20161115-三星证券-Steel_NEUTRAL__Seasonality_back_in_effect_11页_580kb

Sector Update Summary: Steel (NEUTRAL)

Core Content

The document provides an update on the performance of Daehan Steel and its subsidiary Korea Iron & Steel (Kisco) for the third quarter of 2016. It outlines the financial results, highlights the seasonal impact on their performance, and provides forecasts for future quarters and years. The analyst also discusses the outlook for the steel sector and recommends maintaining a BUY rating on both companies despite the 3Q disappointment.

Main Points

• 3Q 2016 Performance:
  • Daehan Steel's consolidated sales and operating profit fell by 18.1% and 61.3% quarter-over-quarter (Q-Q), respectively, to KRW214b and KRW10.5b, with operating profit missing consensus forecasts by 38.1%.
  • Kisco's sales and operating profit declined by 8.3% and 71.5%, respectively, to KRW163.3b and KRW7.6b, with operating profit missing by 54.4%.
• Reason for Decline:
  • The results were attributed to seasonal declines in utilization ratios.
• Future Outlook:
  • The analyst expects improvement in spreads for both companies in the fourth quarter (4Q) due to seasonally strong sales volume growth and declining raw material prices.
  • The construction industry has been a key driver of profitability since 2Q15, but growth in construction starts may slow down year-over-year (Y-Y).
• Recommendations:
  • The BUY ratings on both Daehan Steel and Kisco remain unchanged.
  • Accumulation is recommended on any share-price weakness due to the 3Q results.
• Target Prices:
  • Daehan Steel: KRW12,000 (13.2% upside)
  • Kisco: KRW52,000 (21.5% upside)

Key Information

• Daehan Steel (084010 KS):
  • Current price: KRW10,600
  • P/B: 0.4x–0.5x for 2017
• Kisco (104700 KS):
  • Current price: KRW42,800
  • P/B: 0.4x–0.5x for 2017
• Seasonality:
  • Rebar makers typically experience fixed cost increases during off-peak seasons, which may reoccur if Y-Y construction starts growth slows.
• Import Price Hikes:
  • Recent hikes in Chinese rebar imports may help ease price competition.
• Presales Volume:
  • Presales volume is expected to retain strength through the first half of 2017, maintaining high profitability.
• Margin Analysis:
  • Both companies have better margins than during the 2010–2014 industry downturn (excluding seasonal effects).
• Financial Performance:
  • Both companies have shown earnings improvements since 2Q15, with Daehan Steel's operating profit improving from 2.4b in 2Q15 to 8.6b in 3Q16A.
  • Kisco's operating profit improved from 4.8b in 2015 to 7.6b in 3Q16A.

Charts and Tables

• Chart 1: Rebar sales volume vs construction starts area in Korea

• Chart 2: Rebar prices: Distribution vs imports

• Chart 3: Rebar imports

• Chart 4: Rebar import demand

• Chart 5: Scrap price

• Chart 6: Rebar-swap spread

• Chart 7: Daehan Steel: Rebar sales volume vs construction starts area

• Chart 8: Daehan Steel: Spreads

• Chart 9: Daehan Steel: Gross margin vs spread

• Chart 10: Daehan Steel: P/B band

• Chart 11: Kisco: Rebar sales volume vs construction starts area

• Chart 12: Kisco: Rebar prices and spreads

• Chart 13: Kisco: Gross margin vs rebar spread

• Chart 14: Kisco: P/B band

• Table 1: Daehan Steel: Results and forecasts (parent)

• Table 2: Daehan Steel: Results and forecasts (consolidated)

• Table 3: Kisco: Results and forecasts

• Income Statement: For Daehan Steel and Kisco

• Cash Flow Statement: For Daehan Steel and Kisco

• Balance Sheet: For Daehan Steel and Kisco

• Financial Ratios: For Daehan Steel and Kisco

Summary of Financial Metrics

• Daehan Steel:
  • Sales: KRW864b (2016E), KRW871b (2017E)
  • Operating profit: KRW66b (2016E), KRW58b (2017E)
  • Net profit: KRW47b (2016E), KRW45b (2017E)
  • Gross margin: 13.4% (2016E), 12.7% (2017E)
  • Net margin: 5.4% (2016E), 5.2% (2017E)
  • P/B: 0.6x–0.5x (2017E)
• Kisco:
  • Sales: KRW659b (2016E), KRW662b (2017E)
  • Operating profit: KRW65b (2016E), KRW60b (2017E)
  • Net profit: KRW7.2b (2016E), KRW19.5b (2017E)
  • Gross margin: 16.1% (2016E), 15.5% (2017E)
  • Net margin: 9.1% (2016E), 9.0% (2017E)
  • P/B: 0.4x–0.5x (2017E)

Conclusion

Despite the disappointing 3Q results, the analyst remains positive about the future performance of both Daehan Steel and Kisco, citing the expected improvement in spreads and continued strength in presales volume. The BUY ratings are unchanged, and accumulation is recommended due to the temporary share-price weakness. The P/B ratios are currently low, suggesting potential value for investors.