20171129-三星证券-New_capacity_to_push_profits_higher_8页_610kb

Company Update Summary: Korea Petrochemical (006650)

Core Content

This report provides an update on Korea Petrochemical (KPIC), highlighting its financial performance, valuation metrics, and future outlook. The analyst, Hyunryul Cho, recommends a BUY rating, with a target price of KRW330,000, and emphasizes that the stock is undervalued based on current earnings and book value.

Main Points

1. Market Performance

• Current price: KRW237,000
• Target price: KRW330,000 (up 39.2% from current price)
• Market Cap: KRW1.5 trillion / USD1.4 billion
• Shares (float): 6,500,000 (48.1%)
• 52-week high/low: KRW293,500 / KRW218,500
• Avg daily trading value: KRW12.8 billion

2. One-Year Performance

• KPIC: -9.2% (1M), -15.5% (6M), +8.0% (12M)
• Vs Kospi: -9.6% (1M), -20.6% (6M), -15.0% (12M)

3. Key Changes

• Recommendation: No change (still BUY)
• Target price: No change (KRW330,000)
• 2017E EPS: 34,575 (down 1.1% from previous forecast)
• 2018E EPS: 55,163 (up 1.7% from previous forecast)

4. Valuation Metrics

• P/E (adj): 4.3x (2018E)
• P/B (adj): 0.83x (2018E)
• EV/EBITDA: 2.3x (2018E)
• Dividend Yield: 2.1% (2018E)

5. EPS Growth

• 2017E EPS Growth: -17.4%
• 2018E EPS Growth: 59.5%
• 2019E EPS Growth: 13.5%

6. Financial Projections (2016–2019E)

7. Capacity Expansion and Earnings

• New capacity effects: Expected to fully materialize in 2018, following production issues in June and September.
• ECC expansion in North America: Concerns over potential negative impacts are considered overblown, as they will be offset by improved economic conditions and increased demand from China due to tighter environmental regulations.
• Ethylene prices: Strong ethylene prices (near USD1,300/tonne) are expected to benefit KPIC, with 0.2m tonnes of ethylene to be sold before the completion of PE/PP facilities in late 2018.
• EPS surge: Forecasted to grow by 55.2% in 2018, indicating strong earnings potential.

8. Stock Valuation and Recommendation

• KPIC is currently trading at 4.4x 2018 P/E and 0.83x 2018 P/B, which are significantly lower than the highest multiples observed during the current industry upturn.
• The analyst suggests bargain hunting this quarter, as product prices are weak.
• KPIC is highlighted as the top sector pick due to its undervaluation and strong future earnings growth.

Key Information

• Recommendation: BUY
• Target Price: KRW330,000
• EPS Growth (2018E): 55.2%
• Valuation: 4.4x P/E, 0.83x P/B
• Operating Profit (2018E): Expected to reach KRW453 billion
• ROE (2018E): 21.7%
• Dividend Yield (2018E): 2.1%
• Net Debt to Equity (2018E): -9.7% (negative, indicating strong liquidity)
• Interest Coverage (2018E): 90.4x

Summary of Financial Highlights

• KPIC has shown a strong recovery in 2017 with improved performance and is expected to continue its upward trajectory in 2018.
• The company is well-positioned to benefit from global demand for ethylene and the completion of its new capacity.
• Despite concerns about North American ECC expansion, the analyst believes these will be offset by strong demand and market conditions.
• KPIC remains undervalued relative to its earnings and book value, making it an attractive investment opportunity.

Analyst's View

• The analyst recommends BUY due to the company's strong fundamentals and potential for significant earnings growth.
• KPIC is considered a top sector pick, especially in the current market environment.
• The stock is expected to perform well in the next year, with a target price of KRW330,000, indicating a potential 39.2% increase from the current price.