Company Report Kolon Industries (120110 KS) BUY (M) / TP: W110,000 Kyu-won Hwang kyuwon.hwang@tongyang.co.kr +822-3770-3564 Oct 9, 2012 KOREA Chemicals Share price (won, Oct 5) 59,500 Paid-in capital (Wbn) 139 Market cap (Wbn) 1,539 BPS (won) 67,700 Net debt to equity (%) 93.9 Shares outstanding 27,823,698 Avg daily T/O (2M, Wbn) 7 Avg daily vol (2M, shrs) 102,410 52-week high (won) 79,900 52-week low (won) 57,500 Foreign ownership (%) 15.6 Major shareholders (%) Kolon Corp & others 31.6 Stock performance (%) 1M 3M 12M Absolute (1.2) (15.4) (3.9) Relative 6.5 6.4 19.7 Abs (US$) 1.0 (13.6) 3.0 (won) (%) 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 200 150 100 50 Oct 2010 Oct 2011 Oct 2012 Source: Datastream Kolon Industries (LHS) Rel. to KOSPI(RHS) 0 3Q OP falls on DuPont legal costs 3Q OP likely dropped 17% q-q to W71.7bn We now believe 3Q sales came to W1.29tn, OP W71.7bn, and NPCI W39.5bn. OP likely fell 17% q-q from W85.8bn as strikes at HMC/Kia Motors weakened industrial materials margins. Chem OP likely improved from W25.7bn in 2Q to W28.6bn in 3Q. While petroleum resin price remains at US$2,700/tonne, a 50,000-tpa petroleum resin plant came fully on-stream in 3Q after regular maintenance. An additional 3,500 tonnes completed in May came on-stream in 3Q. Industrial materials OP likely slipped from W20.5bn in 2Q to W20.2bn in 3Q. Amid sluggish tire cord sales on global tire market weakness, strikes at HMC/Kia Motors dragged down airbag sales. PET film OP likely rose from W16.6bn in 2Q to W17.1bn in 3Q. OP has remained weak due to sluggish demand for packaging film (40% of PET film). Demand is sluggish, although 50% of the 15,000 capacity added in June came on stream. We believe fashion OP dropped from W22.1bn in 2Q to W7.1bn in 3Q on sluggish demand amid weak fashion seasonality. While menswear and womenswear sales likely declined, outdoor sales rose around 10% y-y. We estimate legal costs for 3Q related to the DuPont case at W12bn. Legal costs fell sharply from W13.1bn in 2Q, as Kolon Ind cut direct exports of tire cord and PET film to the US, reducing provisional attachment against US accounts receivable. 4Q operating profit likely to recover to W94.4bn We expect 4Q OP to rise W22.7bn q-q to W94.4bn. Amid robust petroleum resin sales, auto material sales (airbags, car seats, POM) should recover as strikes end at HMC. Fashion OP should climb by W20bn q-q on strong fashion seasonality. The US district court in Virginia will deliver a verdict over DuPont s attorney fees and the US court of appeal is set to begin the first hearing. Maintain BUY with target price of W110,000 We advise investors to approach from a mid- to long-term perspective. Forecasts and valuations (K-IFRS) (Wbn) FY ends Dec 2010A 2011A 2012F 2013F 2014F Sales 5,110 5,420 5,542 6,266 6,859 Chg (% y-y) na 6.1 2.3 13.1 9.5 Reported OP 371 397 348 385 445 Adjusted OP* 371 402 349 385 445 Net profit, CI 225 323 218 233 281 EPS, CI (won) 11,877 13,193 8,559 9,166 11,073 Chg (% y-y) na 11.1-35.1 7.1 20.8 P/E (x) 5.0 6.3 7.0 6.5 5.4 P/B (x) 1.2 1.2 0.8 0.8 0.7 EV/EBITDA (x) 4.2 6.5 6.5 6.1 5.5 ROA (%) 11.1 7.3 4.4 4.5 5.1 ROE (%) 34.1 21.2 12.2 12.0 13.0 Note: * Adjusted OP = reported OP (K-IFRS) other operating profit/loss. CI = controlling interest www.tys.co.kr/english TONGYANG Research
Kolon Industries (120110 KS) Table 18. 3Q OP likely came to W71.7bn (vs W85.8bn in 2Q and consensus of W76.6bn) 2011 2012 Full-year 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 2010 2011 2012 2013 Capacity Petroleum resin 000 tpa 25.0 25.0 25.0 25.0 25.0 25.0 27.5 27.5 100.0 100.0 105.0 110.0 Tire cord 000 tpa 14.6 14.6 14.6 19.3 19.3 19.3 19.3 21.8 58.2 63.0 79.7 87.2 Airbag 000 tpa 3.0 3.0 3.0 7.8 7.8 7.8 7.8 10.3 12.0 16.8 33.5 41.0 PET film 000 tpa 28.5 28.5 28.5 28.5 28.5 28.5 32.3 32.3 114.0 114.0 121.5 129.0 Polyester yarn 000 tpa 20.1 20.1 20.1 20.1 20.1 20.1 20.1 20.1 80.5 80.5 80.5 80.5 Nylon yarn 000 tpa 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 55.0 55.0 55.0 55.0 Car seat 000 m2 21.0 21.0 21.0 28.0 28.0 28.0 28.0 28.0 84.0 91.0 112.0 112.0 Polyacetal (POM) 000 tpa 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 30.0 30.0 30.0 30.0 Sales Wbn 1,316 1,379 1,278 1,447 1,331 1,352 1,294 1,565 3,236 542 554 6,266 Chemical Wbn 258 257 268 276 284 274 304 313 806 106 118 1,346 Petroleum resin US$/tonn 2,703 2,826 2,759 2,803 2,855 2,761 2,756 2,786 2,120 2,773 2,790 2,866 Hirenol US$/tonn 2,998 3,064 3,030 3,053 3,124 3,074 3,041 3,088 2,578 3,036 3,082 3,132 Industrial materials Wbn 159 171 177 180 180 192 189 203 560 69 76 790 Tire cord US$/tonn 4,136 4,377 4,491 4,464 4,285 4,141 4,119 4,236 3,909 4,367 4,195 4,129 Airbag US$/tonn 11,057 14,220 12,470 11,489 12,430 13,284 13,725 12,288 12,162 12,309 12,932 12,164 Aramid US$/tonn 21,542 21,533 21,669 21,581 21,594 22,056 21,660 21,602 21,447 21,581 21,728 21,543 Film/electronic materialwbn 197 197 174 167 167 165 161 171 672 73 66 740 PET film US$/tonn 5,016 4,895 5,138 4,812 4,441 5,064 5,339 5,286 4,202 4,965 5,032 4,881 Fashion Wbn 154 264 221 390 284 300 241 448 702 103 127 1,461 Other at parent co Wbn 195 112 68 68 51 45 52 55 501 44 20 231 Kolon Nanjing Wbn 29 34 44 42 47 48 47 65-15 21 270 Tire cord US$/tonn 4,136 4,377 4,491 4,464 4,285 4,141 4,119 4,236 3,909 4,367 4,195 4,129 Kol Fash Mat Wbn 164 169 158 150 152 141 123 128-64 54 613 Polyester yarn US$/tonn 2,129 2,187 1,720 1,668 1,608 1,539 1,400 1,533-1,926 1,520 1,490 Nylon yarn US$/tonn 3,916 4,876 4,317 4,123 3,781 3,698 3,293 3,698-4,308 3,618 3,997 Kolon Glotech Wbn 11 118 114 119 106 124 118 117-36 46 506 Kolon Plastic Wbn 49 53 53 54 60 62 59 65-21 25 311 Polyacetal (POM) US$/tonn 2,042 2,171 2,201 2,120 1,976 1,900 1,796 1,791-2,134 1,866 1,876 Polyamid US$/tonn 3,428 3,677 3,624 3,401 3,191 3,137 2,876 2,686-3,533 2,973 3,141 Operating profit Wbn 108 119 94 77 96 86 72 94 251 40 35 385 Chemical Wbn 20 21 24 25 26 26 29 28 61 9 11 125 Cash margin US$/tonn 1,540 1,577 1,557 1,570 1,557 1,532 1,544 1,583 1,315 1,561 1,554 1,606 Industrial materials Wbn 17 18 19 21 19 21 20 21 62 7 8 88 Cash margin US$/tonn 2,781 3,126 3,098 3,127 3,011 3,105 3,079 3,245 2,724 3,033 3,110 2,959 Film/electronic materialwbn 29 28 25 16 16 17 17 17 82 10 7 80 Cash margin US$/tonn 2,971 2,903 2,745 2,693 2,501 2,512 2,233 2,336 3,150 2,828 2,396 2,396 Fashion Wbn 12 21 9 28 17 22 7 28 52 7 7 76 Other at parent co Wbn 11 8-1 -29 1-17 -17-17 -6-1 -5-68 Kolon Nanjing Wbn 2 2 3 6 5 5 5 7-1 2 31 Kol Fash Mat Wbn 9 9 5 1 7 3 2 3-2 1 18 Kolon Glotech Wbn 13 14 7 6 4 5 6 4-4 2 19 Kolon Plastic Wbn 4 3 3 3 3 4 3 3-1 1 15 Net profit Wbn 86 95 87 55 72 55 40 52 211 32 22 233 Changes to fundamentals 1Q12: OP W96.1bn. Earnings continued to improve at petroleum resin and industrial materials and one-off expenses declined (DuPont legal cost of W4bn) 2Q12: OP down q-q to W85.8bn; DuPont legal cost of W13.1bn 3Q12E: OP likely came to W71.7bn, down from W85.8bn in 2Q on weak fashion/textile seasonality (1) Chemical OP likely rose from W25.7bn in 2Q to W28.6bn on strong petroleum resin price and 3,500-tpa added capacity in May. (2) Industrial mat OP likely slipped from W20.5bn in 2Q to W20.2bn in 3Q as strikes at HMC/Kia Motors dragged down tire cord and airbag sales. (3) Film OP likely increased from W16.6bn in 2Q to W17.1bn in 3Q. Despite operation of 50% of 15,000-tpa added capacity, prices of packaging materials remained weak due to sluggish demand. (4) Fashion OP likely dropped from W22.1bn in 2Q to W7.1bn on sluggish demand amid weak seasonality. Although Aug domestic sportswear sales fell 4% y-y, Kolon's outdoor sales rose around 10% y-y. (5) Strikes at HMC/Kia Motors weakened earnings at Kolon Glotech (car seats) and Kolon Plastic (rubber for automotive valves). (6) W12bn of DuPont legal costs likely booked (= W8bn as provisioning for provisional attachment + W4bn as lawyers' fees) 2012: In 1Q, China's airbag production capacity to rise from 6mn to 12mn/annum and Korea's from 18mn to 24mn; W10bn provisioning every quarter for DuPont litigation expenses -> In 2Q, optical film capacity expanded by 20,000 tpa -> In 3Q, appeal for DuPont antitrust lawsuit ruling -> In 4Q, tire cord production capacity to rise by 10,000 tpa in China 2013: PV PET film capacity to expand by 15,000 tpa, petroleum resin 30,000 tpa; ruling on 2nd trial of trade secrets violation lawsuit with DuPont to be made in 2Q~3Q 2 TONGYANG Securities Inc.
Company Report Table 19. Kolon-DuPont aramid lawsuit history Date Detail 2005 Kolon finishes building 5mn-tpa para-aramid plant 2006 Kolon hires former DuPont engineer Michael Mitchell and launches business in US Feb 2009 Apr 2009 Aug 2009 Mar 2010 Mar 2011 Nov 2011 Mar 2012 Apr 2012 Jul 2012 Aug 30, 2012 Aug 30, 2012 Sep 21, 2012 4Q12 Nov 2012 1H13 DuPont files suit against Kolon in US district court in Virginia for theft of trade secrets Kolon files antitrust suit against DuPont in US district court in Virginia Kolon alleges DuPont s practice of long-term contracts for aramid in US blocks other aramid makers from selling there US district court in Virginia finds in favor of DuPont in antitrust case filed against DuPont by Kolon US district court in Virginia sentences Michael Mitchell to 18 months in prison US federal court orders retrial on antitrust case against DuPont US district court in Virginia orders Kolon to pay DuPont US$919.9mn in damages and US$350,000 in punitive damages US district court in Virginia encourages Kolon and DuPont to settle outside court Kolon s antitrust suit against DuPont rejected by US district court in Virginia Kolon and DuPont fail to reach agreement US district court in Virginia orders Kolon to stop producing and selling aramid for 20 years Kolon files an appeal US federal court allows Kolon to continue producing/selling aramid until second trial is complete US district court in Virginia to order Kolon to pay DuPont s attorney fees US court of appeal to begin first hearing US court of appeal to encourage Kolon and DuPont to settle End-2Q13 If the two fail to settle, the court of appeal will deliver verdict Note: Shaded area is our predictions Source: Media, District Court for the Eastern District of Virginia, TONGYANG Securities TONGYANG Securities Inc. 3
Kolon Industries (120110 KS) Kolon Industries (120110 KS) pro forma financial statements (K-IFRS, consolidated) Statement of comprehensive income Statement of financial position FY ends Dec (Wbn) 2010A 2011A 2012F 2013F 2014F FY ends Dec (Wbn) 2010A 2011A 2012F 2013F 2014F Sales 5,110 5,420 5,542 6,266 6,859 Current assets 1,649 2,238 2,267 2,517 2,757 Cost of sales 3,799 4,036 4,184 4,727 5,159 Cash & cash equiv 147 231 70 144 137 Gross profit 1,311 1,384 1,359 1,539 1,701 Accts rec & other 628 871 1,018 1,109 1,235 SG&A 940 982 1,009 1,155 1,256 Inventory 643 823 964 1,050 1,170 Adj operating profit* 371 402 349 385 445 Non-current assets 2,389 2,559 2,736 2,838 2,924 Other op prof/loss 0-5 -1 0 0 Tangible assets 1,856 1,966 2,054 2,134 2,196 Forex gain/loss 0 5-2 0 0 Investment in affiliate 179 192 202 227 254 Net interest income 0 0 0 0 0 Other non-current 233 244 203 203 203 Other 0-10 1 0 0 Total assets 4,038 4,798 5,003 5,355 5,681 Operating profit 371 397 348 385 445 Current liabilities 1,438 2,057 1,889 1,978 2,058 EBITDA 562 547 518 557 615 Accts payable & other 836 866 885 937 1,009 Non-op profit/loss -90-49 -62-72 -68 ST financial liabilities 216 465 636 619 609 Forex gain/loss 5 0 2 0 0 Liquid LT liabilities 350 484 306 359 377 Net interest inc -99-86 -92-104 -103 Non-current liabilities 1,144 949 1,177 1,224 1,206 Equity-meth gain/loss 25 27 18 24 27 LT financial liabilities 326 397 505 452 434 Other -20 10 10 8 8 Debentures 529 335 405 505 505 Net prof before income tax 281 348 286 313 377 Total liabilities 2,582 3,006 3,066 3,201 3,264 Income tax 36 64 61 73 89 Equity, controlling int 1,319 1,723 1,843 2,044 2,292 Net profit from cont op 245 284 225 239 288 Paid-in capital 131 139 139 139 139 Net profit from discont op 0 55 0 0 0 Capital surplus 719 921 897 897 897 Net profit 245 339 225 239 288 Retained earnings 206 668 844 1,045 1,293 NP for controlling int 225 323 218 233 281 Equity, non-control int 137 69 93 110 125 Total comprehensive inc 245 335 181 239 288 Total equity 1,456 1,792 1,937 2,154 2,417 TCI for controlling int 245 317 246 408 491 Net debt 1,133 1,431 1,731 1,740 1,737 Note: 1. Adjusted op profit = gross profit - SG&A Total debt 1,422 1,681 1,851 1,934 1,925 2. EBITDA is based on adjusted operating profit Cash flow statement Valuation FY ends Dec (Wbn) 2010A 2011A 2012F 2013F 2014F FY ends Dec 2010A 2011A 2012F 2013F 2014F Operating cash flow 291 325 45 236 232 EPS (won) 11,877 13,193 8,559 9,166 11,073 Net profit 245 339 225 239 288 BPS (won) 50,323 66,952 71,224 78,424 87,340 Depreciation & amort 176 147 167 170 168 EBITDA/shr (won) 26,325 20,256 18,617 20,032 22,109 Forex gain/loss 0-2 -2 0 0 SPS (won) 239,219 200,747 199,197 225,216 246,519 Affiliate invest gain/loss -25 0-7 -24-27 DPS (won) 1,200 1,200 1,200 1,200 1,200 Inc(dec) net working cap -182-261 -368-227 -276 P/E (x) 5.0 6.3 7.0 6.5 5.4 Other 77 103 30 78 78 P/B (x) 1.2 1.2 0.8 0.8 0.7 Investing cash flow -382-218 -267-187 -166 EV/EBITDA (x) 4.2 6.5 6.5 6.1 5.5 Investment -17 35-35 0 0 PSR (x) 0.2 0.4 0.3 0.3 0.2 Inc in tangible assets -265-391 -301-250 -230 Dec in tangible assets 8 3 1 0 0 Key financial data Other -108 136 68 63 64 FY ends Dec 2010A 2011A 2012F 2013F 2014F Financing cash flow 167-33 132 91-3 Sales (% y-y) 0.0 6.1 2.3 13.1 9.5 Inc(dec) in ST fin liab -248 0 57-17 -10 Operating profit (% y-y) 0.0 7.0-12.4 10.6 15.6 Inc(dec) in LT fin liab 100 98 107 100 0 Adjusted OP (% y-y) 0.0 8.3-13.2 10.2 15.6 Inc(dec) in equity 315 21 0 0 0 NP, CI (% y-y) 0.0 43.8-32.6 7.0 20.5 Cash dividend -1-32 -36-36 -36 Gross margin (%) 25.7 25.5 24.5 24.6 24.8 Other 0-119 5 45 43 Operating margin (%) 7.3 7.3 6.3 6.1 6.5 Other cash flow 0 1-77 -66-69 Adj OP margin (%) 7.3 7.4 6.3 6.1 6.5 Inc (dec) in cash & eq 76 76-166 74-7 NP, CI margin (%) 4.4 6.0 3.9 3.7 4.1 Beginning cash & equiv 76 160 236 70 144 EBITDA margin (%) 11.0 10.1 9.3 8.9 9.0 Ending cash & equiv 152 236 70 144 137 ROIC (%) 27.0 12.1 8.6 8.5 9.2 NOPLAT 37 40 35 38 44 ROA (%) 11.1 7.3 4.4 4.5 5.1 FCF 67-179 -225-10 5 ROE (%) 34.1 21.2 12.2 12.0 13.0 Debt-to-equity (%) 177.4 167.7 158.3 148.6 135.1 Net debt-to-equity (%) 85.9 83.0 93.9 85.1 75.8 OP/financing cost (x) 3.6 4.3 3.4 3.4 3.9 Note: EPS, BPS, P/E and P/B are based on controlling interest For valuation metrics such as P/E, historical figures are based on annual averages, estimates on current price For ROA or ROE, assets and equity are averages of end-of-year figures for given year and year prior Data to 2010 based on K-GAAP and from 2011, K-IFRS 4 TONGYANG Securities Inc.
Company Report Kolon Industries (120110 KS) ratings and target price history (won) 180,000 Current price Target price 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Oct 2010 Aug 2011 Jun 2012 Date Rating TP (won) 2012/10/08 BUY 110,000 2012/07/09 BUY 110,000 2012/04/06 BUY 110,000 2012/01/31 BUY 110,000 2012/01/05 BUY 110,000 2011/11/23 BUY 160,000 2011/11/15 BUY 160,000 2011/10/10 BUY 160,000 2011/09/20 BUY 160,000 2011/07/05 BUY 160,000 Disclosures & disclaimers This research report has been prepared for informational purposes only; it does not constitute an offer or a solicitation of an offer to buy or sell any securities or other financial instruments. The information and data contained in this report have been obtained from sources we consider reliable; however, we make no representation that the information provided in this report is accurate or complete, and it should not be relied on as such. The recipient of this report should use his/her independent judgment regarding the sale or purchase of any securities or financial instruments mentioned herein. We disclaim any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is for our clients only. It is copyrighted material and may not be reproduced, transmitted, quoted, or distributed in any manner without the prior written consent of TONGYANG Securities Inc. As of the publication date of this report, TONGYANG Securities Inc. does not own a stake in excess of 1%, nor does it have any interest whatsoever, in the subject company (ies). The material contained herein was not disclosed by TONGYANG Securities Inc. to any institutional investors or third parties prior to its publication. The analyst (s) of this report or the analyst (s) spouse does not have any financial interest in the securities of the subject company (ies) mentioned herein, nor financial interest of any nature related to the subject company (ies) (including without limitation, whether it consists of any option, right, warrant, future, long or short position), as of the publication date of this report. Analyst certification I/We, as the research analyst/analysts who prepared this research report, do hereby certify that the views expressed in this report accurately reflect my/our personal views about the subject securities discussed in this report. Stock and sector ratings Stock ratings include an Investment Rating (Buy, Hold, Sell) as well as a Volatility Risk Rating (High, Low) that are based on the expected absolute return of a stock over the next 6-12 months. - Buy: Low Risk if a stock is expected to return 10% or more; High Risk if a stock is expected to return 20% or more - Hold: Low Risk if a stock is expected to return between -10 and +10%; High Risk if a stock is expected to return between -20 and +20% - Sell: Low Risk if a stock is expected to decline by 10% or more; High Risk if a stock is expected to fall by 20% or more Sector ratings suggest 6 to 12 - month forward investment weighting of a given sector compared to its market capitalization weighting. - Overweight: Investment weighting is higher than the market capitalization weighting - Neutral: Investment weighting is equal to the market capitalization weighting - Underweight: Investment weighting is lower than the market capitalization weighting TONGYANG Securities Inc. 5
Kolon Industries (120110 KS) TONGYANG Securities International Network Seoul Head Office TONGYANG Securities Building Euljiro 76 Jung-gu Seoul, Korea 100-845 Tel: +822-3770-3454 Corporate website: www.tys.co.kr/english Research Center TONGYANG Securities Building #32 Gookjegeumyoongro 2-gil Youngdeungpo-gu, Seoul, Korea Tel: +822-3770-3436 Hong Kong TONGYANG Securities Hong Kong Limited Unit 3208-09, 32/F, Alexandra House 18 Chater Road, Central, Hong Kong Tel: +852-3980-6000 New York 150 East 52nd Street 25th Floor New York NY 10022, U.S.A. Tel: +1-212-415-1008 Tokyo 803-3-4-1, Shin-Kokusai Building Maronouchi, Chiyoda-ku Tokyo, Japan 100-0005 Tel: +81-3-6269-9720 Ho Chi Minh Suite 2905, Saigon Trade Center 37 Ton Dou Thang Street District 1, Ho Chi Minh City, Vietnam Tel: +84-8-910-6711 Manila TONGYANG Savings Bank Ground Floor, Chantham House 116 Valero Corner, Herrera Street Salcedo Village, Makati City Metro Manila, Philippines Tel: +63-2-845-3838 Phnom Penh #138, Norodom Boulevard Sangkat Tonle Bassac Khan Chamkarmorn Phnom Penh, Cambodia Tel: +855-23-224-125 6 TONGYANG Securities Inc.