KS) Another beneficiary of China momentum! Korea Equity Research Chemicals Buy Maintain Buy; Raise TP to W72, We maintain our Buy call on Kolon Industries and raise our target price to W72,, from W6,. Our target price, derived based on a sum-of-the-parts valuation, corresponds to 21F P/E of 9.6x and P/B of 1.6x. Our investment recommendation is premised on: 1) operating profit growth amid robust downstream industries such as auto and IT, 2) improved equity-method gains thanks to stable earnings at subsidiaries, 3) growing momentum from China, 4) improved financials, and 5) expectations of a valuation re-rating. 2Q1 OP to hit a historic-high of W6.3bn We forecast Kolon IndustriesÊ 2Q1 operating profit to hit a historic high of W6.3bn, up 35.1% QoQ. Our optimistic outlook is based on: 1) greater demand for industrial materials, films, and chemicals amid robust downstream industries, 2) the arrival of peak season (for fashion), 3) won depreciation against the U.S. dollar (for industrial materials), 4) lower feedstock prices (for industrial materials and films), and 5) capacity expansion (for films). Thanks to robust earnings at subsidiaries, equity-method gains should also improve to W14.5bn in 2Q1 from W13bn in 1Q1. Focus on momentum from China Kolon Industries is expected to gather additional momentum from China, as: 1) earnings at industrial material (airbags and tire cords) and film (LCD films) units should improve on expansion of Chinese consumption; and 2) earnings contribution from its Nanjing factory (producer of auto airbags and tire cords) is likely to increase. Of particular note, capacity expansion at the Nanjing factory should also help boost profitability at the parent by moving the production of low margin products to the more cost-efficient Nanjing factory and focusing more on products with high value added. 28 June 21 Bloomberg: 1211 KS Target Price (12M, W): 72, Share Price (6/25/1, W): 58,7 Expected Return (%): 22.7 Sector: Chemicals Sector Rating: Overweight EPS Growth (1F, %): 79.9 Market EPS Growth (1F, %): 63.8 P/E (X): 7.9 Market P/E (6/25/1F, x): 9.5 Market Cap : 987 Shares Outstanding (mn): 2 Avg Trading Volume (6D, '): 186 Avg Trading Value (6D, Wbn): 9 Margin Balance (' sh): 141 Dividend Yield (1F, %): 1.7 Free Float (%): Week Low/High: 41,85/6,4 Beta (12M, Daily Rate of Return):.8 Price Return Volatility (12M Daily,%,SD): 2.5 Foreign Ownership (%): 18.6 Major Shareholder(s): Kolon et al. (43.3%) National Pension Services (6.9%) Price Performance (%) 1M 6M 12M Absolute Relative FY Sales OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA (%) (W) (%) (x) (x) (x) 12/ /9 2, , /1F 3, , /11F 3, , /12F 3, , estimates Share price KOSPI 2/1 6/1 Eung Ju Yi eungju.lee@dwsec.com Hannah Yoon hannah.yoon@dwsec.com Please carefully read important notices in the last page of this report.

2 2Q1 OP to hit a record-high of W6.3bn Kolon IndustriesÊ 2Q1 operating profit is forecast to record a historic high of W6.3bn, up 35.1% QoQ. All business units are expected to post solid earnings results. Table 1. Kolon IndustriesÊ earnings trend and forecasts by division (Wbn, %) 29 21F 1Q1 growth 1Q 2Q 3Q 4Q Yearly 1Q 2QF 3QF 4QF Yearly YoY QoQ Sales , , Industrial materials Films Chemical (Kolon Chemical) Fashion (FnC Kolon) Operating profit Industrial materials Films Chemical (Kolon Chemical) Fashion (FnC Kolon) OP margin Industrial materials Films Chemical (Kolon Chemical) Fashion (FnC Kolon) Note: Kolon industries was spun off from Kolon at end-29; 29 earnings are based on KolonÊs earnings before merger; Fashion division (FnC) merged with Kolon in Aug 29. Figure 1. Major macro variables and Kolon IndustriesÊ operating profit Figure 2. Equity-method gains at Kolon Industries (1Q8=1) 8 Kolon Industries's OP (L) Relative index of W/US$ (R) Relative index of WTI prices (R) (Old) Kolon: Equity method gains fluctuated due to poor performance of subsidiaries (Now) Kolon Industries: Stable earnings thanks to robust performance of subsidiaries Q8 3Q8 1Q9 3Q9 1Q1 3Q1F 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1F Source: Bloomberg, Company data, Daewoo Securities Research 2

3 Focus on momentum from China We expect Kolon Industries to gather additional momentum from China, as: 1) Earnings should improve on expansion of Chinese consumption. As purchasing power in China received a boost from government stimulus, a rise in income, and appreciation of yuan, sales of autos/tires and LCD TVs have expanded. China is now the largest auto market in the world, and the standard of living has significantly improved. TV sales soared on large-scale sporting events such as the FIFA World Cup and Asian Games. Demand for optical films is soaring, as: 1) the size of LCD TVs is getting bigger; and 2) the main lighting source is shifting to LED from CCFL. As for optical films used for 8G LCD TVs or more advanced, demand is far exceeding supply as capacity expansion takes time. Hence, the companyês industrial material (tire cords and airbags) and film (LCD films and electronic materials) units should enjoy a boom for an extended period. Kolon Industries is the third largest tire cord maker in the world, and has a monopolistic position in the airbag fabric market in Korea and China. The company is also one of three largest optical film makers, along with SKC and Toray Industries. 2) Contribution of Nanjing factory to increase Kolon Industries has manufactured auto airbag cushions and tire cords at its factory in Nanjing, China, since 24. At present, the Nanjing factory holds market shares of 1% for tire cords (3 rd largest) and 5% for airbag cushions (largest) in China. With the Chinese auto/tire market expanding sharply, the company plans to expand its production capacity in Nanjing. By 211, monthly capacity for tire cords and airbag cushions is slated to increase to 2,4 tonnes (from 1,2 tonnes) and 8, units (from 4, units), respectively. Following capacity expansion, tire cord capacity should climb to two thirds of KoreaÊs and airbag cushion capacity should near KoreaÊs. As a consequence, sales at the Nanjing factory are forecast to exceed W1bn in 21 and W165.2bn in 211. Operating profit is projected to surpass W1bn in 21 and W3bn in 211. This should make a meaningful contribution to the companyês earnings (KolonÊs 211 operating profit is forecast at W249.2bn). The capacity expansion should also significantly boost the profitability of the parent company by moving the production of low margin products to the more cost-efficient Nanjing factory and focusing more on products with high value added. Figure 3. Earnings from Nanjing plant in China Figure 4. M/S comparison in ChinaÊs tire cord market (29) 2 15 Airbag sales (L) Tire cord sales (L) Total OP (R) 4 3 Kolon 1% 1 2 Others 46% 29 (7,6 T/M) HS 24% 5 1 PF 2% F 11F 3

4 Maintain Buy; Raise TP to W72, We maintain our Buy call and raise our target price to W72,, from W6,. Our target price was raised, considering: 1) we raised our 21 earnings forecasts; and 2) we raised EV/EBITDA multiple for the film unit in light of improved industry structure. We also re-valued the subsidiaries such as SKC-Kolon PI to reflect the surge in earnings forecasts. Table 2. Target price calculation (Wbn, x, Ê shares, W, %) EBITDA (21F) Multiple Fair value Remarks (Equity stake) (Book value) Operating value Industrial materials Multiple represents 2% discount to the average of manufacturing Films Multiple represents 1% premium to the average of manufacturing Chemicals Multiple represents 15% discount to the average of manufacturing Fashion Multiple represents 2% discount to the average of manufacturing Total (A) ,7 Asset value Cambridge Kolon 7.5% Market cap X equity stake (fashion) Kolon Fashion materials 67.1% P/B of.7x (fibers) Kolon Glotech 62.7% P/B of.9x (auto components) Kolon Plastics 1.% P/B of 1.2 (engineering plastics) SKC-Kolon PI 5.% P/B of 1.5X (engineering plastics - PI films for FPCB) KNC 1.% P/B of 1.1X (manufactures tire cords and airbags in China) Hana Capital 29.1% P/B of 1.X (JV with Hana Financial Group and Kolon Group) Capro 19.9% Market cap X ownership (Caprolactam) Other investment securities Applied book value of 6% Total 618 (Fair asset value, B) % discount to the total asset value Net debt (C)) 1,172 Net debt as of end-1q1 cash inflow when exercising BW Preferred stock market cap. (D) 51 Closing price on June 25, 21 Target market cap. (E=A+B-C-D) 1,311 Outstanding shares (F) 18,236 On the assumption that all warrants will be exercised Target price (E/F) 72, Current price 58,7 Closing price on June 25, 21 Target return 22.7 Note: We gave Kolon IndustriesÊ film division a valuation premium to reflect shortages in base film supply from the strong LCD market 4

5 Table 3. Earnings forecast revisions (Wbn, W) Previous Revised % diff. 1F 11F 12F 1F 11F 12F 1F 11F 12F Sales 3,144 3,379 3,644 3,116 3,315 3, % -1.9% -.3% OP % -5.% -2.2% Pre-tax profit % -1.3% -3.4% Net profit % -1.3% -3.4% EPS 7,33 9,149 1,89 7,47 8,172 1, % -1.7% -3.8% OP margin 6.8% 7.7% 8.1% 7.2% 7.5% 8.% ROE 16.7% 17.7% 18.% 17.5% 16.8% 18.5% Note: We revised down earnings forecasts from 211 due to changed W/US$ rate assumptions Source: Daewoo Securities Research Figure 5. P/E band Figure 6. P/B band (Wtr) x 8.x 6.5x (Wtr) x 1.2x x.9x x.6.6x.3.3.3x F 12F F 12F Note: Kolon holdings data before Feb 21, Source: Daewoo Securities Research Note: Kolon holdings data before Feb 21, Source: Daewoo Securities Research 5

6 Kolon Industries (1211 KS /Buy/TP: W72,) Income Statement (Summarized) Balance Sheet (Summarized) 12/9 12/1F 12/11F 12/12F 12/9 12/1F 12/11F 12/12F Sales 2,215 3,116 3,315 3,631 Current Assets Cost of Goods Sold 1,743 2,346 2,57 2,756 Cash and Cash Equivalents Gross Profit Accounts Receivable SG&A Inventories Operating Profit Other Current Assets Non-Operating Income Non-Current Assets 1,743 1,924 2,23 2,113 Interest Income/Expense Investment Assets F/X-Related Gain/Loss Property, Plant and Equipment 1,78 1,116 1,121 1,121 Equity Method Gain/Loss Intangible Assets Asset Disposal Gain/Loss -2 Total Assets 2,475 2,795 2,91 3,45 Other Non-Operating Profit/Loss Current Liabilities 1,86 1,112 1,88 1,64 Pretax Profit Accounts Payable Tax Short-Term Debt Profit from Continuing Operation Current Long-Term Debt Profit from Discontinued Operation Other Current Liabilities Tax Effect Non-Current Liabilities Net Profit Bonds Residual Income Long-Term Debt EBITDA Other Non-Current Liabilities Free Cash Flow Total Liabilities 1,79 1,914 1,879 1,844 Gross Profit Margin (%) Paid-In Capital EBITDA Margin (%) Capital Surplus Operating Margin (%) Retained Earnings Net Margin (%) Stockholders' Equity ,21 1,21 Cash Flow (Summarized) Forecasts/Valuations (Summarized) 12/9 12/1F 12/11F 12/12F 12/9 12/1F 12/11F 12/12F Cash Flow from Operating P/E (x) Net Profit P/CF (x) Non-Cash Income and Expense P/B (x) Tangible Assets Depreciation EV/EBITDA (x) Intangible Assets Depreciation EPS (W) 4,154 7,47 8,172 1,475 Others CFPS (W) 8,438 13,326 14,219 16,543 Chg in Working Capital BPS (W) 28,447 43,857 51,79 6,32 Chg in Accounts Receivable DPS (W) 45 1, 1,3 1,5 Chg in Inventories Payout Ratio (%) Chg in Accounts Payable Dividend Yield (%) Others Sales Growth (%) Cash Flow from Investment EBITDA Growth (%) Chg in Tangible Assets Operating Profit Growth (%) Chg in Intangible Assets EPS Growth (%) Chg in Investment Assets Accounts Receivable Turnover (x) Others Inventory Turnover (x) Cash Flow from Financing Accounts Payable Turnover (x) Chg in Borrowings ROA (%) Chg in Equity ROE (%) Dividends ROIC (%) Others Liability to Equity Ratio (%) Chg in Cash Current Ratio (%) Beginning Cash Balance Net Debt to Equity Ratio (%) Ending Cash Balance Interest Coverage Ratio (x) estimates 6

7 Important Notices Equity Research for International Investors (ERII) Daewoo Securities Co., Ltd.`s analyst attended the IR meeting held by KOLON IND within recent three months. Expenses related to the meeting were covered by KOLON IND. This report is a translation excerpt of the Korean version publicly released on June 28, 21. Analyst of the subject company or member of the analyst's household does not have any financial interest in the securities of the subject company and the nature of the financial interest (including without limitation, whether it consists of any option, right, warrant, future, long or short position). This report reflects the sole opinion of the analyst without any external influences by third parties. Ratings Distribution Analyst Industry Ratings of Daewoo Securities Buy Relative Performance of +2% or greater Overweight Industry fundamentals are favorable or improving Trading Buy Relative Performance of +1% or greater, but with variability/volatility Neutral Industry fundamentals are steady without any material changes Hold Relative Performance of -1% and +1% Underweight Industry fundamentals are unfavorable or worsening Sell Relative Performance of -1% Note: 1) Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. 2) Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. Source: Daewoo Securities Ratings and Target Price History (Share price (----), Target price (----), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) (W) 8, KOLON IND 7, 6, 5, 4, 3, 2, 1, 6/8 9/8 12/8 3/9 6/9 9/9 12/9 3/1 6/1 This report has been provided by the research division of Daewoo Securities Co., Ltd. The stock ratings, target prices, estimates and overall viewpoints are from the research division of Daewoo Securities. Investors can access Daewoo SecuritiesÊ research through Daewoo research direct ( FirstCall Research, Reuters, FnGuide, WiseFn, FactSet and Bloomberg (DWIR). This document was prepared by Daewoo Securities Co., Ltd. ( Daewoo ). Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith. The information has not been independently verified. Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy or completeness of the information and opinions contained in this document. Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for information purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed or published in whole or in part for any purpose. Daewoo and/or other affiliate companies, their directors, representatives, or employees may have long or short positions in any of the securities or other financial instruments mentioned in this document or of issuers described herein and may purchase and/or sale, or offer to purchase and/or sale, at any time, such securities or other financial instruments in the open market or otherwise, as either a principal or agent. This document is for distribution within the United Kingdom to persons authorized under the Financial Services Act Daewoo Securities is the sole provider of information contained in this document. DaewooÊs U.S. affiliate, Daewoo Securities (America) Inc., a member of FINRA/SIPC, is the sole distributor of this document within the U.S. This document may be distributed in the U.S. only to major U.S. institutional investors as defined in Rule 15a-6 of the U.S. Securities Exchange Act of Any U.S. recipient of this document wishing to effect any transactions in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc. Daewoo Securities International Network Daewoo Securities Co. Ltd. (Seoul) Tel : Fax : Contact: Jin Song jin.song@dwsec.com Chris Park Chris.park@dwsec.com Daewoo Securities Ltd. (Hong Kong) Tel : Fax : Contact: Stacey Park stacey@dwsec.com.hk Ho Chi Minh Representative Office Tel: Fax : Contact: Jong-Min Sohn jongmin.shon@dwsec.com Daewoo Securities Ltd. (Europe) Tel : Fax : Contact: Sean Kang sean.kang@dwsec.com Tokyo Representative Office Tel : Fax : Contact: John (Sejung) Oh sejung.oh@dwsec.com Daewoo Securities Inc. (Americas) Tel : Fax : Contact: Jean-Louis Lee jlee@dwsec.com Beijing Representative Office Tel : Fax : Contact: Kang-Won Choe kangwon.choe@dwsec.com 7