(113 KS) Don t bet against global policy Non-ferrous metal Results Comment April 23, 215 (Upgrade) Trading Buy Target Price (12M, W) 53, Share Price (4/22/15, W) 461, Expected Return 15% OP (15F, Wbn) 727 Consensus OP (15F, Wbn) 725 EPS Growth (15F, %) 12.2 Market EPS Growth (15F, %) 37.7 P/E (15F, x) 15.5 Market P/E (15F, x) 11.1 KOSPI 2,143.89 Market Cap (Wbn) 8,699 Shares Outstanding (mn) 19 Free Float (%) 42.7 Foreign Ownership (%) 15.4 Beta (12M).26 52-Week Low 321,5 52-Week High 462,5 (%) 1M 6M 12M Absolute 9.5 14.8 42.1 Relative 4.1 3.7 32.8 16 KOSPI 14 12 1 8 4.14 8.14 12.14 4.15 1Q15 review: In-line results For 1Q, announced consolidated revenue and operating profit of W1.14tr (-1.5% QoQ, -2.5% YoY) and W172.7bn (-1.9% QoQ, +8.9% YoY), respectively, the latter in line with the consensus (W173.3bn). Both revenue and operating profit contracted QoQ due to 1) a seasonal decline in lead and silver sales volume, and 2) a fall in the prices of major metals (zinc, lead, and silver). On a positive note, the company s Australian subsidiary Sun Metals Corporation (SMC), which is highly leveraged to zinc prices, delivered a healthy OP margin of 12.4% thanks to zinc prices remaining above US$2,1/tonne. Upgrading to Trading Buy We upgrade our rating on to Trading Buy based on the following rationale. First, we believe it is best not to bet against global government policies. Many countries are determined to maintain an accommodative policy until inflation shows clear signs of picking up. Such pro-inflation policies will eventually push metal prices higher, which in turn will drive s earnings higher. Inflation expectations, which move in line with metal prices, have already started to pick up. Second, we believe earnings bottomed in 1Q and will improve in the coming quarters. Full-year earnings should also remain on an upward trajectory through 217. One of the most important drivers of commodity-related stocks is the trajectory of earnings. Third, we could see extreme divergence emerge in the steel sector. Currently, we are witnessing a sharp divergence in the stock market between companies displaying improving earnings and those that are not. In the steel sector, heavyweights POSCO and Hyundai Steel face a challenging business environment. As an alternative, investor attention is likely to turn to, which is expected to deliver improved earnings for the next three years. That said, we rate as a Trading Buy instead of a Buy because valuation does not look particularly compelling, with the company s upside earnings potential largely priced in. Valuation We present a target price of W53, for, taking into account a 216F ROE of 13.2% and COE of 7%. Our target price corresponds to a high P/E of 15.1x, which reflects the potential of a valuation divergence in the sector. We expect s earnings to climb higher over the long term, and therefore believe the stock will stand out as a good alternative to steel stocks. Daewoo Securities Co., Ltd. [Steel/Non-ferrous metals] Seung-hun Jeon +822-768-2713 sh.jeon@dwsec.com FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 5,498 4,818 4,939 4,98 5,925 6,61 OP (Wbn) 758 599 683 727 849 937 OP margin (%) 13.8 12.4 13.8 14.8 14.3 14.2 NP (Wbn) 56 448 51 562 657 731 EPS 29,685 23,745 26,565 29,798 34,822 38,738 ROE (%) 15.5 11.1 11.4 11.6 12.3 12.3 P/E (x) 13.6 13.4 15.2 15.5 13.2 11.9 P/B (x) 2. 1.4 1.6 1.7 1.5 1.4 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.
Earnings forecast and valuation Table 1. 1Q15 review (Wbn, %) 1Q14 4Q14 Preliminary (A) 1Q15P KDB Daewoo Consensus (B) Diff. (%) Revenue 1,165 1,268 1,136 1,211 1,187-4.3 Operating profit 159 194 173 174 173. OP margin 13.6 15.3 15.2 14.4 14.6 4.3 Pretax profit 169 182 18 181 177 1.7 Net profit 126 136 136 135 133 2.3 Notes: Consolidated basis Source: Company data, Bloomberg, Table 2. Quarterly earnings trend and forecast (Wbn, %) 1Q 2Q 214 215F 3Q 4Q Annual 1QP 2QF 3QF 4QF Annual (A/B) 1Q15 growth Revenue 1,165 1,229 1,276 1,268 4,939 1,136 1,227 1,223 1,323 4,98-1.5-2.5 Operating profit 159 15 18 194 683 173 178 183 193 727-1.9 8.9 Pretax profit 169 148 184 182 683 177 188 192 196 752-3.1 4.5 Net profit 124 18 134 136 51 132 14 143 146 562-2.6 6.7 OP margin 13.6 12.2 14.1 15.3 13.8 15.2 14.5 15. 14.6 14.8 Pretax margin 14.5 12. 14.4 14.4 13.8 15.6 15.3 15.7 14.8 15.3 Net margin 1.6 8.8 1.5 1.7 1.2 11.6 11.4 11.7 11.1 11.5 Zinc price (US$/tonne) 2,19 2,32 2,257 2,276 2,146 2,131 2,176 2,33 2,37 2,252-6.4 5.5 Lead price (US$/tonne) 2,134 2,81 2,18 2,61 2,114 1,859 1,976 2,18 2,27 2,71-9.8-12.9 Gold price (US$/ounce) 1,253 1,37 1,296 1,214 1,267 1,225 1,29 1,2 1,2 1,29.9-2.2 Silver price (US$/ounce) 2 2 2 17 19 17 16 17 17 17-2.9-16.7 Zinc sales volume (tonnes) 134,525 132,524 128,128 128,312 523,489 136,411 143,22 138,12 145,165 562,7 6.3 1.4 Lead sales volume (tonnes) 63,262 69,549 8,546 77,771 291,128 63,175 64,549 73,248 76,945 277,917-18.8 -.1 Gold sales volume (kg) 1,77 2,154 2,2 2,96 8,22 2,21 2,54 2, 2, 8,264 5.4 24.9 Silver sales volume (tonnes) 475 569 548 555 2,146 469 549 475 527 2,2-15.5-1.2 US$/W 1,69 1,3 1,26 1,87 1,53 1,1 1,9 1,7 1,7 1,82 1.2 2.9 Source: Company data, Table 3. Earnings forecast revisions (Wbn, %) Previous 215F 216F Revised 215F 216F 215F % chg. Revenue 5,17 6,4 4,98 5,925-3.9-1.3 Operating profit 74 821 727 849 3.3 3.4 Pretax profit 728 852 752 881 3.3 3.4 Net profit 544 636 562 657 3.3 3.3 OP margin 13.8 13.7 14.8 14.3 Net margin 1.7 1.6 11.5 11.1 Zinc price (US$/tonne) 2,184 2,45 2,174 2,45 -.5. Lead price (US$/tonne) 2,58 2,35 2,45 2,35 -.6. Gold price (US$/ounce) 1,254 1,22 1,26 1,22.5. Silver price (US$/ounce) 1,847 1,891 1,853 1,891.3. Zinc sales volume (tonnes) 567,763 611,23 562,7 611,23 -.9. Lead sales volume (tonnes) 28,4 352,859 277,917 352,859 -.7. Gold sales volume (kg) 8,64 8,28 8,264 8,28 2.5. Silver sales volume (tonnes) 2,68 2,335 2,2 2,335-2.3. Base zinc price 2,1 2,2 2,1 2,2.. Base TC 22 22 22 22.. Escalator 5. 5. 5. 5. De-escalator -3. -3. -3. -3. Actual TC 224 233 224 233 -.2. US$/W 1,81 1,78 1,82 1,7.1 -.7 Source: Company data, QoQ YoY 216F 2
Table 4.. Valuation table Risk-free rate (%) 1.9 Risk premium (%) 5.7 Beta (x).9 COE (%) 7. ROE (%) 12.3 Target P/B (x) 1.75 Target price 53, Source: Figure 1. P/E Band Figure 2. P/B Band 7, 6, Adj. price 17.x 14.x 7, 6, Adj. price 2.5x 2.x 1.5x 4, 11.x 8.x 4, 1.x 2, 1, 5.x 2, 1,.5x 9 92 94 96 98 2 4 6 8 1 12 14 16 Source: Company data, 9 92 94 96 98 2 4 6 8 1 12 14 16 Source: Company data, 3
Price-related variables Figure 3. Share price more than 3% overvalued considering current sales volume and metal prices (W'/tonne) 6, 5, 4, 2, Won denominated-sales volume weighted metal price composite (L) 's share price (R) 6, 4, 2, 1, 1, 8 9 1 11 12 13 14 15 Source: Thomson Reuters, Figure 4. Share price is expected to rise further, howe owever, given the likelihood of an increase in sales volume and metal prices (W'/tonne) 6, 5, 4, 2, Won denominated-sales volume weighted metal price composite (L) 's share price (R) 6, 4, 2, 1, 1, 8 9 1 11 12 13 14 15 16 17 Source: Thomson Reuters, Figure 5. Rising inflation i expectations should push up non- ferrous metal prices (p) (%) 4,5 LME index (L) 2.9 TIPS spread (R) 2.7 4, 2.5 Figure 6. Special metal prices also move in line with inflation expectations (US$/ounce) (%) 2, Gold price (L) 2.9 TIPS spread (R) 2.7 1,8 2.5 3,5 2.3 2.1 1,6 1,4 2.3 2.1 1.9 1.7 1,2 1.9 1.7 2,5 6/11 12/11 6/12 12/12 6/13 12/13 6/14 12/14 1.5 1, 6/11 12/11 6/12 12/12 6/13 12/13 6/14 12/14 1.5 Source: Thomson Reuters, Source: Thomson Reuters, 4
Figure 7. An oil price rebound will be positive to metal prices (US$/tonne) 5, LME index (L) Oil price (R) (US$/bbl) 12 4,5 1 4, 8 3,5 6 2,5 1/1 1/11 1/12 1/13 1/14 1/15 4 Source: Thomson Reuters, Figure 8. Zinc prices are also positively correlated with oil prices (US$/tonne) Zinc price (L) Oil price (R) (US$/bbl) 12 2,5 1 8 2, 6 1,5 1/1 1/11 1/12 1/13 1/14 1/15 4 Source: Thomson Reuters, 5
(113 KS/Trading Buy/TP: W53,) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F Revenue 4,939 4,98 5,925 6,61 Current Assets 2,674 3,17 3,59 4,87 Cost of Sales 4,113 4,3 4,919 5,53 Cash and Cash Equivalents 175 751 1,49 1,448 Gross Profit 826 878 1,6 1,98 AR & Other Receivables 333 341 388 432 SG&A Expenses 143 152 157 161 Inventories 1,278 1,37 1,185 1,32 Operating Profit (Adj) 683 727 849 937 Other Current Assets 888 888 887 887 Operating Profit 683 727 849 937 Non-Current Assets 2,968 3,1 3,191 3,267 Non-Operating Profit 25 32 43 Investments in Associates 31 31 31 31 Net Financial Income 37 33 4 48 Property, Plant and Equipment 2,112 2,244 2,336 2,412 Net Gain from Inv in Associates -4 4 4 4 Intangible Assets 65 65 64 64 Pretax Profit 683 752 881 98 Total Assets 5,642 6,117 6,7 7,355 Income Tax 178 184 216 24 Current Liabilities 551 573 65 635 Profit from Continuing Operations 55 568 665 74 AP & Other Payables 27 228 261 291 Profit from Discontinued Operations Short-Term Financial Liabilities 134 134 134 134 Net Profit 55 568 665 74 Other Current Liabilities 21 211 21 21 Controlling Interests 51 562 657 731 Non-Current Liabilities 38 38 38 38 Non-Controlling Interests 4 6 8 9 Long-Term Financial Liabilities 39 39 39 39 Total Comprehensive Profit 541 568 665 74 Other Non-Current Liabilities 269 269 269 269 Controlling Interests 54 56 657 732 Total Liabilities 859 881 914 943 Non-Controlling Interests 2 8 8 8 Controlling Interests 4,634 5,81 5,623 6,239 EBITDA 839 885 1,8 1,9 Capital Stock 94 94 94 94 FCF (Free Cash Flow) 12 684 46 55 Capital Surplus 57 57 57 57 EBITDA Margin (%) 17. 18. 17. 16.5 Retained Earnings 4,474 4,921 5,463 6,8 Operating Profit Margin (%) 13.8 14.8 14.3 14.2 Non-Controlling Interests 149 155 163 172 Net Profit Margin (%) 1.1 11.5 11.1 11.1 Stockholders' Equity 4,783 5,236 5,786 6,411 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 44 974 656 735 P/E (x) 15.2 15.5 13.2 11.9 Net Profit 55 568 665 74 P/CF (x) 9. 1. 8.8 8.1 Non-Cash Income and Expense 344 33 329 337 P/B (x) 1.6 1.7 1.5 1.4 Depreciation 156 158 158 153 EV/EBITDA (x) 8.2 8.4 7.1 6.2 Amortization EPS 26,565 29,798 34,822 38,738 Others 188 145 171 184 CFPS 44,982 46,166 52,664 57,44 Chg in Working Capital -348 255-162 -15 BPS 248,46 272,116 3,849 333,5 Chg in AR & Other Receivables -3-24 -35-33 DPS 6,5 6,5 6,5 6,5 Chg in Inventories -298 241-148 -135 Payout ratio (%) 22.8 2.2 17.3 15.5 Chg in AP & Other Payables -71 35 25 24 Dividend Yield (%) 1.6 1.4 1.4 1.4 Income Tax Paid -136-184 -216-24 Revenue Growth (%) 2.5 -.6 2.7 11.4 Cash Flows from Inv Activities -564-287 -248-225 EBITDA Growth (%) 12.6 5.5 13.9 8.1 Chg in PP&E -388-29 -25-23 Operating Profit Growth (%) 14. 6.4 16.8 1.4 Chg in Intangible Assets EPS Growth (%) 11.9 12.2 16.9 11.2 Chg in Financial Assets -191 Accounts Receivable Turnover (x) 21.8 2.3 21.8 21.6 Others 15 3 2 5 Inventory Turnover (x) 4.4 4.2 5.3 5.3 Cash Flows from Fin Activities -87-115 -115-115 Accounts Payable Turnover (x) 21.9 24.1 25. 24.9 Chg in Financial Liabilities 7 ROA (%) 9.4 9.7 1.4 1.5 Chg in Equity ROE (%) 11.4 11.6 12.3 12.3 Dividends Paid -9-115 -115-115 ROIC (%) 16.1 16.4 18.8 19.4 Others -4 Liability to Equity Ratio (%) 18. 16.8 15.8 14.7 Increase (Decrease) in Cash -244 576 297 399 Current Ratio (%) 485.2 526.6 579.5 643.5 Beginning Balance 42 175 751 1,49 Net Debt to Equity Ratio (%) -18.4-27.8-3.3-33.6 Ending Balance 175 751 1,49 1,448 Interest Coverage Ratio (x) 271.8 262.2 36.3 337.9 Source: Company data, estimates 6
APPENDIX 1 Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price (113) 4/22/215 Trading Buy 53, 7/27/214 Hold - 6/11/214 Trading Buy 41, 4/27/214 Buy 385, 1/19/214 Buy 4, 7/25/213 Trading Buy 35, 4/29/213 Trading Buy 37, 4/16/213 Trading Buy 48, 6, 4, 2, 1, Apr 13 Apr 14 Apr 15 Stock Ratings Industry Ratings Buy : Relative performance of 2% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 1% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -1% and 1% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -1% 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. 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 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 7
Article 19(5) of the Financial Services and Markets Act 2 (Financial Promotion) Order 25 (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 1934. 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 15-716 Korea Two International Finance Centre Suites 25-212 8 Finance Street, Central Hong Kong, China 32 Park Avenue 31st Floor New York, NY 122 United States Tel: 82-2-768-326 Tel: 85-2-2845-6332 Tel: 1-212-47-1 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch 41st Floor, Tower 42 25 Old Broad St. London EC2N 1HQ United Kingdom Six Battery Road #11-1 Singapore, 4999 7th Floor, Yusen Building 2-3-2 Marunouchi, Chiyoda-ku Tokyo 1-5 Japan Tel: 44-2-7982-8 Tel: 65-6671-9845 Tel: 81-3- 3211-5511 Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office 241A, 24th Floor, East Tower, Twin Towers B-12 Jianguomenwai Avenue Chaoyang District, Beijing 122 China Room 38T31, 38F SWFC 1 Century Avenue Pudong New Area, Shanghai 212 China Suite 213, Saigon Trade Center 37 Ton Duc Thang St, Dist. 1, Ho Chi Minh City, Vietnam Tel: 86-1-6567-9299 Tel: 86-21-513-6392 Tel: 84-8-391-6 Daewoo Investment Advisory (Beijing) Co., Ltd. 241B, 24th Floor, East Tower, Twin Towers B-12 Jianguomenwai Avenue, Chaoyang District, Beijing 122 China Daewoo Securities (Mongolia) LLC #46, Blue Sky Tower, Peace Avenue 17 1 Khoroo, Sukhbaatar District Ulaanbaatar 1424 Mongolia PT. Daewoo Securities Indonesia Tel: 86-1-6567-9699 Tel: 976-711-87 Tel: 62-21-515-114 Equity Tower Building Lt.5 Sudirman Central Business District Jl. Jendral Sudirman Kav. 52-53, Jakarta Selatan Indonesia 1219 8