S-Oil (010950) Hold (Initiate) Stock price (Sep 15, KRW) 46,000 Market cap (USD mn) 4,989 Shares outstanding (mn) 113 52W High/Low (KRW) 81,200/43,500 6M avg. daily turnover (USD mn) 15.4 Free float (%) 36.3 Foreign ownership (%) 46.2 Yr to Sales OP NP EPS % chg EBITDA PE EV/EBITDA PB ROE DY Dec (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%) (%) 2012A 34,723 782 585 5,025 (50.9) 1,173 20.7 12.2 2.3 11.0 2.5 2013A 31,159 366 290 2,487 (50.5) 734 29.8 14.7 1.6 5.4 1.8 2014F 30,350 201 272 2,338 (6.0) 562 19.3 14.6 1.0 5.0 2.9 2015F 30,480 530 542 4,649 98.9 888 9.7 9.1 0.9 9.6 2.9 2016F 30,150 524 539 4,621 (0.6) 936 9.8 8.6 0.8 8.9 2.9 Note: NP and EPS attributed to controlling interest Healthier revenue structure already reflected in valuations Performance 1M 6M 12M Absolute (%) (13.4) (27.6) (41.8) Rel. to Kospi (%p) (12.0) (33.6) (43.9) 12MF PB trend 3.5 (X) 12MF PBR (LHS) (KRW) 180,000 price (RHS) 3.0 160,000 140,000 2.5 120,000 2.0 100,000 1.5 80,000 60,000 1.0 40,000 0.5 20,000 0.0 0 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Initiate coverage with Hold: We initiate coverage of S-Oil with a Hold rating as profitability should improve only marginally due to limited upside for refining margins. Even though refining margins are passing the bottom in 3Q14, they are unlikely to improve much as oil prices should remain weak for the time being. While we are positive about S-Oil s petrochemical and lube oil divisions whose profit contribution is relatively larger than other refiners, this has already been reflected in valuations. Lower refining margin in 3Q14 is structural: We believe the lower refining margin in 3Q14 is due to structural reasons. First, crude oil prices keep falling. Second, China s diesel demand is weakening and diesel exports rising, which is dragging down prices. Moreover, as China s industrial production is slowing, there is less demand for diesel. And with homegrown refining capabilities getting stronger, exports of surplus products are growing. China s refining capacity and petroleum product exports should continue to grow, while petroleum product prices remain weak as well. Better profitability from PX and lube base oil is a pro: At present, S-Oil s petrochemicals comprise 70% paraxylene (PX) whose profitability has been improving from 3Q14. Another plus is the profitability from lube base oil continues to get better. In 2Q14, the PX-naphtha spread fell to as low as USD205/tonne. And when PX profitability turned downward, companies made aggressive utilization adjustments. This sent prices higher and the PX-naphtha spread now stands at USD376/tonne. But as refiners are set for massive PX capacity expansion through 2016, any PX profitability upswing is unlikely to last for the long-term. 3Q14F OP to turn upward and reach W21.8bn: Despite poor refining margins, better PX and lube base oil profitability should help OP turn upward and reach W21.8bn in 3Q14F. For the refining business, we expect margins to pass the bottom in 3Q14 and move into positive territory from 4Q14. However, earnings are unlikely to make a meaningful improvement in 2015. And if refining margins do not recover, shares will likely see a limited upside. Jay Yoo, CFA 822-3276-6178 jongwoo.yoo@truefriend.com Bohwa Hong 822-3276-6241 bohwa.hong@truefriend.com 53
Figure 9. China diesel exports (USD '000) 400,000 China diesel exports 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 Source: DataStream, Korea Investment & Securities 54
Table 10. Quarterly earnings (W bn, %) 1Q14 2Q14 3Q14F 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 2012 2013 2014F 2015F Sales 7,602 7,419 7,650 7,679 7,601 7,607 7,629 7,643 34,723 31,159 30,350 30,480 Refining 6,179 6,000 6,191 6,195 6,123 6,160 6,134 6,165 28,172 25,509 24,565 24,582 Petrochemicals 895 907 922 945 939 919 943 928 4,297 3,898 3,668 3,730 Lube base oil 529 512 536 539 539 527 552 550 2,254 1,752 2,116 2,168 % of total sales Refining 81.3% 80.9% 80.9% 80.7% 80.5% 81.0% 80.4% 80.7% 81.1% 81.9% 80.9% 80.6% Petrochemicals 11.8% 12.2% 12.1% 12.3% 12.4% 12.1% 12.4% 12.1% 12.4% 12.5% 12.1% 12.2% Lube base oil 7.0% 6.9% 7.0% 7.0% 7.1% 6.9% 7.2% 7.2% 6.5% 5.6% 7.0% 7.1% COGS 7,416 7,330 7,498 7,338 7,284 7,367 7,385 7,350 33,411 30,229 29,582 29,386 Gross profit 186 89 152 341 318 239 244 293 1,312 929 767 1,094 Gross margin 2.4% 1.2% 2.0% 4.4% 4.2% 3.1% 3.2% 3.8% 3.8% 3.0% 2.5% 3.6% SG&A costs 139 143 130 154 137 145 130 153 531 563 566 564 SG&A-to-sales 1.8% 1.9% 1.7% 2.0% 1.8% 1.9% 1.7% 2.0% 1.5% 1.8% 1.9% 1.9% OP 47 (55) 22 187 181 95 114 140 782 366 201 530 Refining (52) (153) (142) 45 49 (36) (33) 1 (376) (322) (303) (19) Petrochemicals 47 26 89 72 62 59 71 64 827 565 233 256 Lube base oil 53 73 75 70 70 71 76 75 330 156 270 292 OPM 0.8% (0.9%) 0.4% 3.0% 3.0% 1.5% 1.9% 2.3% 3.0% 1.5% 0.8% 2.2% Refining (0.8%) (2.6%) (2.3%) 0.7% 0.8% (0.6%) (0.5%) 0.0% (1.3%) (1.3%) (1.2%) (0.1%) Petrochemicals 5.2% 2.9% 9.6% 7.6% 6.6% 6.5% 7.5% 6.9% 19.3% 14.5% 6.4% 6.9% Lube base oil 9.9% 14.2% 14.1% 13.0% 13.0% 13.5% 13.8% 13.6% 14.7% 8.9% 12.8% 13.5% Depreciation 92 86 88 89 88 88 88 88 390 368 354 352 EBITDA 139 31 110 276 269 182 202 228 1,171 734 555 881 EBITDA margin 1.8% 0.4% 1.4% 3.6% 3.5% 2.4% 2.7% 3.0% 3.4% 2.4% 1.8% 2.9% EBT 28 90 3 235 229 143 163 188 719 387 357 723 EBT margin 0.4% 1.5% 0.1% 3.8% 3.7% 2.3% 2.6% 3.1% 2.7% 1.6% 1.5% 2.9% Income tax 3 22 1 59 57 36 41 47 134 98 84 181 Effective tax rate 10.2% 24.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 18.6% 25.2% 23.6% 25.0% NP 25 68 2 176 172 107 122 141 585 290 272 542 Controlling int. NP 25 68 2 176 172 107 122 141 585 290 272 542 NPM 0.3% 0.9% 0.0% 2.3% 2.3% 1.4% 1.6% 1.8% 1.7% 0.9% 0.9% 1.8% Source: Company data, Korea Investment & Securities 55
Balance sheet Current assets 8,582 7,913 7,707 7,810 7,817 Cash & cash equivalents 434 585 569 610 603 Accounts & other receivables 3,007 2,710 2,640 2,651 2,713 Inventory 4,386 4,238 4,128 4,146 4,101 Non-current assets 3,916 4,008 4,742 5,043 5,440 Investment assets 174 175 171 171 170 Tangible assets 3,670 3,760 4,500 4,800 5,200 Intangible assets 43 47 45 46 45 Total assets 12,497 11,921 12,449 12,853 13,257 Current liabilities 6,275 5,885 6,106 6,245 6,192 Accounts & other payables 3,116 3,046 2,967 2,980 2,947 ST debt & bonds 2,517 2,533 2,841 2,995 2,995 Current portion of LT debt 310 154 154 155 156 Non-current liabilities 846 682 1,034 833 828 Debentures 648 499 858 658 658 LT debt & financial liabilities 25 21 19 16 14 Total liabilities 7,121 6,567 7,141 7,078 7,021 Controlling interest 5,376 5,354 5,469 5,852 6,233 Capital stock 292 292 292 292 292 Capital surplus 1,332 1,332 1,332 1,332 1,332 Other reserves (2) (2) (2) (2) (2) Retained earnings 3,704 3,683 3,800 4,187 4,571 Minority interest 0 0 0 0 0 Shareholders' equity 5,376 5,354 5,469 5,852 6,233 Income statement Sales 34,723 31,159 30,350 30,480 30,150 COGS 33,411 30,229 29,582 29,386 29,068 Gross profit 1,312 929 767 1,094 1,082 SG&A expenses 531 563 566 564 558 Operating profit 782 366 201 530 524 Financial income 370 291 287 287 289 Interest income 45 37 33 33 35 Financial expenses 195 250 253 258 257 Interest expenses 86 54 57 61 61 Other non-operating profit (224) (27) 115 156 156 Gains (Losses) in associates, subsidiaries and JV (14) 7 7 7 7 Earnings before tax 719 387 357 723 718 Income taxes 134 98 84 181 180 Net profit 585 290 273 542 539 Net profit of controlling interest 585 290 272 542 539 Other comprehensive profit (9) (3) (3) (3) (3) Total comprehensive profit 576 287 269 539 536 Total comprehensive profit of controlling interest 576 287 269 539 536 EBITDA 1,173 734 562 888 936 Cash flow C/F from operations 735 793 716 850 871 Net profit 585 290 273 542 539 Depreciation 386 361 354 352 406 Amortization 5 7 7 7 7 Net incr. in W/C (163) 316 90 (44) (73) Others (78) (181) (8) (7) (8) C/F from investing (597) (96) (1,081) (689) (802) Capex (187) (446) (1,096) (653) (807) Decr. in fixed assets 4 1 1 1 1 Incr. in investment (426) 355 9 3 6 Net incr. in intangible assets (2) (6) (5) (7) (6) Others 14 0 10 (33) 4 C/F from financing (580) (547) 510 (203) (157) Incr. in equity 0 0 0 0 0 Incr. in debt (155) (239) 665 (48) (2) Dividends (425) (309) (155) (155) (155) Others 0 1 0 0 0 C/F from others (0) (0) 0 0 0 Increase in cash (443) 150 145 (42) (87) Key financial data FY-ending Dec. Per-share data (KRW) EPS 5,025 2,487 2,338 4,649 4,621 BPS 46,121 45,932 46,914 50,206 53,471 DPS 2,650 1,330 1,330 1,330 1,330 Growth (%) Sales growth 8.8 (10.3) (2.6) 0.4 (1.1) OP growth (53.9) (53.2) (45.1) 163.4 (1.1) NP growth (50.9) (50.5) (5.9) 98.9 (0.6) EPS growth (50.9) (50.5) (6.0) 98.9 (0.6) EBITDA growth (43.4) (37.4) (23.4) 58.0 5.4 Profitability (%) OP margin 2.3 1.2 0.7 1.7 1.7 NP margin 1.7 0.9 0.9 1.8 1.8 EBITDA margin 3.4 2.4 1.9 2.9 3.1 ROA 4.6 2.4 2.2 4.3 4.1 ROE 11.0 5.4 5.0 9.6 8.9 Dividend yield 2.5 1.8 3.0 3.0 3.0 Dividend payout ratio 52.6 53.4 57.0 28.6 28.8 Stability Net debt (W bn) 2,328 2,254 2,944 2,823 2,832 Debt/equity ratio (%) 65.3 60.0 70.9 65.4 61.4 Valuation (x) PE 20.7 29.8 19.3 9.7 9.8 PB 2.3 1.6 1.0 0.9 0.8 EV/EBITDA 12.2 14.7 14.6 9.1 8.6 Note: K-IFRS (consolidated) 56
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 Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings. 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. Distribution United States: This report is distributed in the U.S. by Korea Investment & Securities America, Inc., a member of FINRA/SIPC, and is only intended for major U.S. institutional investors as defined in Rule 15a-6(a)(2) 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 U.S. institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Korea Investment & Securities, Co., Ltd. or its affiliates. Pursuant to Rule 15a-6(a)(3), any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Korea Investment & 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. person absent registration or an applicable exemption from the registration requirement. 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 10 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 the companies mentioned in this report. 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 the companies mentioned in this report in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from the companies mentioned in this report in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intend to seek compensation for investment banking services from the companies mentioned in this report in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in securities of the companies mentioned in this report at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of Lotte Chemical,Kumho Petrochemical,LG Chem,S-Oil,GS Holdings,SK Innovation shares as of September 16, 2014. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analyst/analysts who prepared this report nor their associates own any shares of the company/companies covered in this report as of September 16, 2014. Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of Lotte Chemical,Kumho Petrochemical,LG Chem,S-Oil,GS Holdings,SK Innovation and is the liquidity provider. Prepared by: Jay Yoo 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.