April 15, 214 (112 KS) Clearer visibility on long-term earnings growth BUY (MAINTAIN) Price (Apr. 14) W3,15 Target Price W38, % variance 26.% MinHo Hur (82-2) 3772-2183 hiroo79@shinhan.com KOSPI 1,997.2p KOSDAQ 562.4p Market Cap. W1,168.6bn/US1,25.1mn Par Value W5, Outstanding Shares Free Floating Shares 52-Week High/Low 6-Day Avg. Trading Volume 6-Day. Avg. Trading T/O 38.8mn 27.9mn(71.9%) W39,/W26,45 27,774shrs W5,958mn Foreign Ownership 1.17% Major Shareholders Bon-Jun Koo and 43 others 27.88% National Pension Service (NPS) 12.86% Absolute Performance 3M 4.5% 6M -3.8% 12M -22.% Relative performance 3M 1.8% to KOSPI 6M -2.7% 12M -24.8% Retain BUY and target price of W38,, share price at long-term trough 1Q preview: OP of W25.9bn (+211% QoQ), pre-tax profit of W26.4bn 214 forecast: OP of W13.7bn (+33%), pre-tax profit of W138.bn (+85%) Retain BUY rating and target price of W38,, share price at long-term trough We retain BUY and target price of W38, for. Earnings from commodity trading and resource development are not likely to rebound in 214 due to the weak commodity market. However, we expect earnings recovery in the mid/long-term led by project organization along with growth of new industrial materials businesses including the green business (palm oil, afforestation, etc.) and downstream pursuits (coal/chemical engineering plants in China). New businesses should lead to stable earnings in 214 and resumption of growth in 215. The current PER is 11.x based on 214F earnings and 8.3x based on 215F earnings. Considering the heightened visibility of earnings improvement, the current share price represents the mid-to-long-term trough. 1Q preview: OP of W25.9bn (+211% QoQ), pre-tax profit of W26.4bn We expect 1Q14 operating profit of W25.9bn (+211% QoQ) and pre-tax profit of W26.4bn (swing to the black). The low comparison base from major one-off costs booked in 4Q13 should lead to QoQ improvement. 2Q outlook: Project income on successful financing In April, obtained financing from the Export-Import Bank of Korea for the Turkmenistan petrochemical plant project (worth W3.7tr). It will organize the project from planning and consortium formation to funding and procurement. The project is expected to generate a total of W133.7bn in operating profit over the next four years and yield an operating margin of 3.6%, higher than the trading business. The company is expected to book contingency fees of about W2bn in 2Q14 and operating profit of W7bn-8bn every quarter. 214 forecast: OP of W13.7bn (+33% YoY), pre-tax profit of W138.bn (+85% YoY) is forecast to post operating profit of W13.7bn (+33% YoY) and pre-tax profit of W138.bn (+85% YoY) for 214. We expect profits of W71.1bn from industrial materials, W4.bn from green and non-ferrous metal trading, and W94.bn from resource development. Year to Dec. Sales OP Pre-tax NP EPS Growth BPS PER EV/EBITDA PBR ROE Net Debt (W bn) (W bn) (W bn) (W bn) (Won) (%) (Won) (X) (X) (X) (%) Ratio (%) 212 12,793.8 25.5 299.9 221.7 5,72 (1.5) 37,894 8.5 1.9 1.3 15.8 48.4 213 12,72.7 98.3 74.5 48.2 1,242 (78.3) 38,76 23.1 11..8 3.3 7.6 214F 12,441.5 13.7 138. 15. 2,79 118. 39,91 11. 1.8.8 7. 62.8 215F 13,55.3 141. 183.3 139.5 3,598 32.8 42,19 8.3 9.9.7 8.9 51.2 216F 13,426.7 156. 212.5 161.7 4,172 15.9 45,863 7.1 8.8.6 9.5 39.7 1
Resource development earnings 1Q13 2Q13 3Q13 4Q13 1Q14F 2Q14F 3Q14F 4Q14F 212 213 214F 215F 216F KRW/USD exchange rate 1,84 1,122 1,112 1,62 1,7 1,65 1,65 1,55 1,127 1,95 1,64 1,4 1,3 Dubai crude (USD/bbl) 18 11 16 16 15 14 15 17 19 15 15 15 15 Newcastle coal (USD/ton) 91 86 77 82 77 75 74 8 95 84 77 79 81 LME copper (USD/ton) 7,916 7,162 7,85 7,1 7,6 7, 7,18 7,53 7,956 7,316 7,33 6,748 6,463 Share of output Coal (mn tons) 1.2 1.3 1.4 1.4 1.2 1.3 1.3 1.4 5.4 5.3 5.1 6.7 7.7 Oil/gas (mn Boe) 1.4 1.3 1.3 1.1 1.3 1.2 1.2 1.1 3.7 5.2 5.2 5.1 5.2 Copper (1, tons) 4. 4. 4. 4..... 16.4 16.... Source: Shinhan Investment Corp. Quarterly earnings (bn KRW, %) 1Q13 2Q13 3Q13 4Q13 1Q14F 2Q14F 3Q14F 4Q14F 212 213 214F 215F 216F Sales 2,884. 3,122. 3,166.1 2,9.6 2,792.1 3,86.5 3,357.3 3,25.5 12,793.8 12,72.7 12,441.5 13,55.3 13,426.7 Industrial goods 2,111.8 2,282. 2,316.1 2,148.2 2,45.7 2,262.5 2,53.5 2,419.4 9,596.9 8,858.1 9,231.2 9,648.5 9,783.3 Resources/commodities 772.2 84. 85. 752.3 746.5 823.9 853.8 786.1 3,196.8 3,214.6 3,21.3 3,46.8 3,643.4 OP 6.3 14.8 14.8 8.3 25.9 44.4 31.7 28.6 25.5 98.3 13.7 141. 156. Industrial goods 12.8 8.5 5. 2.7 11.7 28.9 16.3 16.2 58.7 29. 73. 68.2 69.1 Non-ferrous metals/green (.2) (1.4) (6.2) (1.3).3 1.2 1.5 1.3 37.3 (18.1) 4.3 8.1 9.7 Coal 5.6 4.5 6.5 (1.4) 5. 5.9 5.9 3.3 2.5 15.2 2. 34.8 48.1 Oil gas 44.4 1. 9.5 8.3 9. 8.5 8. 7.9 84.1 72.2 33.5 29.8 29. Equity method gains + dividend income 1.8 6.1 5.2 (38.1) 7.4 8.9 9.3 9.9 39.9 (16.) 35.5 59.1 68.9 Industrial goods.4 (4.5) (2.9).4 (2.8) (2.3) (.3).2 3.7 (6.6) (5.2) 1.6 12.8 Non-ferrous metals/green.4.3 1.2 (47.3) (.8) (.8) (.8) (.8) 1.3 (45.3) (3.2) (1.6) (1.2) Coal 4.1 3.5 2.6 3. 2.9 2.7 2.7 2.7 25.3 13.1 11. 12.3 14.6 Oil/gas 5. 5.6 3.9 4.7 7.5 8.5 6.7 6.8 9.6 19.2 29.5 34.5 39.4 Others.8 1.2.5 1.1.7.8 1..9. 3.6 3.3 3.3 3.3 Pre-tax OP 71. 21. 2.1 (29.8) 33.4 53.3 4.9 38.5 245.4 82.3 166.1 2.2 224.9 Industrial goods 14.1 5.2 2.5 4.2 9.5 27.3 16.9 17.3 62.4 26. 71.1 82.1 85.2 Non-ferrous metals/green (2.2) (11.5) (9.5) (21.2) (.5).4.7.5 28.1 (18.4) 4. 8.1 9.7 Resource development 61.5 25. 27. (12.9) 24.3 25.6 23.4 2.8 15. 1.7 94. 111.5 131.2 Coal 9.7 8. 9.1 1.6 7.8 8.5 8.6 6. 45.8 28.3 31. 47.2 62.7 Oil/gas 49.4 15.6 13.4 13. 16.5 17. 14.7 14.7 93.7 91.4 63. 64.4 68.4 Non-ferrous metals 2.4 1.5 4.6 (27.5).... 1.5 (19.)... Pre-tax profit 7.7 12.9 17.6 (26.6) 26.4 46.4 33.4 31.8 299.9 74.5 138. 183.3 212.5 NP 58.1 1.2 3.2 (27.4) 2.3 35.7 25.7 24.5 229.3 44.1 16.3 141.2 163.7 OPM 2.1.5.5.3.9 1.4.9.9 1.6.8 1.1 1.1 1.2 Pre-tax margin 2.5.4.6 (.9).9 1.5 1. 1. 2.3.6 1.1 1.4 1.6 Note: 1) Pre-tax OP = OP + equity method gains + dividend income 2) 1Q13 and 2Q13 figures for each business segment are estimates 2
Earnings estimate revision (bn KRW, %) Before After Change 214F 215F 214F 215F 214F 215F Sales 12,442.2 13,62.9 12,441.5 13,55.3 (.) (.1) OP 122.9 127.5 13.7 141. 6.3 1.6 Pre-tax profit 139.1 175.9 138. 183.3 (.8) 4.2 NP 17.1 135.5 16.3 141.2 (.8) 4.2 OPM 1. 1. 1.1 1.1 - - Pre-tax margin 1.1 1.3 1.1 1.4 - - Source: Shinhan Investment Corp. 12-month forward PER band 12-month forward PBR band (KRW) 8, (KRW) 8, 1.8x 1.5x 15x 12x 1x 7x 1.2x 1.x.6x 4x 1 11 12 13 14 1 11 12 13 14 Valuation of domestic trading companies PER PBR EV/EBITDA EPS Growth ROE (x, bn, %) 13 14F 15F 13 14F 15F 13 14F 15F 13 14F 15F 13 14F 15F Daewoo International 34. 16.2 9.3 2.1 1.8 1.5 41.7 17. 1.9 (37.6) 94.6 74. 6.3 11.5 17.7 SK Networks - 12.9 12.1.7.9.8 9.5 8.4 7.1 TN TP 6.4 (2.) 6.9 7. 23.1 11. 8.3.8.8.7 11. 1.8 9.9 (78.3) 118. 32.8 3.3 7. 8.9 3
Balance Sheet Year to Dec. (W bn) 212 213 214F 215F 216F Assets 4,957.5 4,877. 5,73.3 5,232.2 5,375.5 Total Current Assets 2,935.6 2,799. 3,18.6 3,29.5 3,374.4 Cash and Cash Equivalents 534.3 384.8 429.2 5.2 588.1 Accounts Receivables 1,317. 1,18.9 1,345. 1,419.1 1,459.4 Inventories 672.1 689.4 687.4 75.7 725.8 Non-Current Assets 2,22. 2,78. 2,54.7 2,22.8 2,1. Tangible Assets 133. 88.9 86.6 84.6 82. Intangible Assets 928.3 868.6 813.7 761.2 712.7 Investment Assets 851.3 926.1 939.2 959.8 987. Other Financial Institutions Assets..... Liabilities 3,341.9 3,263.5 3,419.2 3,456.3 3,455.2 Current Liabilities 2,423.2 2,245.3 2,48. 2,453.5 2,466.6 ST Borrowings 64.3 676.5 646.5 616.5 586.5 Account Payables 1,347.6 1,239. 1,397.9 1,466.9 1,58.6 Current Portion of LT Debt 13.1 147. 149. 145. 14. Non-Current Liabilities 918.7 1,18.2 1,11.2 1,2.8 988.6 Bonds 89.6 129.6 118.6 19.3 99.4 LT Borrowings(incl. LT Fin. Liab.) 724.4 777.2 767.2 761.9 753.8 Other Financial Institutions Liab...... Shareholders' Equity 1,615.6 1,613.5 1,654.1 1,775.9 1,92.2 Capital Stock 193.8 193.8 193.8 193.8 193.8 Capital Surplus 11.9 11.9 11.9 11.9 11.9 Other Reserves (1.6) (1.6) (1.6) (1.6) (1.6) Accu. Other Comp. Income 77.7 56.7 4.6 4.6 4.6 Retained Earnings 1,96.9 1,125. 1,216.4 1,336.6 1,478.9 Owners of Parent Equity 1,468.8 1,475.8 1,515.2 1,635.3 1,777.6 Non-Controlling Interests Equity 146.8 137.7 138.9 14.6 142.6 *Total Debt 1,564.8 1,742.9 1,694.3 1,646.4 1,593.7 *Net Debts(Cash) 781.4 1,138.3 1,38.8 98.6 761.4 Profit and Loss Year to Dec. (W bn) 212 213 214F 215F 216F Sales 12,793.8 12,72.7 12,441.5 13,55.3 13,426.7 Growth (%) (8.5) (5.6) 3.1 4.9 2.8 COGS 12,178.1 11,582.8 11,757.2 12,324.2 12,674.8 Gross Profit 615.7 489.8 684.3 731.1 751.9 Gross margin (%) 4.8 4.1 5.5 5.6 5.6 SG&A 41.2 391.6 553.6 59.1 595.9 Operating Income 25.5 98.3 13.7 141. 156. Growth (%) 2.4 (52.2) 33. 7.9 1.6 Operating margin (%) 1.6.8 1.1 1.1 1.2 Other Net Non-Operating Profits 94.4 (23.8) 7.3 42.3 56.6 Financial Income(Expenses) (36.8) (4.7) (27.6) (15.7) (11.) Net Other Non-Operating Profits 16.4 46.7 9.3 8.9 8.9 Net Gains in Asso., Subs., and JVs 24.9 (29.9) 25.6 49.1 58.7 Pre-tax Profit from Cont. Op. 299.9 74.5 138. 183.3 212.5 Income Taxes 7.7 3.4 31.7 42.2 48.9 Profit from Continuing Op. 229.3 44.1 16.3 141.2 163.7 Profit from Discontinued Op...... Net Profit 229.3 44.1 16.3 141.2 163.7 Growth (%) (12.4) (8.8) 141. 32.8 15.9 Net Profit margin (%) 1.8.4.9 1.1 1.2 Net Profit of Parent 221.7 48.2 15. 139.5 161.7 Net Profit to Non-Controlling 7.6 (4.1) 1.3 1.7 2. Total Comprehensive Income 146.4 21.3 54.1 141.2 163.7 Total Comp. Income of Parent 15.9 26.4 67.1 175. 22.9 Total Comp. Income to Non-Cont. (4.4) (5.1) (13.) (33.8) (39.2) EBITDA 257.6 216.4 214.8 221.5 233. Growth (%) (5.3) (16.) (.7) 3.1 5.2 EBITDA Margin (%) 2. 1.8 1.7 1.7 1.7 Note: Operating profit is based on 212 K-IFRS (gross profit - SG&A costs) Cash Flow Year to Dec. (W bn) 212 213 214F 215F 216F Operating Cash Flow 456.4 (173.5) 28.4 145.3 165.4 Net Profit 229.3 44.1 16.3 141.2 163.7 Depreciation 15. 16.5 17.3 18. 18.5 Amortization 37.1 11.7 66.9 62.5 58.5 Losses(Gains) on F/X Translation (28.3) 1.9. (8.) (8.) Losses(Gains) on Disp. of Assets..... Losses(Gains) in Asso.., Subs.,JVs.. (25.6) (49.1) (58.7) Chg. in A/L from Op. Activities 37.2 (287.) 33.7 (29.4) (18.8) (Payments of Income Taxes) (89.1) (146.5) (31.7) (42.2) (48.9) Others (14.8) 95.8 41.5 52.3 59.1 Investing Cash Flow (261.9) (235.2) (94.1) (2.7) 4.6 Incr. in Tangible Assets(CAPEX) (47.6) (9.1) (15.) (16.) (16.) Decr. in Tangible Assets 4.2 1.... Decr.(Incr.) in Intangible Assets (139.4) (89.2) (12.) (1.) (1.) Decr.(Incr.) in Investment Assets 27.3 (12.) (39.7) 28.5 31.4 Others (16.4) (17.9) (27.4) (5.2) (.8) Free Cash Flow 463.1 (138.3) 191.4 143.4 158.5 Financing Cash Flow (45.1) 239.3 (6.2) (61.5) (71.9) Incr.(Decr.) in Borrowing.. (48.6) (48.) (52.6) Decr.(Incr.) of Treasury Stock..... Dividend (19.3) (22.2) (11.6) (13.5) (19.3) Others (25.8) 261.5 (.). (.) Other Cash Flows.. (9.8) (1.1) (1.2) Change of Consolidated Scope..... Difference by Chg. in F/X Rates (5.8) 2.... Incr.(Decr.) in Cash 143.6 (149.4) 44.3 71. 87.9 Beginning Cash 39.7 534.3 384.8 429.1 5.2 Ending Cash 534.3 384.8 429.1 5.2 588.1 Key Ratios Year to Dec. 212 213 214F 215F 216F EPS_C (won) 5,915 1,138 2,742 3,642 4,222 EPS_P (won) 5,72 1,242 2,79 3,598 4,172 BPS_C (won) 41,682 41,628 42,675 45,818 49,542 BPS_P (won) 37,894 38,76 39,91 42,19 45,863 DPS (won) 5 3 35 5 5 PER_C (x) 8.2 25.3 1.8 8.2 7. PER_P (x) 8.5 23.1 11. 8.3 7.1 PBR_C (x) 1.2.7.7.6.6 PBR_P (x) 1.3.8.8.7.6 EV/EBITDA (x) 1.9 11. 1.8 9.9 8.8 EV/EBIT (x) 13.6 24.3 17.8 15.6 13.2 Dividend Yield (%) 1. 1. 1.2 1.7 1.7 Profitability EBITTDA Margin (%) 2. 1.8 1.7 1.7 1.7 OP Margin (%) 1.6.8 1.1 1.1 1.2 NP Margin (%) 1.8.4.9 1.1 1.2 ROA (%) 4.6.9 2.1 2.7 3.1 ROE (%) 15.8 3.3 7. 8.9 9.5 ROIC (%) 15.3 (2.3) 6.4 6.9 7.6 Stability D/E Ratio (%) 26.9 22.3 26.7 194.6 179.9 Net Debt to Equity (%) 48.4 7.6 62.8 51.2 39.7 Cash Ratio (%) 22. 17.1 17.8 2.4 23.8 Interest Coverage (x) 4. 2.1 2.7 3. 3.4 Activity (%) Working Capital Turnover (t) 2.3 19.1 16.1 16.8 16.7 Inventory Turnover (d) 19. 2.6 2.2 19.5 19.5 Receivable Turnover (d) 42.4 37.8 37.1 38.6 39.1 4
Share Price Performance (won) (Indexed,Apr-13=1) 45, 11 KOSPI Index = 1 35, 15 3, 1 25, 95 15, 9 1, 5, 85 8 4/13 8/13 12/13 4/14 Price (LHS) Relative Performance to KOSPI (RHS) Target Price & Recommendation History (won) 7, 5, 3, 1, 4/12 1/13 1/13 Target Price (LHS) Price (LHS) Recommendation (RHS) BUY Trading BUY HOLD REDUCE Compliance Notice Analyst Certification: The following analysts hereby certify the information and material presented in this report are accurate expressions of their views, and that they have not received wrongful pressure to express such views: MinHo Hur. As of the date of this report's publication, Shinhan Investment Corp.'s shareholdings in the company mentioned in this report() do not exceed 1% of outstanding shares of the company. As of this date, Shinhan Investment Corp. has not participated as the lead underwriter or advisor in issuance of the securities of the company during the past 1 year. Shinhan Investment Corp. confirms it has issued ELS based on the LG International's underlying asset. As of this date, the covering analyst does not possess any financial interest in the securities or debt instruments convertible into such shares of the company, which is required to be disclosed by law, and has not and will not receive any compensation of any kind whatsoever in exchange for expressing specific recommendations. All opinions and estimates regarding the company and its securities are accurate representations of the covering analyst's judgments as of this date, and may differ from actual results. This report is intended to provide information to assist investment decisions only and should not be used or considered an offer or the solicitation of an offer to sell or to buy any securities. Stock selection and final investment decisions should be made at the client's own discretion. This report is distributed to our clients only, and any unauthorized use, duplication, or redistribution of this report is strictly prohibited. History Table Recommendation Target Price (won) 212. 9. 27 BUY 65,5 212. 1. 26 BUY 61, 212. 12. 4 BUY 59, 213. 5. 3 BUY 45, 213. 7. 25 BUY 41,5 213. 1. 7 BUY 213. 1. 17 BUY 39, 213. 1. 25 BUY 38,2 213. 12. 19 BUY 35, 214. 1. 21 BUY 38, SHIC Rating Classifications (As of 25 Jul. 211) Stock BUY: Expected return of over +15% in the next 6 months Trading BUY: Expected return of % ~ +15% in the next 6 months HOLD: Expected return of -15% ~ % in the next 6 months REDUCE: Expected return of below -15% in the next 6 months Sector OVERWEIGHT: Prevalence of BUY rating for stocks in our sector coverage universe based on market cap NEUTRAL: Prevalence of HOLD rating for stocks in our sector coverage universe based on market cap UNDERWEIGHT: Prevalence of REDUCE rating for stocks in our sector coverage universe based on market cap 5