Hyundai Steel (004020)

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1 Earnings Review February 1, M rating BUY (Maintain) 12M TP W111, from W111, Hyundai Steel (42) Astonishing earnings in many aspects Above In line Below Up/downside +34% Stock Data KOSPI (Jan 31, pt) 1,962 Stock price (Jan 31, KRW) 82,9 Market cap (USD mn) 6,495 Shares outstanding (mn) Week high/low (KRW) 117,5/75,2 6M avg. daily turnover (USD mn) 25.3 Free float / Foreign ownership (%) 65./19.4 Major shareholders (%) KIA Motors Corporation and 3 others 33.8 National Pension Service (NPS) 9.1 Valuation 211A 212F 213F PER (x) PBR (x) ROE (%) EV/EBITDA (x) EPS (KRW) 8,876 9,449 8,97 BPS (KRW) 17,87 115,4 123,241 Performance 1M 6M 12M Absolute (%) (5.6) (1.3) (23.6) Relative to KOSPI (%p) (3.8) (5.6) (23.9) 12MF PER trend 14. (X) 12MF PER (LHS) (KRW) 16, price (RHS) , 1. 12, 1, 8. 8, 6. 6, 4. 4, 2. 2,. Feb-8 Feb-9 Feb-1 Feb-11 Feb-12 Source: WISEfn consensus What s new: Only steelmaker to beat consensus Hyundai Steel s 4Q12 separate OP of W163bn (-28.5% QoQ, -45.9% YoY) is 13.2% above our estimate (W144bn) and 8.4% above consensus. The company posted robust earnings considering most steel companies failed to meet the consensus. In addition, OPM was 4.9%, higher than that of domestic competitors. And, OP per tonne was W4,, W5, higher than our estimate as ASP was W4, lower than expected, but COGS per tonne were W9, lower than our outlook. Of note, the company expanded its raw material purchasing portion at the current quarter average price from 3% to 7% while average prices falling. Furthermore, a falling KRW/USD reduced COGS per tonne, another reason for the robust earnings. Pros: Two changes from growing captive demand Hyundai Hysco will begin operating no. 2 cold-rolled coil (CRC) plant (1.5mn tonnes capacity) in Dangjin steel complex from May. Hysco will produce mostly auto sheet. Considering the low operating rate in the early stages, we expect Hysco to produce.73mn tonnes, although potential production volume in 213 reaches 1mn tonnes. As such, Hysco needs.8mn tonnes more hot-rolled coil (HRC), a raw material. We believe Hyundai Steel will supply 8% of this. HRC for automotive sheet is typically W4,-W5, per tonne more expensive than general HRC. As such, the operation of Hysco s no.2 CRC plant should expand Hyundai Steel s captive market and improve profitability given a larger portion of high value-added products. Cons: Slow 1Q13 on capex, but groundwork for 2Q13 ramp up Hyundai Steel is remodeling C HRC line to 3.5mn tonnes of capacity. For the construction, the company will halt operations for 45 days in 1Q13, indicating.438mn tonnes less production given quarterly production volume of.875mn tonnes. We expect Hyundai Steel to cut shipments by.45mn tonnes. And, we believe 1Q13 OP will decrease by 1.3% QoQ to W146bn due to the larger fixed costs burden on reduced sales. Of note, quarterly capacity of the C HRC line should expand to 1.375mn tonnes from 2Q13. The company will use the additional amounts to respond to rising HRC demand in affiliates. We believe 2Q13 OP should reach W271bn on record high HRC shipments. Conclusion: Recommend Hyundai Steel as a top pick We rank market condition as HRC, long steel, CRC and plate in terms of attractiveness. Hyundai Steel s sales by product in 213 are forecast at HRC 38%, Moonsun Choi moonsun@truefriend.com Jinwoo Kim, CFA jinwoo.kim@truefriend.com (W bn, %, %p) (Separate) 4Q12P Change 213F KIS est. Actual Diff. Consensus QoQ YoY KIS Consensus Sales 3,397 3,311 (2.5) 3,359 (2.8) (15.2) 12,914 13,764 OP (28.5) (45.9) OP margin %p 4.5 (1.8%p) (2.8%p) EBT (19.4) 873 NP (6.6) (19.9)

2 Hyundai Steel (42) long steel 4%, plate 7% and others 15%, which is the most favorable lineup give the current market conditions. We suggest Hyundai Steel as our top pick in steel sector. We maintain a TP of W111, (PB.9x to 213 BPS of W123,241). Figure 1. PBR band Figure 2. KOSPI PB vs. Hyundai Steel PB 2, 18, 16, 14, 12, 1, (KRW) 1.6x 1.4x 1.2x 1.x.8x (PBR, x) Hyundai Steel discount vs. KOSPI (R) (%) KOSPI (L) Hyundai Steel (L) 2 (2) 8, 6,.6x 1. (4) 4, 2, % Nov 28-4%. (8) (6) Source: Quantwise, Korea Investment & Securities Table. 1 Earnings review (separate) (W bn, %) vs. 4Q12 YoY QoQ consensus Actual Preview Diff. 2Q11 Chg. 1Q12 Chg. 2Q12 Diff. Sales 3,311 3,397 (2.5) 3,94 (15.2) 3,46 (2.8) 3,359 (1.4) OP (45.9) 228 (28.5) OPM (%) %p 7.7 (2.8%p) 6.7 (1.8%p) 4.5.4%p EBT (19.4) 264. NP (19.9) 232 (6.6) Shipments ( tonnes) 4,87 4,171 (2.) 4,174 (2.1) 3, ASP ( won/tonne) (.5) 935 (13.4) 86 (5.8) COGS per tonne ( won) (1.2) 83 (11.2) 769 (4.1) OP per tonne ( won) (44.7) 58 (3.7) Figure 3. Quarterly Hysco CRC capacity Figure 4. Quarterly Hyundai Steel HRC capacity 1,6 (' tonnes) , (' tonnes) 1,4 1, , , 2, ,5 6 1, Q12 2Q12 3Q12 4Q12 1Q13F 2Q13F 3Q13F 4Q13F 1Q12 2Q12 3Q12 4Q12 1Q13F 2Q13F 3Q13F 4Q13F 2

3 Hyundai Steel (42) Figure 5. Hyundai Steel sales by product (213F) Figure 6. Hyundai Steel crude steel capacity Heavy Ind. 13% Rebar 18% 3 (mn tonne) STS/CR 2% 22 Plates 7% Sections 22% HR 38% F Table 2. Quarterly earnings forecasts and key assumptions (separate) (W bn) 1Q12 2Q12 3Q12 4Q12P 1Q13F 2Q13F 3Q13F 4Q13F 212P 213F 214F Sales 3,55 3,861 3,46 3,311 2,924 3,559 3,181 3,25 14,129 12,914 14,616 OP ,191 OPM 4.3% 8.4% 6.7% 4.9% 5.% 7.6% 6.9% 8.6% 6.2% 7.1% 8.2% EBT ,212 NP Key assumptions KRW/USD (avg.) 1,131 1,152 1,133 1,76 1,88 1,65 1,48 1,3 1,133 1,58 1,5 Iron ore contract price (USD/tonne) Hard coking coal contract price (USD/tonne) Shipments ( tonnes) 3,948 4,345 3,959 4,87 3,546 4,47 4,4 4,255 16,339 16,248 19,62 ASP ( won/tonne) COGS per tonne ( won) OP per tonne ( won) EBITDA per tonne ( won) Table 3. Quarterly earnings forecasts (consolidated) (W bn) 1Q12 2Q12 3Q12 4Q12P 1Q13F 2Q13F 3Q13F 4Q13F 212P 213F 214F Sales 3,558 3,862 3,41 3,316 2,934 3,569 3,191 3,26 14,146 12,954 14,661 OP ,196 OPM 4.4% 8.4% 6.7% 5.% 5.% 7.6% 6.9% 8.6% 6.2% 7.1% 8.2% EBT ,342 NP ,74 3

4 Hyundai Steel (42) Company overview & Glossary Hyundai Steel is the second largest steelmill in Korea, and it advanced to the BF business in 21 from EAF. Hyundai Steel will become world s thirteen largest steelmaker on crude steel basis with 1mn tonnes of capacity in EAF and 12mn tonnes of capacity in BF after the no.3 BF is completed on Sep 213. Main products are HRC (4%), section (21%), rebar (17%), heavy plate (9%), on 211 basis. HRC and heavy plate capacity should increase 2mn tonnes, respectively, in 213 due to no.3 BF. HRC (Hot-rolled coil): Rolling slabs in high temperature. Used in construction or intermediary goods of other steel products CRC (Cold-rolled coil): Rolling HRC in ordinary temperature. Used in general applications or automobile parts Heavy plate: 6mm above thickness HR sheet. Used in shipbuilding or construction Rebar: Bar shaped steel product melted steel scraps in EAF. Used in basic frame in construction Section: Frame-shaped steel product melted steel scraps in EAF. Used in basic frame in construction 4

5 Hyundai Steel (42) Balance sheet FY-ending Dec. (W bn) 21A 211A 212F 213F 214F Current assets 5,978 6,619 5,487 6,85 7,547 Cash & cash equivalent 1, ,466 Accounts & other receivables 2,156 2,541 2,122 2,332 2,712 Inventory 2,289 2,566 2,237 2,332 2,639 Non-current assets 13,899 15,158 17,465 18,315 18,638 Investment assets 2,29 2,141 1,985 1,817 2,57 Tangible assets 11,6 12,76 15,192 16,234 16,282 Intangible assets Total assets 19,877 21,777 22,952 24,4 26,185 Current liabilities 5,687 6,38 6,125 6,484 6,988 Accounts & other payables 1,926 1,892 1,754 1,66 1,818 ST debt & bond 2,55 3,131 3,171 3,374 3,489 Current portion of LT debt 1,132 1,26 1,196 1,331 1,396 Non-current liabilities 5,76 6,278 6,999 7,419 7,713 Debentures 1,895 2,866 3,32 3,574 3,698 LT debt & financial liabilities 3,388 2,919 3,222 3,427 3,541 Total liabilities 11,447 12,658 13,124 13,93 14,71 Controlling interest 8,431 9,119 9,828 1,497 11,483 Capital stock Capital surplus Capital adjustments (2) (17) (17) (17) (17) Retained earnings 6,462 7,141 7,896 8,69 9,641 Minority interest Shareholders' equity 8,431 9,119 9,828 1,497 11,483 Income statement FY-ending Dec. (W bn) 21A 211A 212F 213F 214F Sales 1,235 15,26 14,146 12,954 14,661 Gross profit 1,52 15,26 1,417 1,464 1,791 SG&A expense Other operating gains 1 3 (4) Operating profit 1,59 14, ,196 Financial income Interest income Financial expense Interest expense Other non-operating profit Gains (Losses) in associates, subsidiaries and JV Earnings before tax 1, ,342 Income taxes Net profit ,74 Net profit of controlling interest ,74 Other comprehensive profit 473 (32) (45) (45) (45) Total comprehensive profit 1, ,29 Total comprehensive profit of controlling interest 1, ,29 EBITDA 1,46 15,453 1,731 1,782 2,215 Cash flow FY-ending Dec. (W bn) 21A 211A 212F 213F 214F C/F from operating (546) 82 2,13 1,294 1,765 Net profit ,74 Depreciation ,15 Amortization Net incr. in W/C (1,678) (861) 487 (317) (316) Others (19) 214 (13) (8) (11) C/F from investing (1,479) (1,867) (3,214) (1,736) (1,582) CAPEX (2,169) (1,817) (3,353) (1,912) (1,74) Decr. in fixed assets Incr. in investment 696 (2) (275) Net incr. in intangible assets (1) (4) 6 7 (16) Others (6) (2) 29 (227) C/F from financing 2,25 1, Incr. in equity Incr. in debts 2,247 1, Dividends (42) (42) (42) (42) (42) Others C/F from others Increase in cash 18 (27) (393) Key financial data FY-ending Dec. 21A 211A 212F 213F 214F per share data (KRW) EPS 1,992 8,876 9,449 8,97 12,737 BPS 99,56 17,87 115,4 123, ,83 DPS Growth (%) Sales growth (7.3) (8.4) 13.2 OP growth ,292.6 (94.1) NP growth (19.9) (19.) 6.6 (5.1) 42. EPS growth (19.9) (19.3) 6.5 (5.1) 42. EBITDA growth (88.8) Profitability (%) OP margin NP margin EBITDA margin ROA ROE Dividend yield Stability Net debt (W bn) 7,44 8,737 9,848 1,346 9,998 Debt/equity ratio (%) Valuation (X) PER PBR PSR EV/EBITDA Note: Based on K-IFRS (consolidated) 5

6 Hyundai Steel (42) Changes to recommendation and price target Company (Code) Date Recommendation Price target Hyundai Steel Company (42) Hold W16, BUY W16, BUY W144, BUY W125, BUY W111, 18, 16, 14, 12, 1, 8, 6, 4, 2, Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 6

7 Hyundai Steel (42) Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance 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. Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Important Disclosures As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 1 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of Hyundai Steel Company. There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance. Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for Hyundai Steel Company in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from Hyundai Steel Company in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment banking services from Hyundai Steel Company in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in Hyundai Steel Company s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of Hyundai Steel Company shares as of February 1, 213. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analysts covering these companies nor their associates own any shares of as of February 1, 213. Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of Hyundai Steel Company and is the liquidity provider. Prepared by: Moonsun Choi This report was written 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 report has been prepared by Korea Investment & Securities Co., Ltd. and 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 report or its contents. The final investment decision is based on the client s judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions. 7