20170719-三星证券-Treasury_stock_cancellation_yet_to_price_in_13页_525kb

SK Chemicals (006120) Summary

Core Content

SK Chemicals, a subsidiary of Samsung, is undergoing significant structural and strategic changes, including the spin-off into holding and operating entities. This has impacted its share price, which has retreated since the announcement of the restructuring and has not yet reflected the treasury stock cancellation. The company is also focusing on expanding its business through new investments and divesting non-core areas.

Key Financial Performance

2Q17E Preview

• Sales: KRW1,937.4b (up 19.3% y-y, meeting consensus)
• Operating profit: KRW65.0b (up 16.6% y-y, beating consensus by 13.4%)
• Net profit: KRW53.7b (up 8.7% y-y, beating consensus by 16.0%)

Full-Year Forecasts (Revisions)

• Sales: 2017E increased by 1.8% to KRW8,009.3b
• Operating profit: 2017E increased by 3.2% to KRW243.3b
• Pre-tax profit: 2017E decreased by 3.2% to KRW262.7b
• Net profit: 2017E decreased by 3.2% to KRW202.4b

Main Business Divisions

Green Chemicals Division

• Sales: KRW198.8b (down 9.7% y-y)
• Operating profit: KRW11.9b (down 24.2% y-y)
• Margin: 6% (down 1.2% pts y-y)
• Contributions:
  • Synthetic Resin: KRW93.4b (up 10.0% y-y)
  • Bioenergy: KRW60.0b (down 34.3% y-y)
  • Utilities: KRW13.7b (flat y-y)

Life Sciences Division

• Sales: KRW70.0b (down 2.2% y-y)
• Operating profit: KRW-1.8b (remained in the red)
• Margin: -2.5% (up 4.5% pts y-y)
• Key Developments:
  • Expected to start receiving royalties for hemophilia-A treatment from CSL627
  • SKYpneumo is in Phase III trials for expanding use to children
  • Anticipated to win a patent lawsuit against Pfizer
  • Applied for WHO pre-qualification for flu vaccine and Korean approval for herpes zoster vaccine
  • Other vaccine projects in various stages of development

SK Gas (45.5% stake)

• Sales: KRW1,634.9b (up 25.7% y-y)
• Operating profit: KRW54.8b (up 17.4% y-y)
• Net profit: KRW63.9b (up 24.9% y-y)
• Performance: Strong growth attributed to increased sales volume and normalized LPG spread and ASP

Share Price and Valuation

• Current price: KRW68,500
• Target price: KRW93,000 (up 35.8%)
• Market cap: KRW1.5t / USD1.3b
• Shares (float): 9,283,563
• 52-week high/low: KRW79,500 / KRW55,400
• Avg daily trading value (60-day): KRW21.5b / USD19.1m
• P/E (adj): 15.4x (2017E), 13.0x (2018E)
• P/B: 1.0x
• EV/EBITDA: 14.6x (2017E), 14.0x (2018E)

Spin-Off Impact

• Corporate Structure:
  • Before spin-off: Total assets = KRW2,531,131b, Total liabilities = KRW1,144,782b, Total equity = KRW1,386,349b
  • After spin-off:
    • Surviving entity: Total assets = KRW1,639,309b
    • New entity: Total assets = KRW909,794b
    • Capital stock: Surviving entity = KRW65,403b, New entity = KRW70,199b

Divestments and New Investments

• Divestments:

  • Yarn/raw cotton (2000): KRW337b
  • Fabric (2003): KRW62b
  • Fiber (2007): KRW16b
  • Petrochemical (2008): KRW528b
  • Acetate and others (2009): KRW164b
  • Keris/Eurochem (2010): KRW601b
  • Utis (2010): KRW15b
  • Total divestments: KRW1,722b

• New investments:

  • PETG/CHDM (expand copolyester business): KRW154b
  • Biodiesel business: KRW31b
  • Pharmaceutical business (acquired SK Pharmaceutical/Dongshin Pharmaceutical; vaccine development): KRW400b
  • PPS business: KRW69b
  • Total new investments: KRW654b

Vaccine R&D Pipeline

• Trivalent influenza (cell-cultured): Estimated Korean market value = KRW170b
• Quadrivalent influenza (cell-cultured): Estimated Korean market value = KRW170b
• Pneumococcal conjugate vaccine (adult): Estimated Korean market value = KRW120b
• Pneumococcal conjugate vaccine (child): Estimated Korean market value = KRW120b
• Zoster vaccine: Estimated Korean market value = KRW80b
• Varicella vaccine: Estimated Korean market value = KRW80b
• HPV vaccine: Estimated Korean market value = KRW65b
• Rota virus vaccine: Estimated Korean market value = KRW40b
• Typhoid fever: Plan submitted (Oct 2015)

Analyst Notes

• Recommendation: BUY
• Target price: KRW93,000
• Key changes:
  • 2017E EPS: KRW4,448 (up 0.6% from old estimate)
  • 2018E EPS: KRW5,267 (up 8.1% from old estimate)

Summary

SK Chemicals is navigating a complex landscape of restructuring, divestments, and new investments. The spin-off into holding and operating entities has led to a drop in share price, which has yet to fully reflect the treasury stock cancellation. Despite challenges in the green chemicals and life sciences divisions, the company is showing growth in its SK Gas subsidiary, driven by increased sales volume and normalized pricing. The company's focus on vaccine development and R&D is promising, with several projects in various stages of development. Financially, the company is expected to maintain a stable P/E ratio and P/B ratio, with forward-looking earnings showing modest growth. The analyst maintains a BUY recommendation with a target price of KRW93,000.