(1211 KS) Another beneficiary of China momentum! Korea Equity Research Chemicals Buy Maintain Buy; Raise TP to W72, We maintain our Buy call on Kolon Industries and raise our target price to W72,, from W6,. Our target price, derived based on a sum-of-the-parts valuation, corresponds to 21F P/E of 9.6x and P/B of 1.6x. Our investment recommendation is premised on: 1) operating profit growth amid robust downstream industries such as auto and IT, 2) improved equity-method gains thanks to stable earnings at subsidiaries, 3) growing momentum from China, 4) improved financials, and 5) expectations of a valuation re-rating. 2Q1 OP to hit a historic-high of W6.3bn We forecast Kolon IndustriesÊ 2Q1 operating profit to hit a historic high of W6.3bn, up 35.1% QoQ. Our optimistic outlook is based on: 1) greater demand for industrial materials, films, and chemicals amid robust downstream industries, 2) the arrival of peak season (for fashion), 3) won depreciation against the U.S. dollar (for industrial materials), 4) lower feedstock prices (for industrial materials and films), and 5) capacity expansion (for films). Thanks to robust earnings at subsidiaries, equity-method gains should also improve to W14.5bn in 2Q1 from W13bn in 1Q1. Focus on momentum from China Kolon Industries is expected to gather additional momentum from China, as: 1) earnings at industrial material (airbags and tire cords) and film (LCD films) units should improve on expansion of Chinese consumption; and 2) earnings contribution from its Nanjing factory (producer of auto airbags and tire cords) is likely to increase. Of particular note, capacity expansion at the Nanjing factory should also help boost profitability at the parent by moving the production of low margin products to the more cost-efficient Nanjing factory and focusing more on products with high value added. 28 June 21 Bloomberg: 1211 KS Target Price (12M, W): 72, Share Price (6/25/1, W): 58,7 Expected Return (%): 22.7 Sector: Chemicals Sector Rating: Overweight EPS Growth (1F, %): 79.9 Market EPS Growth (1F, %): 63.8 P/E (X): 7.9 Market P/E (6/25/1F, x): 9.5 Market Cap : 987 Shares Outstanding (mn): 2 Avg Trading Volume (6D, '): 186 Avg Trading Value (6D, Wbn): 9 Margin Balance (' sh): 141 Dividend Yield (1F, %): 1.7 Free Float (%): 56.7 52-Week Low/High: 41,85/6,4 Beta (12M, Daily Rate of Return):.8 Price Return Volatility (12M Daily,%,SD): 2.5 Foreign Ownership (%): 18.6 Major Shareholder(s): Kolon et al. (43.3%) National Pension Services (6.9%) Price Performance (%) 1M 6M 12M Absolute 18.6 -- -- Relative 18.9 -- -- FY Sales OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA (%) (W) (%) (x) (x) (x) 12/8 - - - - - - - - - - - 12/9 2,215 18 8.1 1 4,154 286-25 12.7 13.7 2. 7.7 12/1F 3,116 224 7.2 146 7,47 344 25 17.5 7.9 1.3 6.3 12/11F 3,315 248 7.5 16 8,172 368 15 16.8 7.2 1.1 5.7 12/12F 3,631 29 8. 25 1,475 41 129 18.5 5.6 1. 5. estimates 14 13 12 11 1 9 8 Share price KOSPI 2/1 6/1 Eung Ju Yi +822-768-3857 eungju.lee@dwsec.com Hannah Yoon +822-768-4161 hannah.yoon@dwsec.com Please carefully read important notices in the last page of this report.
2Q1 OP to hit a record-high of W6.3bn Kolon IndustriesÊ 2Q1 operating profit is forecast to record a historic high of W6.3bn, up 35.1% QoQ. All business units are expected to post solid earnings results. Table 1. Kolon IndustriesÊ earnings trend and forecasts by division (Wbn, %) 29 21F 1Q1 growth 1Q 2Q 3Q 4Q Yearly 1Q 2QF 3QF 4QF Yearly YoY QoQ Sales 415.5 479.2 64.4 716.1 2,215.2 732.1 788.3 784.2 811.5 3,116.1 64.5 7.7 Industrial materials 11.5 15.9 18.4 12.3 436.1 124.2 132.9 135.9 147.8 54.7 25.5 7. Films 13.3 127.3 139.8 138.8 59.2 147.2 161.3 165.3 155.3 629.1 26.7 9.6 Chemical (Kolon Chemical) 125.7 145.6 165.2 141.3 577.7 192.3 197.3 211.6 178.5 779.6 35.5 2.6 Fashion (FnC Kolon) - - 81.4 25.6 287. 148.8 171.8 15.4 218.9 69.1-15.5 Operating profit 43.8 4.6 46.8 48.7 179.9 44.7 6.3 6.8 58.5 224.3 48.4 35.1 Industrial materials 2.6 15.8 15.2 14.4 65.9 12.4 15.1 16.9 16.8 61.2-4.5 21.4 Films 11.4 12.6 14.3 12.5 51. 13.4 17.8 18.8 16.7 66.8 41. 32.9 Chemical (Kolon Chemical) 12.1 13.2 13.8 9.2 48.4 12.1 15.8 16.9 12.3 57.1 19.5 3.7 Fashion (FnC Kolon) - - 4.4 14.5 18.9 9.4 14.2 9.3 15.4 48.4-51.1 OP margin 1.5 8.5 7.7 6.8 8.1 6.1 7.7 7.8 7.2 7.2 Industrial materials 2.3 14.9 14.1 11.9 15.1 1. 11.3 12.4 11.4 11.3 Films 11.1 9.9 1.3 9. 1. 9.1 11. 11.4 1.8 1.6 Chemical (Kolon Chemical) 9.6 9.1 8.4 6.5 8.4 6.3 8. 8. 6.9 7.3 Fashion (FnC Kolon) - - 5.4 7.1 6.6 6.3 8.3 6.2 7. 7. Note: Kolon industries was spun off from Kolon at end-29; 29 earnings are based on KolonÊs earnings before merger; Fashion division (FnC) merged with Kolon in Aug 29. Figure 1. Major macro variables and Kolon IndustriesÊ operating profit Figure 2. Equity-method gains at Kolon Industries (1Q8=1) 8 Kolon Industries's OP (L) 2 5 6 Relative index of W/US$ (R) Relative index of WTI prices (R) 15 25 (Old) Kolon: Equity method gains fluctuated due to poor performance of subsidiaries (Now) Kolon Industries: Stable earnings thanks to robust performance of subsidiaries 4 1 2 5-25 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1F 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1F Source: Bloomberg, Company data, Daewoo Securities Research 2
Focus on momentum from China We expect Kolon Industries to gather additional momentum from China, as: 1) Earnings should improve on expansion of Chinese consumption. As purchasing power in China received a boost from government stimulus, a rise in income, and appreciation of yuan, sales of autos/tires and LCD TVs have expanded. China is now the largest auto market in the world, and the standard of living has significantly improved. TV sales soared on large-scale sporting events such as the FIFA World Cup and Asian Games. Demand for optical films is soaring, as: 1) the size of LCD TVs is getting bigger; and 2) the main lighting source is shifting to LED from CCFL. As for optical films used for 8G LCD TVs or more advanced, demand is far exceeding supply as capacity expansion takes time. Hence, the companyês industrial material (tire cords and airbags) and film (LCD films and electronic materials) units should enjoy a boom for an extended period. Kolon Industries is the third largest tire cord maker in the world, and has a monopolistic position in the airbag fabric market in Korea and China. The company is also one of three largest optical film makers, along with SKC and Toray Industries. 2) Contribution of Nanjing factory to increase Kolon Industries has manufactured auto airbag cushions and tire cords at its factory in Nanjing, China, since 24. At present, the Nanjing factory holds market shares of 1% for tire cords (3 rd largest) and 5% for airbag cushions (largest) in China. With the Chinese auto/tire market expanding sharply, the company plans to expand its production capacity in Nanjing. By 211, monthly capacity for tire cords and airbag cushions is slated to increase to 2,4 tonnes (from 1,2 tonnes) and 8, units (from 4, units), respectively. Following capacity expansion, tire cord capacity should climb to two thirds of KoreaÊs and airbag cushion capacity should near KoreaÊs. As a consequence, sales at the Nanjing factory are forecast to exceed W1bn in 21 and W165.2bn in 211. Operating profit is projected to surpass W1bn in 21 and W3bn in 211. This should make a meaningful contribution to the companyês earnings (KolonÊs 211 operating profit is forecast at W249.2bn). The capacity expansion should also significantly boost the profitability of the parent company by moving the production of low margin products to the more cost-efficient Nanjing factory and focusing more on products with high value added. Figure 3. Earnings from Nanjing plant in China Figure 4. M/S comparison in ChinaÊs tire cord market (29) 2 15 Airbag sales (L) Tire cord sales (L) Total OP (R) 4 3 Kolon 1% 1 2 Others 46% 29 (7,6 T/M) HS 24% 5 1 PF 2% 6 7 8 9 1F 11F 3
Maintain Buy; Raise TP to W72, We maintain our Buy call and raise our target price to W72,, from W6,. Our target price was raised, considering: 1) we raised our 21 earnings forecasts; and 2) we raised EV/EBITDA multiple for the film unit in light of improved industry structure. We also re-valued the subsidiaries such as SKC-Kolon PI to reflect the surge in earnings forecasts. Table 2. Target price calculation (Wbn, x, Ê shares, W, %) EBITDA (21F) Multiple Fair value Remarks (Equity stake) (Book value) Operating value Industrial materials 99 5.7 561 Multiple represents 2% discount to the average of manufacturing Films 13 6.9 711 Multiple represents 1% premium to the average of manufacturing Chemicals 92 5.4 491 Multiple represents 15% discount to the average of manufacturing Fashion 61 5. 36 Multiple represents 2% discount to the average of manufacturing Total (A) 354 5.8 2,7 Asset value Cambridge Kolon 7.5% 111 38 Market cap X equity stake (fashion) Kolon Fashion materials 67.1% 82 57 P/B of.7x (fibers) Kolon Glotech 62.7% 122 11 P/B of.9x (auto components) Kolon Plastics 1.% 31 37 P/B of 1.2 (engineering plastics) SKC-Kolon PI 5.% 14 155 P/B of 1.5X (engineering plastics - PI films for FPCB) KNC 1.% 44 48 P/B of 1.1X (manufactures tire cords and airbags in China) Hana Capital 29.1% 38 38 P/B of 1.X (JV with Hana Financial Group and Kolon Group) Capro 19.9% 86 118 Market cap X ownership (Caprolactam) Other investment securities 27 16 Applied book value of 6% Total 618 (Fair asset value, B) 464 25% discount to the total asset value Net debt (C)) 1,172 Net debt as of end-1q1 cash inflow when exercising BW Preferred stock market cap. (D) 51 Closing price on June 25, 21 Target market cap. (E=A+B-C-D) 1,311 Outstanding shares (F) 18,236 On the assumption that all warrants will be exercised Target price (E/F) 72, Current price 58,7 Closing price on June 25, 21 Target return 22.7 Note: We gave Kolon IndustriesÊ film division a valuation premium to reflect shortages in base film supply from the strong LCD market 4
Table 3. Earnings forecast revisions (Wbn, W) Previous Revised % diff. 1F 11F 12F 1F 11F 12F 1F 11F 12F Sales 3,144 3,379 3,644 3,116 3,315 3,631 -.9% -1.9% -.3% OP 213 261 296 224 248 29 5.2% -5.% -2.2% Pre-tax profit 179 235 272 183 211 263 2.2% -1.3% -3.4% Net profit 143 178 212 146 16 25 2.1% -1.3% -3.4% EPS 7,33 9,149 1,89 7,47 8,172 1,475 1.9% -1.7% -3.8% OP margin 6.8% 7.7% 8.1% 7.2% 7.5% 8.% ROE 16.7% 17.7% 18.% 17.5% 16.8% 18.5% Note: We revised down earnings forecasts from 211 due to changed W/US$ rate assumptions Source: Daewoo Securities Research Figure 5. P/E band Figure 6. P/B band (Wtr) 1.5 9.5x 8.x 6.5x (Wtr) 1.5 1.5x 1.2x 1.2 1.2 5.x.9x.9.9.6 3.5x.6.6x.3.3.3x. 96 98 2 4 6 8 1F 12F. 96 98 2 4 6 8 1F 12F Note: Kolon holdings data before Feb 21, Source: Daewoo Securities Research Note: Kolon holdings data before Feb 21, Source: Daewoo Securities Research 5
Kolon Industries (1211 KS /Buy/TP: W72,) Income Statement (Summarized) Balance Sheet (Summarized) 12/9 12/1F 12/11F 12/12F 12/9 12/1F 12/11F 12/12F Sales 2,215 3,116 3,315 3,631 Current Assets 732 871 878 931 Cost of Goods Sold 1,743 2,346 2,57 2,756 Cash and Cash Equivalents 33 75 64 41 Gross Profit 472 77 88 875 Accounts Receivable 33 357 365 399 SG&A 292 545 56 585 Inventories 33 373 381 418 Operating Profit 18 224 248 29 Other Current Assets 66 66 67 74 Non-Operating Income -8-41 -37-27 Non-Current Assets 1,743 1,924 2,23 2,113 Interest Income/Expense -74-81 -77-73 Investment Assets 65 785 881 972 F/X-Related Gain/Loss 1-2 -2 2 Property, Plant and Equipment 1,78 1,116 1,121 1,121 Equity Method Gain/Loss -7 46 49 51 Intangible Assets 14 23 21 2 Asset Disposal Gain/Loss -2 Total Assets 2,475 2,795 2,91 3,45 Other Non-Operating Profit/Loss 3-4 -7-7 Current Liabilities 1,86 1,112 1,88 1,64 Pretax Profit 1 183 211 263 Accounts Payable 38 357 365 399 Tax 1 37 51 58 Short-Term Debt 324 37 359 326 Profit from Continuing Operation 1 146 16 25 Current Long-Term Debt 268 19 166 121 Profit from Discontinued Operation Other Current Liabilities 186 195 199 218 Tax Effect Non-Current Liabilities 74 82 791 78 Net Profit 1 146 16 25 Bonds 49 526 515 492 Residual Income 1 146 16 25 Long-Term Debt 97 14 99 96 EBITDA 286 344 368 41 Other Non-Current Liabilities 118 172 177 192 Free Cash Flow -25 25 15 129 Total Liabilities 1,79 1,914 1,879 1,844 Gross Profit Margin (%) 21.3 24.7 24.4 24.1 Paid-In Capital 97 97 97 97 EBITDA Margin (%) 12.9 11. 11.1 11.3 Capital Surplus 438 438 438 438 Operating Margin (%) 8.1 7.2 7.5 8. Retained Earnings 146 286 466 Net Margin (%) 4.5 4.7 4.8 5.7 Stockholders' Equity 784 881 1,21 1,21 Cash Flow (Summarized) Forecasts/Valuations (Summarized) 12/9 12/1F 12/11F 12/12F 12/9 12/1F 12/11F 12/12F Cash Flow from Operating 219 177 228 248 P/E (x) 13.7 7.9 7.2 5.6 Net Profit 1 146 16 25 P/CF (x) 6.8 4.4 4.1 3.6 Non-Cash Income and Expense 13 83 73 67 P/B (x) 2. 1.3 1.1 1. Tangible Assets Depreciation 13 114 118 119 EV/EBITDA (x) 7.7 6.3 5.7 5. Intangible Assets Depreciation 3 5 1 1 EPS (W) 4,154 7,47 8,172 1,475 Others 24-36 -47-53 CFPS (W) 8,438 13,326 14,219 16,543 Chg in Working Capital -11-52 -5-24 BPS (W) 28,447 43,857 51,79 6,32 Chg in Accounts Receivable -84-63 -8-35 DPS (W) 45 1, 1,3 1,5 Chg in Inventories -22-42 -8-36 Payout Ratio (%) - 13.5 16. 14.4 Chg in Accounts Payable 111 51 8 35 Dividend Yield (%) 1.1 1.7 2.2 2.6 Others -16 2 3 13 Sales Growth (%) - 4.7 6.4 9.6 Cash Flow from Investment -4-197 -171-158 EBITDA Growth (%) - 2.2 6.9 11.4 Chg in Tangible Assets -246-153 -123-119 Operating Profit Growth (%) - 24.7 1.6 16.8 Chg in Intangible Assets -19-14 EPS Growth (%) - 79.9 9.4 28.2 Chg in Investment Assets -9-3 -47-4 Accounts Receivable Turnover (x) 7.3 9.4 9.2 9.5 Others -45-1 1 Inventory Turnover (x) 6.7 8.9 8.8 9.1 Cash Flow from Financing 191 56-67 -114 Accounts Payable Turnover (x) 7.2 9.4 9.2 9.5 Chg in Borrowings 182 58-46 -89 ROA (%) 4. 5.5 5.6 6.9 Chg in Equity 9-2 -26 ROE (%) 12.7 17.5 16.8 18.5 Dividends 5-2 -26 ROIC (%) 11.9 14.7 15.7 18.2 Others -1-1 -1 1 Liability to Equity Ratio (%) 228.2 217.2 184. 153.5 Chg in Cash 37-1 -24 Current Ratio (%) 67.4 78.3 8.6 87.5 Beginning Cash Balance 16 33 75 64 Net Debt to Equity Ratio (%) 146. 126.6 15.2 82.8 Ending Cash Balance 33 7 64 41 Interest Coverage Ratio (x) 2.3 2.7 3. 3.8 estimates 6
Important Notices Equity Research for International Investors (ERII) Daewoo Securities Co., Ltd.`s analyst attended the IR meeting held by KOLON IND within recent three months. Expenses related to the meeting were covered by KOLON IND. This report is a translation excerpt of the Korean version publicly released on June 28, 21. Analyst of the subject company or member of the analyst's household does not have any financial interest in the securities of the subject company and the nature of the financial interest (including without limitation, whether it consists of any option, right, warrant, future, long or short position). This report reflects the sole opinion of the analyst without any external influences by third parties. Ratings Distribution Analyst Industry Ratings of Daewoo Securities Buy Relative Performance of +2% or greater Overweight Industry fundamentals are favorable or improving Trading Buy Relative Performance of +1% or greater, but with variability/volatility Neutral Industry fundamentals are steady without any material changes Hold Relative Performance of -1% and +1% Underweight Industry fundamentals are unfavorable or worsening Sell Relative Performance of -1% Note: 1) Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. 2) 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. Source: Daewoo Securities Ratings and Target Price History (Share price (----), Target price (----), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) (W) 8, KOLON IND 7, 6, 5, 4, 3, 2, 1, 6/8 9/8 12/8 3/9 6/9 9/9 12/9 3/1 6/1 This report has been provided by the research division of Daewoo Securities Co., Ltd. The stock ratings, target prices, estimates and overall viewpoints are from the research division of Daewoo Securities. Investors can access Daewoo SecuritiesÊ research through Daewoo research direct (www.bestez.com), FirstCall Research, Reuters, FnGuide, WiseFn, FactSet and Bloomberg (DWIR). This document was prepared by Daewoo Securities Co., Ltd. ( Daewoo ). Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith. The information has not been independently verified. 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