Valuation. Economic forecast

Transcription

1 November 13, 2013 Market Performance Nov 13 1D 1M 3M YTD KOSPI (pt) 1, (1.60) (3.03) 2.64 (1.68) Turnover (W bn) 3,340 KOSDAQ (pt) (1.00) (5.07) (8.21) 1.87 Major Indicators Nov 12 1-wk ago 1M ago end yr US Treasury Notes yr gov t bonds (%) AA- corporate bonds (%) KRW/USD (won) 1, , , , KRW/100JPY (won) 1, , , , JPY/USD (yen) USD/EUR (USD) WTI (USD/bbl) Gold (USD/oz) 1, , , , WHAT S NEW TODAY In-depth reports 2014 Outlook: Money Returns Company & sector note KEPCO (015760): 3Q13 review Hanwha Chemical (009830): 3Q13 review Seoul Semiconductor (046890): 3Q13 review Cosmax (044820): 3Q13 review AmorePacific (090430): 3Q13 review Domestic Institutions Net Buy / Sell Net Buy (W bn) Net Sell (W bn) KEPCO 31.2 Samsung Electronics 21.9 KT 13.1 Hyundai Heavy 13.4 Hyundai Mobis 8.9 KB Financial Group 11.8 Samsung F&M 6.1 LS Chem 11.2 NAVER 5.4 Korea Zinc 10.7 Foreign Net Buy / Sell Our market view (for the mid- to long-term) Net Buy (W bn) Net Sell (W bn) (%, x) 2012A 2013F 2014F SK Holdings 16.0 Samsung Electronics 27.3 Corporate OP growth (2.3) KB Financial Group 13.2 Hyundai Mobis 17.3 earnings NP growth (1.6) NCsoft 7.1 Hyundai Mipo Dockyard 15.6 PER Valuation KCC 5.0 SK Hynix 13.4 PBR Hanwha Corp. 4.0 Hyundai Motor 13.3 Daily performance by sector Economic forecast Factors 1Q13A 2Q13A 3Q13F 4Q13F 2013F 2014F GDP (%) Top five sectors % chg Bottom five sectors % chg Private consumption (%) Electric & gas utilities 0.23 Transport equipment (2.52) Facility investment (%) (11.9) (5.1) (3.4) 5.5 Telecom services 0.21 Electronics (2.26) Current account (USD bn) Textile & apparel (0.06) Metals (2.08) CPI (%) F&B (0.13) Transport & storage (1.79) KRW/USD (AVG) Retail (0.17) Medical precision (1.60) Policy rate (%, EOP) NA Note) All figures growth rates are on YoY basis. Korea Investment & Securities 1

2 In-depth reports 2014 Outlook KIS Research Center, Money Returns 2014 stock market keyword- Money returns: In projecting 2014, we believe the Korean stock market could be explained by the following keyword: money returns. This is a term linked to money movements in the financial markets, recovery of domestic and overseas economies and turnaround of industry conditions and corporate earnings. The ultimate conclusion of the ongoing changes will be money returns, i.e., the return of liquidity that ebbed from stock markets after the global financial crisis and Europe s debt crisis. Money movements- From bonds to equities, from emerging markets to the developed world: Two major changes have been observed in liquidity flows since the global financial markets were thrown into panic in May by the possibility of the Fed starting to taper quantitative easing (QE). Global liquidity used to gravitate toward bonds and emerging markets since the introduction of QE. But since May, global liquidity flows completely reversed with capital flight from bonds to equities and from emerging markets to the developed world. The changing trend will continue for more than one to two years given the relatively healthier economic recovery in the developed world and still low interest rates. Recovery- Global recovery to gather pace; Developed economies to be in relative better health: The US economy has been held back by the debt ceiling fracas while the government s contribution to GDP growth continues to fall. But with the deleveraging cycle nearing its end, the private sector is expected to recover. Europe s GDP growth should turn positive in 2014 after two years of negative YoY growth. Meanwhile, the outlook for emerging nations is gradually getting bleaker due to repercussions from the possibility of the US starting to taper QE, a drop in commodity prices and a mounting current account deficit in major economies. Turnaround- Broad NP growth, especially materials and industrials: Global economic growth should bolster most sectors and lift NP in Consensus NP growth is 9% for 2013F and 26% for 2014F. Sectors with the highest NP growth potential are mostly materials and industrials, such as chemicals, shipbuilding/machinery and construction, which have been sluggish since F stock market- Kospi fair at 2,250pt: According to our top-down analysis based on macro variables, 2014F NP should grow ~9% YoY and actual PE should also edge up as the nation s economy picks up and uncertainties fade. Based on 9% YoY NP growth and actual PE 13x, fair 2014F Kospi is forecast at 2,250pt portfolio strategy: As for the portfolio strategy, we recommend 1) companies that appeal to overseas investors, such as those with stable growth, global competitiveness and dividend/valuation merit, 2) consumer goods manufacturers with improving earnings and materials/industrials that should turn around with strong profit visibility and positive factors that are not yet fully priced in, and 3) industry leaders with potential structural growth through a shift in the industry s landscape (i.e., new consumption patterns, change in competition environment, technological development, etc.) or pioneering new markets. We selected eight large caps, four mid caps and four small caps. (Samsung Electronics, Hyundai Motor, KB Financial Group, Hankook Tire, Lotte Chemical, DSME, Naver, SK Hynix, Hyundai Wia, Lotte Chilsung, Hyundai Department Store, Daelim Industrial, LG Fashion, Coxmax, SM Entertainment, Soulbrain) Company & sector note KEPCO (015760) Heedo Yun, , heedo@truefriend.com BUY (Maintain), TP: W35,000 (Maintain), Closing price: W30,100 (+1.35%) 3Q13 review: OP falls on nuclear plant cable scandal KEPCO reported K-IFRS consolidated sales of W14.3tn (up 6.8% YoY) an OP of W1,547bn (down 18.8% YoY). OP fell on higher fuel costs and purchased power costs due to the reduction in nuclear utilization from 84.4% (3Q12) to 76.6%. Meanwhile, electricity sales volume grew 2.3% YoY, and average selling price rose 5.5% YoY. OP were 9.9% less than our estimate as fuel costs and other expenses were higher than forecast (consensus OP W1,654bn). We believe electricity rates will be raised again in And, the industrial-use rate is likely to be lifted more than the residential-use rate. Along with a rate hike, the electricity rate system is likely to be restructured, including reducing progressive rate levels for residential use and lifting peak demand rates. Korea Investment & Securities 2

3 If the rate rises 4% in December, the rate will increase by 24.4% over five hikes since Since two years ago, the government has justified hikes to prevent shortage and compensate KEPCO s losses. We believe the electricity demand and supply balance should improve at least marginally in 2014, so another hike appears unlikely in 2014, and there appears to be no other positive catalysts. Although shares already reflect the rate hike possibility, we believe shares may rally briefly, as the hike has not been announced yet. Once the hike is official, shares should pullback. Even if earnings increase sharply in 2014, we believe investment sentiment is unlikely to improve significantly as higher earnings should not be enough to offset capex of W15tn and interest costs of W2.5tn. We maintain BUY and a TP of W35,000 (0.44x 12MF PB, derived on July 19). Hanwha Chemical (009830) BUY (Maintain), TP: W27,000 (Maintain), Closing price: W22,050 (-3.29%) 3Q13 review: 3Q13 results in line Matthew Yang, , matthew.yang@truefriend.com Hanwha Chemical (Hanwha) posted 3Q13 sales of W2.1tn (+5.3% QoQ, +17.7% YoY) and OP of W41.1bn (+29.7% QoQ, +1.9% YoY), in line with our estimates. Results improved QoQ, as: 1) PV operating losses decreased from W34.1bn to W25.0bn on higher utilization and ASP, 2) Ningbo PVC OPM turned profitable from -4.1%, and 3) core product spreads, including LDPE, climbed 7.0% QoQ. As PV operating losses narrow, market expectations for Hanwha are improving. In 4Q13, PV sales should increase 5% QoQ, as: 1) sales volume grows led by Japan and Europe, where margins are higher, 2) solution sales start in Portugal, and 3) PV module ASP improves backed by the EU s anti-dumping regulations against China. Steadily growing net debt is a concern. As of end-3q13, Hanwha has total debt of W5.6tn and net debt of W4.6tn, up W307.0bn QoQ and W253.9bn QoQ, respectively. As the company will continue polysilicon and PV solution-related downstream investments, financial structure improvements should be limited. We maintain BUY and a TP of W27,000 (PB average of 0.8x during previous market upturn). 1) Benefits should be concentrated on Hanwha as it has the highest sales weighting (447,000 tonnes p.a.) of low-density polyethylene (LDPE) among Korean chemical firms. Of note, LDPE prices have jumped the most among polyethylene products. 2) Solar division losses are narrowing from an OPM of -8% in 1H13. 3) Financial structure, a longstanding weakness, began to improve from Seoul Semiconductor (046890) BUY (Maintain), TP: W50,000 (Maintain), Closing price: W39,050 (-2.25%) 3Q13 review: Considering October, 4Q13 earnings to be solid Kevin Lee, , kevin.lee@truefriend.com Seoul Semiconductor (SS) posted 3Q13 sales of W270bn (+2% QoQ) and OP of W32bn (OPM 11.8%). Earnings beat the consensus (W30bn), as: 1) yield improved, 2) the weighting of high-margin tablet LEDs increased, and 3) acrich-type LED product contributed to OP (sales weighting grew to 20%). In fact, SS has recorded the highest OPM in the global LED supply chain, suggesting improving technologies and competitiveness. 1) Recently, there has been news that Chinese LED players will order more MOCVD, but Veeco and Aixtron backlogs remain low. As such, the LED glut should ease in 1H14, bolstering the LED market. 2) LED lighting prices have fallen on yield improvements, and 3) non-operating profit should improve as unrealized R&D tax credits should be reversed in 4Q13. ) 3Q13 NP missed our estimate due to valuation losses on accounts receivable due to the KRW appreciation and postponement of R&D tax credits until 4Q13. 2) In addition, tablet LED sales to a major player were delayed, and 3) LED wafer prices are trending up, adding to the cost burden. Given relatively robust October conditions, 4Q13 earnings should erode only slightly QoQ, unlikely last year (inventory valuation losses booked quarterly). Specifically, we expect 4Q13 sales of W259bn (-4% QoQ) and OP of W28.5bn (-11% QoQ, OPM 11%). As such, we maintain BUY as SS is the most profitable player and lighting LED grows rapidly. In fact, SS is our top LED pick. Korea Investment & Securities 3

4 Cosmax (044820) Jung-In Lee, , BUY (Maintain), TP: W61,000 (Maintain), Closing price: W49,750 (+5.07%) 3Q13 review: Sector-leading results as expected Cosmax posted robust 3Q13 earnings as we previewed on October 24. IFRS consolidated sales (W91.7bn, up 17.8% YoY) met our expectations, and OP (W8bn, up 35.9% YoY) beat our estimate by 13.9%. OP topped our outlook by 8.5% even if we strip out the effects of the Tree of Life F&B acquisition (acquired by Cosmax Bio, 50% stake). In 3Q13, the Korean parent company maintained strong sales (W65.7bn, up 22.3% YoY) despite concerns over the economy. Higher sales from new brands and products (CC cream) at brand shops and home shopping were the key catalysts. Sales growth (15% YoY) at the Shanghai subsidiary slowed from previous quarters (3Q13 cumulative growth 46.2% YoY). However, this should be temporary, as it was due to: 1) a sales dip as some promotional products were delivered in advance in 2Q13 and 2) a high comparison base (76.1% YoY in 3Q12). There are some concerns weak China sales will continue beyond 3Q13 as other China players posted slowing earnings recently. However, we see ample structural growth potential given the growing mass market trend among Chinese cosmetics market, Cosmax s ODM brand power and ongoing new contracts. Cosmax has reconfirmed its long-term investment attractiveness via strong 2Q13-3Q13 earnings. As such, we recommend focusing on the expanding overseas momentum in 2014F rather than We maintain BUY and a TP of W61,000 (27x 12MF PE, 10% discount to historical peak). AmorePacific (090430) BUY (Maintain), TP: W1,100,000 (Maintain), Closing price: W866,000 (+0.58%) Jung-In Lee, , jilee@truefriend.com 3Q13 review: In line with lower expectations, long-term improvement noteworthy 3Q13 earnings were in line with our lower expectations and the consensus with sales of W792.8bn (+8.1% YoY) and OP of W85.6bn (-5.3% YoY). OP slipped on the accelerating contraction in high-margin door-to-door sales (D2D) and restructuring at the China business. Domestic cosmetics channels, except D2D and direct sales, performed well with sales growth of 20.7% YoY (Figure 1). Of note, duty-free shop sales grew 43% YoY on an influx of Chinese tourists. Strong growth should continue in 4Q13 given the effects of China's National Day. D2D sales contracted more (-24% YoY) on less demand and 2H13 inventory adjustments by distributors. Although various measures are being considered, such as launching a D2D exclusive product line, it would be difficult for the channel to turn around by yearend. However, contraction should narrow from 4Q13, thanks to the low YoY comparison base. We maintain BUY and a TP of W1,100,000 (26.5x 2013 PE, 15% discount to historical peak). We remain focused on the expected earnings turnaround and growing overseas momentum after 2014, rather than unfavorable short-term earnings. Please click on the underlined companies and sectors to see the full reports. The KIS Morning Brief, KIS Korea Daily and other research reports can be viewed at eng.truefriend.com Korea Investment & Securities 4

5 Guide to Korea Investment & Securities Co., Ltd. stock ratings based on 12-month-forward share price performance relative to market index BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and +15% Underweight: Expected to give a return of -15% or less Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings. Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sector s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Disclaimer This material is prepared by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This material is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this material or its contents. The final investment decision is based on the client s judgment, and this material cannot be used as evidence in any legal dispute related to investment decisions. The contents of this material accurately reflect the analyst s views. Under no circumstances were there any external pressure or intervention during the analysis process or the preparation of this material. Korea Investment & Securities 5