SK Holdings ( KS)

Transcription

1 ( KS) Five growth strategies to drive up NAV Holding companies Company Update November 23, 2015 (Maintain) Buy Target Price (12M, W) 330,000 Share Price (11/20/15, W) 243,000 Expected Return 36% OP (15F, Wbn) 1,827 Consensus OP (15F, Wbn) - EPS Growth (15F, %) 2,929.5 Market EPS Growth (15F, %) 21.0 P/E (15F, x) 3.2 Market P/E (15F, x) 11.5 KOSPI 1, Market Cap (Wbn) 17,098 Shares Outstanding (mn) 71 Free Float (%) 48.4 Foreign Ownership (%) 24.2 Beta (12M) Week Low 196, Week High 320,500 (%) 1M 6M 12M Absolute Relative Daewoo Securities Co., Ltd. [Holding Companies/IT Services] Dae-ro Jeong daero.jeong@dwsec.com Yoon-seok Seo yoonseok.seo@dwsec.com KOSPI Retain Buy and TP of W330,000; Our top pick for 2016 As an operating holding company, is focusing on five key areas it believes are essential to ensuring sustainable growth. We believe the company is well positioned to implement its vision given its ample cash flow and ICT capabilities. As the company executes its growth strategies, we expect the value of the operating business and subsidiary stakes to increase, supporting a potential upward revision in our target price. We maintain our Buy call on with a target price of W330,000. Five growth strategies to drive up NAV 1) IT services (in-house): The company is seeking to raise its IT services capabilities to global top-tier levels, using cloud, big data, and IoT technologies. As part of such efforts, the company established a joint venture called F with Taiwanese firm Foxconn (Hon Hai Precision Industry). Through the joint venture (70% owned by Foxconn and 30% by ), the company plans to acquire Daiwa Associate Holdings, a Hong Kong-based manufacturer of smart sensors and parts for the Internet of Things (IoT). Looking forward, we expect the company to gain various opportunities related to smart factory projects for Foxconn s Chongqing plants. 2) ICT security convergence and smart logistics (in-house): The company is aiming to establish a security convergence platform (information security and physical security) and expand into security devices (sensors, etc.), as well as biometrics- and video surveillance-related software. The company is also looking to enter the business of smart logistics using big data and IoT. The company will initially focus on bolstering its capabilities on the back of captive (affiliate) demand until 2016 and then work on broadening its global presence, especially in China through its partnership with Hon Hai, from ) Bio/pharmaceuticals (SK Biopharmaceuticals and SK Biotek): SK Group plans to fully integrate its value chain (R&D, manufacturing, and marketing) by After this, SK Biopharmaceuticals will consider going public and acquire developers with strong potential. Currently, SK Biopharmaceuticals is focusing its resources on developing central nervous system agents and seeking licensing-out deals with global companies. In particular, the drug company has successfully completed the phase 2b clinical trial for its lead epilepsy treatment (YKP3089) and is expected to move onto the phase 3 trial. Assuming manufacturing and sales begin in 2018, we estimate annual revenue to reach W1tr. SK Biotek, which was spun off from SK Biopharmaceuticals in April, manufactures and sells active pharmaceutical ingredients (API) and intermediates to multinational drug companies. The company plans to invest W70.1bn to expand its API capacity by 2019 with the aim of increasing its annual revenue to W100bn by ) LNG (SK E&S): SK E&S is aiming to integrate its LNG value chain and expand its LNG capacity to 5mn tonnes by The LNG business enjoys cost advantages due to direct access to cheap gas in the US and Australia. SK E&S is also expected to secure new business opportunities in China through partnerships with local companies like Huadian Group and China Gas Holdings. 5) Semiconductor module (Essencore) and materials (M&A, JV, etc.): The semiconductor module business (Essencore) aims to achieve W1.5tr in revenue by The semiconductor materials business is looking to acquire or form a joint venture with a company with global technology in order to tap into the fast-growing materials market. FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Revenue (Wbn) 1,702 2,242 2,302 2,426 41,476 99,362 OP (Wbn) ,827 5,842 OP margin (%) NP (Wbn) ,427 1,513 EPS (W) 8,765 7,122 3,777 2,546 77,130 21,498 ROE (%) P/E (x) P/B (x) Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the t U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

2 Table 1. SK Group s growth framework ICT New growth portfolio Growth areas Related companies (1) IT services SK C&C, etc. (2) ICT convergence (3) Bio/ pharmaceuticals (4) LNG SK E&S SK C&C, Infosec, NSOK, etc. SK Biopharmaceuticals Details - Extend the coverage of IT services, establish overseas footholds through business partnerships, and broaden cloud-based offerings - Security convergence platform (information security and physical security) - Expand into security devices (sensors, etc.) as well as biometrics- and video surveillance - related software - Integrate the pharmaceuticals value chain, including R&D, manufacturing, and marketing, by Take SK Biopharmaceuticals public in 2018 and acquire drug developers with strong potential - Integrate and expand LNG value chain in the group; expand the capacity of LNG business to 5mn tonnes by Benefiting from cost advantages (due to direct access to cheap gas in the US and Australia) and captive demand - Expected to partner with a Chinese firm in the near future to secure new business opportunities (5) Semiconductor modules/materials SK C&C, Essencore, SK Hynix, etc. - Semiconductor module business (Essencore) aims to achieve W1.5tr in revenue by Plans to acquire a firm with global technology to secure stable footing in the market Source: Company data, Figure 1. SK Group roup s s corporate governance and current business portfolio Chey Tae-won and related parties Chey Chang-won and related parties major shareholders CheyTae-won23.4% CheyGi-won7.5% Treasury shares15.7% 30.9% 99.4% Infosec SKChem smajor shareholders CheyChang-won14.7% CheyShin-won0.1% Treasury shares15.5% 17.3% SK C&C+ [ KS] 50.0% 10.0% Encar SKSecurities [ KS] 28.2% SK Chemicals [ KS] 25.2% 33.4% 41.8% 39.1% 100% 83.1% 100% 100% 44.5% 25.4% SK Telecom [ KS] SK Innovation [ KS] SKC [ KS] SKNetworks [ KS] SKForest SK Shipping SK E&S SK Biophram SK E&C 100% 20.1% 48.9% 64.5% 83.5% 100% 100% 66.0% 50.0% 44.0% 45.6% SK SK Broadband SKHynix iriver Communications [ KS] [ KQ] SK Telink SKPlanet [ KQ] SK Syntec Initz Entis UBcare [ KQ] SK Gas [ KS] 32.8% SKD&D [ KS] Source: Table 2. major shareholders Name Number of shares Ownership Value Chey Tae-won 16,465, ,001 Noh So-young 8, Chey Gi-won 5,250, ,276 Chey Shin-won 5, Total of related parties 21,729, ,280 Notes Best Leap Enterprises 2,450, % subsidiary of Foxconn Holdings Other 31,644, ,690 (%, Wbn) Total treasury shares 14,535, ,532 Original 11,021, stake in SK C&C (31.8%) became treasury shares after 2,678 merger Newly acquired 3,514, Share buyback completed (9/11/ /11/2015) Total number of issued shares 70,360, ,098 Notes: Based on Nov 20 th, 2015 closing price Source: Dart, 2

3 Table 4. quarterly and annual earnings Table earnings review (Wbn, %) 15 Growth (Former SK (Former SK Former SK Former SK C&C) C&C) Results C&C Holdings QoQ YoY (Jul-Sep) (Aug Aug-Sep Sep) Revenue , ,679 2, ,403.7 Operating profit Net profit , , ,295.7 OP margin Net margin Notes: Net profit attributable to controlling interests; merged with SK C&C on August 3 rd, 2015; 15 results refer to the sum of the former SK C&C s results (July-September) and the former August and September results Source: F 4Q Annual 4QF Annual (Wbn) 2016F Revenue 29,169 27,833 27,967 28, ,666 24,035 24,350 23,496 24,798 96,679 99,362 Operating profit ,396 1,144 1,628 1,064 1,194 5,030 5,842 Equity-method income , , Pretax profit , ,295 1,590 6, ,586 5,501 Net profit , ,101 5, ,339 3,718 Net profit attributable to controlling interests , , ,248 1,393 Notes: Bargain purchase gains of W4.99tr recognized as other non-operating income in 15 through merger Source: estimates Table 5. Quarterly and annual earnings of former SK C&C (IT services) and major subsidiaries F 4Q Annual 4QF Annual (Wbn) 2016F Revenue , ,762 3,289 IT services , ,350 1,723 Non-IT , ,412 1,566 Distribution (Encar) Semiconductor modules (Essencore) Security services (Infosec) Operating profit Source: estimates 3

4 Table 6. Earnings of SK Group s s major consolidated subsidiaries SK Innovation (33.4%) SK K Telecom (25.2%) SK Networks (39.1%) SKC (42.5%) SK E&S ( %) SK E&C (parent parent) (44.5%) SK Shipping (83.1%) F 4Q Annual 4QF Annual (Wbn) 2016F Revenue 16,878 16,261 16,609 16,117 65,865 12,046 12,998 12,447 12,036 49,528 51,678 Operating profit ,995 1,892 OP margin Revenue 4,202 4,305 4,367 4,289 17,164 4,240 4,256 4,261 4,327 17,084 17,558 Operating profit , ,813 2,153 OP margin Revenue 6,089 5,506 5,443 5,370 22,408 4,859 5,160 5,101 5,366 20,486 21,135 Operating profit OP margin Revenue , ,597 2,690 Operating profit OP margin Revenue 2,015 1, ,624 5,639 1, ,608 5,029 5,129 Operating profit OP margin Profit from Discontinued Operations Revenue 1,680 2,020 2,062 2,716 8,477 2,110 2,148 2,248 2,749 9,255 9,678 Operating profit OP margin Revenue , ,178 2,314 Operating profit OP margin Source: Table 7. SK Biopharmaceuticals major pipeline Sleep-wake disorders (SKL-N05) Epilepsy (YKP3089) Chronic constipation/ Irritable bowel syndrome (YKP10811) Acute seizures (PLUMIAZ) Dementia/ cognitive impairment (SKL 15508) Current stage Details Signed out-licensing deal with Jazz Pharmaceuticals (US); Plan to go on sale in 2018 Will receive engineering fees during clinical Phase 3b clinical trials underway trials (under technology export deal with Jazz) and royalties once drug goes on sale Secured copyright in 12 Asian countries; Plans to engage in direct marketing Phase 3b clinical trials expected to begin in 4Q15 Phase 2b clinical trials underway Global release planned for 2018; Direct Results expected to come out in July revenue (approximately W1tr annually) expected Plans to sign out-licensing deals with global drug companies in 16 Signed out-licensing in 2010 with Acorda Therapeutics (US supplier of drugs for central nervous system disorders) Conducting phase 2a clinical trials independently Source: Phase 2b clinical trials underway Submitted NDA Phase 2a clinical trials underway 4

5 Table 8. SK Biopharmaceuticals consolidated income statement (Wbn) Revenue CMS Development of new drugs (adjustment) Cost of sales Gross profit SG&A Operating profit OP margin -59.4% -69.5% -73.0% -54.2% CMS OP margin 4.4% 6.9% Development of new drugs OP margin % % (adjustment) Financial income Financial expenses Non-operating income Non-operating expenses Pretax income Corporate tax Net profit Source: Dart, Figure 2. SK Group s bio business value chain Tae-won Chey and related persons 30.9% SK C&C+ ( KS) 100% SK Biopharm (New drug development) 100% 100% Figure 3. SK Biopharmaceutical s s global peer UCB (UCB BB Equity) UCB's financial data (US$mn) Revenue 4, , , ,442.5 Cost of sales 1, , , ,398.9 Gross profit 3, , , ,043.6 Operating profit OP margin 10.7% 12.1% 8.4% 8.2% Pretax profit Net profit ($mn,x) SK Biotech (Supplies pharmaceutical ingredients) Source: SKLife Science (US) Market cap P/E P/B EV/EBITD A 2015F 16, Source: Bloomberg, 5

6 Table 9. Valuation of (Wbn, W) Fair value 1. Operating value 9,828 In-house businesses (SK C&C) 7,472 Notes IT services 6,487 - Based on 2016F EBITDA; applied EV/EBITDA of 18.0x Distribution (Encar) Security services (Infosec) Other (semicon. modules, etc.) Brand royalties () Real estate () 2. Value of investment assets Listed subsidiaries Unlisted subsidiaries Based on 2016F NOPLAT; applied 2015F P/E of 20.0x Based on 2016F EBITDA; applied P/E of 20.0x Based on 2016F EBITDA; applied global peer average P/E of 10.9x 2,326 12, Total asset value (1+2) 22, Net borrowings (-) 4,697 - As of Net asset value 17,996 Number of shares outstanding ( 000 shares) NAV per share 322, Target price 330,000 - Based on brand royalty rate of 20bps (contract period: 1/1/ /31/ Investment properties as of 15 7,800-20% discount based on market price 5,065 - Book value and relative valuation 55,824 - Outstanding shares (excluding treasury stock) Current share price 243,000 - As of Nov. 20, 2015 Upside potential 35.8% Source: Table 10. investment securities (Wbn, W) Listed subsidiaries Stake Book value Current price Valuation SK Innovation 33.40% 3, ,000 3,830 SK Telecom 25.20% 3, ,000 4,745 SK Networks 39.10% 906 5, SKC 42.30% , SK Securities 10.00% 28 1, Unlisted subsidiaries Notes 9,749 - As of Nov. 20, ,065 - Applied book value SK E&S % 1,315 3, F P/E of 8.0x SK Biopharm % SK E&C 44.48% SK Shipping 83.08% SK Forest % Other Source: 6

7 APPENDIX 1 Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price (034730) 08/30/2015 Buy 330,000 04/27/2015 Buy 290,000 03/08/2015 Buy 270,000 03/07/2014 Buy 170,000 02/06/2014 Buy 150,000 11/01/2013 Buy 140,000 (W) 400, , , ,000 0 Nov 13 Nov 14 Nov 15 Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price ( ), Target price ( ), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * 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. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Equity Ratings Distribution Buy Trading Buy 72.77% 13.86% 13.37% 0.00% * Based on recommendations in the last 12-months (as of September 30, 2015) Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. ( Daewoo ), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment Hold Sell 7

8 banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order ), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as Relevant Persons ). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction. KDB Daewoo Securities International Network Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office 34-3 Yeouido-dong, Yeongdeungpo-gu Seoul Korea Two International Finance Centre Suites Finance Street, Central Hong Kong, China 320 Park Avenue 31st Floor New York, NY United States Tel: Tel: Tel: Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch 41st Floor, Tower Old Broad St. London EC2N 1HQ United Kingdom Six Battery Road #11-01 Singapore, th Floor, Yusen Building Marunouchi, Chiyoda-ku Tokyo Japan Tel: Tel: Tel: Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office 2401A, 24th Floor, East Tower, Twin Towers B-12 Jianguomenwai Avenue Chaoyang District, Beijing China Room 38T31, 38F SWFC 100 Century Avenue Pudong New Area, Shanghai China Suite 2103, Saigon Trade Center 37 Ton Duc Thang St, Dist. 1, Ho Chi Minh City, Vietnam Tel: Tel: Tel: Daewoo Investment Advisory (Beijing) Co., Ltd. 2401B, 24th Floor, East Tower, Twin Towers B-12 Jianguomenwai Avenue, Chaoyang District, Beijing China Daewoo Securities (Mongolia) LLC #406, Blue Sky Tower, Peace Avenue 17 1 Khoroo, Sukhbaatar District Ulaanbaatar Mongolia PT. Daewoo Securities Indonesia Tel: Tel: Tel: Equity Tower Building Lt.50 Sudirman Central Business District Jl. Jendral Sudirman Kav , Jakarta Selatan Indonesia