Company Note April 1, 212 Korea Zinc (113) 12M rating BUY (Maintain) 12M TP W6, from W6, Up/downside +57% Stock Data KOSPI (Apr 9, pt) 1,997 Stock price (Apr 9, KRW) 381,5 Market cap (USD mn) 6,286 Shares outstanding (mn) 19 52-Week high/low (KRW) 487,/232, 6M avg. daily turnover (USD mn) 26.8 Free float / Foreign ownership (%) 42.6/14.3 Major shareholders (%) YOUNGPOONG Corporation and 4 others 51.1 National Pension Service (NPS) 6. Performance 1M 6M 12M Absolute (%) (1.6) 35. (13.5) Relative to KOSPI (%p) (9.5) 21.6 (7.3) 12MF PER trend 12. (X) 12MF PER (LHS) (W' ) 5 price (RHS) 45 1. 4 8. 35 3 6. 25 2 4. 15 2. 1 5. 27 28 29 21 211 Source: WISEfn consensus 1Q12 preview: Not over until it s over Korea Zinc to post 1Q12 OP of W214bn Concerns mounted that Korea Zinc would post 1Q12 OP below W2bn on rumors that Jan-Feb OP reached only W115bn. However, we note that strong metal prices in Mar, including silver (up 11.4%), gold (up 5.5%), copper (up 5%), zinc (up 3.8%) and lead (up 1.2%). And, we believe Mar earnings will top Jan and Feb, as shipments were also larger in the last month of 1Q12. As such, we forecast 1Q12 OP (individual) of W214bn, 11% lower than our previous estimate of W24bn, but still robust compared to market concerns. Of note, we revised our estimate as we adjusted our gold shipment assumption from 45,9 oz (1,3 kg) to 35,3 oz (1, kg) as we learned 17,6 oz (5 kg) in inventories from 4Q11 have yet to be sold. 2Q12 OP to increase QoQ 2Q12 OP should also increase QoQ as average metal prices should also increase. Metal prices were soft in Jan-Feb, but rebounded in Mar and should stabilize upward in 2Q12. Shipments should also grow QoQ on seasonal factors. Overall, higher prices and larger shipments should fuel the QoQ growth. Furthermore, unsold gold from 1Q12 may also be disposed. As such, we expect 2Q12 OP at W24bn (up 12% QoQ). 212 is just the start Concerns are persisting that 212 earnings will deteriorate as prices will fall on fading demand for materials since China announced a low economic growth target of 7.5%. However, we believe a recover similar to 29 will be repeated this year. In Jan, the US LEI reached 12 for the first time in 47 months, and the EU (14 countries) LEI also rebounded after 12 months, picking up in Jan. While concerns over China, a major player in the commodities market, may continue, a downturn has yet to be confirmed. Furthermore, the US and EU appear to be in recovery. As such, we believe the current concerns are excessive. Maintain BUY rating and TP of W6, We maintain BUY with a TP of W6,, derived by applying a target PE of 12x to 12MF EPS of W49,718. Earnings stability has firmed on the growing contribution of precious metals and other metals. This year, we believe growth should be continue, catalyzed by the expansion of Fumer (completed in Oct). Overall, we believe Korea Zinc is attractive on long-term fundamental improvements. Moonsun Choil 822-3276-6182 moonsun@truefriend.com Jinwoo Kim 822-3276-6278 jinwoo.kim@truefriend.com Yr to Sales OP EBT NP EPS % chg EBITDA P/E EV/EBITDA P/B ROE Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%) 29A 3,185 419 541 415 23,482 46.9 568 8.7 6.7 1.7 2.9 21A 3,84 562 632 48 27,169 15.7 745 1.2 6.8 1.9 19.6 211F 5,556 964 975 74 39,84 46.6 1,83 7.6 4.9 1.7 23.1 212F 5,861 1,92 1,13 816 46,195 15.9 1,228 8.3 5.2 1.7 21.6 213F 6,382 1,336 1,356 1,3 56,764 22.9 1,481 6.7 4. 1.4 21.4 Note: Net profit and EPS are based on figures attributed to controlling interest
Earnings preview (individual) Preview YoY QoQ Consensus Preview Previous Diff. (%) 1Q11 Diff. (%) 4Q11 Diff. (%) 1Q12F Diff. (%) Sales 1,159 1,21 (4.2) 1,48 1.5 1,134 2.2 1,224 (5.4) - Zinc 36 39 (.9) 361 (15.2) 38 (.5) - Lead 165 159 4. 155 6.2 188 (12.4) - Gold 6 81 (25.7) 33 84.5 31 94.6 - Silver 499 519 (3.9) 368 35.4 479 4. - Copper 53 55 (3.4) 52 2.3 49 8.8 - Others 75 87 (13.4) 79 (5.3) 79 (4.6) OP 214 24 (11.) 29 2.1 21 1.7 224 (4.3) OPM 18.5 19.9 (1.4%p) 2. (1.5%p) 18.5 (.1%p) 18.3.2%p EBT 22 246 (1.8) 227 (3.2) 224 (2.) NA NP 167 187 (1.8) 173 (3.4) 168 (.6) 176 (4.9) Price Zinc 1,981 2, (.9) 2,38 (16.8) 1,961 1.1 Lead 2,8 2, 4. 2,531 (17.8) 2,81 (.) Gold 1,68 1,74 (3.5) 1,375 22.2 1,726 (2.7) Silver 31.7 33. (3.9) 3. 5.7 34.4 (7.8) Copper 8,16 8,3 (3.4) 9,531 (15.9) 7,758 3.3 Shipments Zinc ( tonne) 134.5 134.5. 128.7 4.5 129.8 3.5 Lead ( tonne) 69.6 69.6. 5.6 37.4 75. (7.2) Gold ( oz) 35.3 45.9 (23.1) 23.3 51.5 17.6 1. Silver ( oz) 15,784 15,784. 12,84 3.6 13,43 21. Copper ( tonne) 6. 6.. 4.8 25.2 5.7 5.3 (W bn) 12MF PE band (won) 6, 5, 4, 3, Initiated coverage with BUY Upgraded to BUY 12x 1x 8x 6x 2, 4x 1, Downgraded to NEUTRAL 25 26 27 28 29 21 211 212 2
Base metal price trends Post-Nov rebound continues Precious metal price Silver up 11.4%, gold 5.5% in Mar 2,4 8,8 41 1,8 2,2 Lead (L) 8,5 38 Silver (L) 1,75 2, 1,8 1,6 1,4 1,2 Zinc (L) Copper (R) 8,2 7,9 7,6 7,3 35 32 29 26 23 Gold (R) 1,7 1,65 1,6 1, Oct Nov Dec Jan Feb Mar 7, 2 Oct Nov Dec Jan Feb Mar 1,55 US leading economic indicator exceeded 12pt after 47months EU (14 countries) and China leading economic indicator EU rebounded after 12 months (pt) (pt) 15 11 China 1 15 95 9 1 95 9 EU 85 85 8 28 29 21 211 212 8 28 29 21 211 212 Base metal price forecast Upturn on economic recovery Precious metal price forecast To stabilize after small gains in 2Q12 2,8 1, 45 2, 2,6 2,4 2,2 2, 1,8 1,6 1,4 1,2 Zinc (L) Lead (L) Copper (R) 9, 8, 7, 6, 5, 4 35 3 25 2 15 1 5 Silver (L) Gold (R) 1,8 1,6 1,4 1,2 1, 8 6 4 2 1, 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12F 4, 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12F Source: LME, Korea Investment & Securities Source: LME, Korea Investment & Securities 3
Quarterly earning forecasts (individual) 1Q11 2Q11 3Q11 4Q11 1Q12F 2Q12F 3Q12F 4Q12F 211 212F 213F Sales 1,48 1,325 1,35 1,134 1,159 1,339 1,32 1,343 4,858 5,142 5,599 - Zinc 361 374 32 38 36 36 3 368 1,344 1,334 1,352 - Lead 155 173 29 188 165 177 185 196 726 724 741 - Gold 33 39 6 31 6 84 63 63 163 271 292 - Silver 368 588 622 479 499 535 586 535 2,58 2,155 2,448 - Copper 52 54 59 49 53 76 71 78 214 278 316 - Others 79 96 98 79 75 17 97 12 352 392 451 OP 29 196 263 21 214 24 253 258 879 964 1,188 OPM 2.% 14.8% 19.5% 18.5% 18.5% 17.9% 19.4% 19.3% 18.1% 18.8% 21.2% EBT 227 25 234 224 22 243 256 261 89 979 1,211 NP 173 158 178 168 167 184 194 199 677 744 921 Key assumption KRW/USD 1,12 1,83 1,85 1,144 1,135 1,12 1,95 1,67 1,126 1,14 1,61 Price forecasts Zinc 2,38 2,29 2,277 1,961 1,981 2,2 2,3 2,5 2,227 2,245 2,3 Lead 2,531 2,585 2,534 2,81 2,8 2,2 2,4 2,6 2,433 2,32 2,42 Gold 1,375 1,472 1,62 1,726 1,68 1,75 1,75 1,76 1,548 1,735 1,735 Silver 3. 38.6 38. 34.4 31.7 35. 35. 36. 35.3 34.4 34.4 Copper (USD/ton) 9,531 9,319 9,239 7,758 8,16 9, 9,2 9,5 8,962 8,929 1, Shipment forecasts Zinc( tonne) 129 142 116 13 134 143 114 132 517 524 53 Lead( tonne) 51 58 73 75 7 71 7 69 256 28 28 Gold( oz) 23 26 36 18 35 47 35 35 13 153 159 Silver( oz) 12,85 16,85 16,565 13,44 15,786 15,526 17,376 15,87 57,779 64,495 67,21 opper( tonne) 5 5 6 6 6 8 7 7 22 28 3 (W bn) Quarterly earning forecasts (consolidated) 1Q11 2Q11 3Q11 4Q11 1Q12F 2Q12F 3Q12F 4Q12F 211 212F 213F Sales 1,225 1,56 1,516 1,39 1,332 1,54 1,471 1,517 5,556 5,861 6,382 - Korea Zinc 1,48 1,325 1,35 1,134 1,159 1,339 1,32 1,343 4,858 5,142 5,599 - Subsidiaries 177 181 166 175 174 21 169 175 699 718 784 Sales portions 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% - Korea Zinc 86% 88% 89% 87% 87% 87% 88% 88% 87% 88% 88% - Subsidiaries 14% 12% 11% 13% 13% 13% 12% 12% 13% 12% 12% OP 235 23 276 224 246 277 281 288 964 1,92 1,336 - Korea Zinc 29 196 263 21 214 24 253 258 879 964 1,188 - Subsidiaries 25 34 13 14 33 37 28 3 85 128 148 OPM 19.2% 15.3% 18.2% 17.1% 18.5% 18.% 19.1% 19.% 17.4% 18.6% 2.9% - Korea Zinc 2.% 14.8% 19.5% 18.5% 18.5% 17.9% 19.4% 19.3% 18.1% 18.8% 21.2% - Subsidiaries 14.3% 18.7% 7.6% 7.8% 18.7% 18.6% 16.8% 17.% 12.2% 17.8% 18.9% EBT 255 24 242 237 63 7 71 73 975 1,13 1,356 NP 186 178 182 167 187 21 213 218 714 828 1,17 (W bn) 4
Balance sheet FY-ending Dec. (W bn) 29A 21A 211F 212F 213F Current assets 1,687 2,14 2,521 2,982 3,662 Cash & cash equivalent 169 37 5 73 894 Accounts & other receivables 22 261 445 498 574 Inventory 857 925 1, 1,55 1,213 Non-current assets 1,529 1,959 2,276 2,442 2,84 Investment assets 275 418 511 539 779 Tangible assets 1,225 1,444 1,645 1,776 1,888 Intangible assets 1 67 78 82 89 Total assets 3,216 3,973 4,798 5,424 6,467 Current liabilities 559 574 813 653 683 Accounts & other payables 34 313 278 293 319 ST debt & bond 145 152 122 143 128 Current portion of LT debt 39 9 189 139 159 Non-current liabilities 384 588 483 471 476 Debentures 57 17 18 185 165 LT debt & financial liabilities 239 231 6 Total liabilities 943 1,162 1,296 1,124 1,159 Controlling interest 2,178 2,648 3,394 4,181 5,175 Capital stock 94 94 94 94 94 Capital surplus 296 57 57 57 57 Capital adjustments (47) (53) (53) (53) (53) Retained earnings 1,818 2,581 3,241 4,13 4,973 Minority interest 95 97 17 119 133 Shareholders' equity 2,273 2,811 3,51 4,3 5,37 Income statement FY-ending Dec. (W bn) 29A 21A 211F 212F 213F Sales 3,185 3,84 5,556 5,861 6,382 Gross profit 53 652 1,98 1,192 1,445 SG&A expense 111 9 13 136 144 Other operating gains (4) 36 35 Operating profit 419 562 964 1,92 1,336 Financial income 117 59 62 62 68 Interest income 28 24 27 41 54 Financial expense 33 39 48 47 44 Interest expense 19 17 15 14 14 Other non-operating profit 37 53 Gains (Losses) in associates, subsidiaries and JV 1 (3) (4) (4) (4) Earnings before tax 541 632 975 1,13 1,356 Income taxes 123 151 261 276 339 Net profit 418 487 714 828 1,17 Net profit of controlling interest 415 48 74 816 1,3 Other comprehensive profit 21 15 35 Total comprehensive profit 418 487 734 843 1,52 Total comprehensive profit of controlling interest 415 48 725 831 1,38 EBITDA 568 745 1,83 1,228 1,481 Cash flow FY-ending Dec. (W bn) 29A 21A 211F 212F 213F C/F from operating 19 641 7 764 972 Net profit 418 487 714 828 1,17 Depreciation 147 178 19 125 133 Amortization 2 5 1 1 11 Net incr. in W/C (32) (21) (146) (25) (196) Others (57) (8) 13 6 7 C/F from investing (3) (524) (442) (433) (723) CAPEX (274) (33) (315) (264) (251) Decr. in fixed assets 1 22 5 8 6 Incr. in investment (19) (198) (76) (17) (29) Net incr. in intangible assets (6) (3) (2) (15) (19) Others (2) (15) (36) (145) (25) C/F from financing (62) 31 (65) (128) (59) Incr. in equity 1 Incr. in debts (35) 72 (21) (84) (15) Dividends (37) (41) (44) (44) (44) Others C/F from others 12 (11) Increase in cash (16) 137 193 23 19 Key financial data FY-ending Dec. 29A 21A 211F 212F 213F per share data (KRW) EPS 23,482 27,169 39,84 46,195 56,764 BPS 117,455 145,835 181,893 223,63 276,258 DPS 2,2 2,5 2,5 2,5 2,5 Growth (%) Sales growth 3.2 2.6 44.7 5.5 8.9 OP growth (23.2) 34.1 71.7 13.3 22.3 NP growth 46.9 15.7 46.6 15.9 22.9 EPS growth 46.9 15.7 46.6 15.9 22.9 EBITDA growth (16.9) 31.2 45.5 13.4 2.6 Profitability (%) OP margin 13.2 14.6 17.4 18.6 2.9 NP margin 13. 12.5 12.7 13.9 15.7 EBITDA margin 17.8 19.4 19.5 21. 23.2 ROA 14.2 13.5 16.3 16.2 17.1 ROE 2.9 19.6 23.1 21.6 21.4 Dividend yield 1.1.9.8.6.6 Stability Net debt (W bn) (117) (24) (449) (881) (1,335) Debt/equity ratio (%) 22. 2.3 15.7 1.9 8.5 Valuation (X) PER 8.7 1.2 7.6 8.3 6.7 PBR 1.7 1.9 1.7 1.7 1.4 PSR 1.2 1.4 1. 1.2 1.1 EV/EBITDA 6.7 6.8 4.9 5.2 4. Note: Based on K-IFRS (consolidated) 5
Changes to recommendation and price target Company (Code) Date Recommendation Price target Korea Zinc (113) 6-1-1 BUY W25, 7-27-1 BUY W28, 1-25-1 BUY W36, 1-13-11 BUY W38, 4-5-11 BUY W5, 3-5-12 BUY W6, 7, 6, 5, 4, 3, 2, 1, Apr-1 Aug-1 Dec-1 Apr-11 Aug-11 Dec-11 6
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 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 Korea Zinc. 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 Korea Zinc in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from Korea Zinc 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 Korea Zinc in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in Korea Zinc s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of Korea Zinc shares as of April 1, 212. Korea Investment & Securities Co., Ltd. has special interests in Korea Zinc as of April 1, 212. 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 April 1, 212. Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of Korea Zinc 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