20171115-三星证券-Effective_equity_management_is_key_for_rebar_makers_11页_733kb

Sector Update Summary

Core Content

This report provides an update on the performance and outlook of two Korean steel companies, Daehan Steel and Korea Iron & Steel (Kisco), with a focus on their rebar business and financial metrics. It highlights the impact of market conditions, pricing trends, and regulatory changes on their quarterly results and future performance. The analysis suggests that while the rebar market faces challenges, both companies are still considered for investment with specific strategies.

Key Points

3Q Performance

• Daehan Steel:
  • Consolidated sales and operating profit fell by 14.7% and 75.5% q-q, respectively, to KRW378.8b and KRW5b.
  • Operating profit missed consensus by 62.1%.
• Kisco:
  • Parent-based sales increased by 1% q-q to KRW190b, but operating profit dropped by 72% q-q to KRW5.7b, missing consensus by 52.7%.

Market Conditions

• Rebar demand: Both firms experienced strong sales due to increased demand and the Chuseok holiday effect (shift in holiday timing).
• Price spreads: The main drag on earnings was the q-q narrowing of rebar spreads, attributed to reference price cuts and unexpected increases in scrap prices.
• 4Q Outlook: Rebar spreads are expected to widen as reference prices have increased by KRW50,000-60,000/tonne since mid-August, and domestic scrap prices have stabilized.

Industry Trends

• Construction growth: Regulatory tightening in the real estate market is expected to limit construction industry growth next year.
• Soft landing: The construction start area is experiencing a soft landing, indicating a gradual slowdown rather than a sharp decline.
• Chinese imports: The share of Chinese rebar in Korea's market is declining, which could benefit domestic producers.

Investment Recommendations

• Daehan Steel and Kisco are both maintained with BUY ratings.
• Investors are advised to use trading buy strategies for the pair until more clarity on dividend policies is provided.
• Both firms are assumed to maintain dividends at 2016 levels.
• Daehan Steel is trading at 0.57 x P/B, and Kisco at 0.41 x P/B.

Financial Analysis

Daehan Steel

• ROE: Estimated at 7.7% for 2018, down from 9.0% in 2017.
• P/B ratio: Expected to remain around 0.6x in 2018.
• P/E ratio: Around 6.8x in 2018.
• Net profit: Expected to be KRW33.2b in 2018, with a net margin of 3.1%.

Kisco

• ROE: Estimated at 4.9% for 2018, down from 5.1% in 2017.
• P/B ratio: Expected to be 0.5x in 2018.
• P/E ratio: Around 7.4x in 2018.
• Net profit: Expected to be KRW40.2b in 2018, with a net margin of 5.6%.

Charts and Tables

Charts

• Chart 1: Rebar sales volume vs construction start area (Korea).
• Chart 2: Domestic vs import rebar prices.
• Chart 3: Rebar imports (Korea).
• Chart 4: Import portion of total rebar volume (Korea).
• Chart 5: Scrap prices (Korea).
• Chart 6: Rebar-swap spread (Korea).
• Chart 7: Daehan Steel rebar sales volume vs construction start 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 start area.
• Chart 12: Kisco rebar prices and spreads.
• Chart 13: Kisco gross margin vs rebar spread.
• Chart 14: Kisco P/B band.

Tables

• Table 1: Daehan Steel results and forecasts (parent company).
• Table 2: Daehan Steel results and forecasts (consolidated).
• Table 3: Kisco results and forecasts.
• Table 4: Daehan Steel income statement.
• Table 5: Daehan Steel cash flow statement.
• Table 6: Daehan Steel balance sheet.
• Table 7: Daehan Steel financial ratios.
• Table 8: Kisco income statement.
• Table 9: Kisco financial ratios.

Conclusion

Both Daehan Steel and Kisco are facing challenges in the rebar market due to narrowing spreads and regulatory changes, but their strong demand and stable pricing trends suggest potential for recovery. The report emphasizes the importance of capital utilization efficiency and ROE maintenance for these companies to defend their valuations. Investors are advised to adopt trading buy strategies and monitor dividend policies for long-term value.