三星-全球-钢铁行业（个股-大韩钢铁）-增持：有效的股权管理是螺纹钢生产商的关键-20171115-Samsung_Securities-Steel（OVERWEIGHT）Effective_equity_management_is_key_for_rebar_makers_11页_721kb

Sector Update Summary

Core Content

This document provides an analysis of the steel sector in South Korea, with a focus on Daehan Steel and Korea Iron & Steel (Kisco). It outlines recent financial performance, market conditions, and future outlook for these companies, emphasizing the importance of effective equity management and the impact of market dynamics on their profitability.

Main Points

• Financial Performance (3Q 2017):

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

• Market Conditions:

  • Despite weak seasonality, both companies experienced strong sales volumes due to increased demand and the shift of Chuseok holidays from September to October.
  • Rebar spreads narrowed significantly due to reference price cuts in early July and rising scrap prices, affecting quarterly earnings.
  • Rebar reference prices have increased by KRW50,000-60,000/tonne since mid-August, with domestic scrap prices stable since October, suggesting potential improvement in rebar spreads in 4Q.

• Industry Outlook:

  • Regulatory tightening in the real estate market may limit construction industry growth next year.
  • Construction start area is experiencing a soft landing, and the Chinese import portion of Korea's rebar market is declining, leading to a slow deterioration of domestic rebar.
  • Capital utilization will be a key determinant for rebar shares.

• Valuation and Investment Recommendations:

  • The report maintains BUY ratings on both Daehan Steel and Kisco.
  • Daehan Steel is trading at 0.57 x P/B, and Kisco at 0.41 x P/B.
  • It advises a trading buy strategy until more information is available on dividend policies, as neither company has announced a specific policy.

Key Information

• Daehan Steel:

  • 3Q 2017 Sales: KRW378.8b, down 14.7% q-q.
  • 3Q 2017 Operating Profit: KRW5b, down 75.5% q-q.
  • Expected ROE for 2018: 7.7%.
  • Dividend yield: 3.6%.
  • Target Price: KRW14,000, implying a 23.3% upside.

• Kisco:

  • 3Q 2017 Sales: KRW190b, up 1% q-q.
  • 3Q 2017 Operating Profit: KRW5.7b, down 72% q-q.
  • Expected ROE for 2018: 4.9%.
  • Dividend yield: 3.6%.
  • Target Price: KRW45,000, implying a 22% upside.

Charts and Tables

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

• Chart 2: Domestic vs import rebar prices.

• Chart 3: Rebar imports in Korea.

• Chart 4: Import portion of total rebar volume in Korea.

• Chart 5: Domestic scrap prices.

• Chart 6: Rebar-swap spread.

• 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.

• 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, cash flow statement, balance sheet, and financial ratios.

• Table 5: Kisco income statement, cash flow statement, balance sheet, and financial ratios.

Conclusion

The report suggests that while the steel sector, particularly rebar makers, faces challenges due to regulatory changes and market shifts, both Daehan Steel and Kisco are still worth considering for investment. The focus should be on their ability to manage capital efficiently and maintain their valuations, with a recommendation to use trading buy strategies due to their current low P/B ratios and potential for improvement in rebar spreads.