20170516-三星证券-Rebar_makers__Near-term_outlook_bright_11页_630kb

Sector Update Summary

Core Content

This document provides a detailed analysis of the steel sector, with a specific focus on two rebar makers: Daehan Steel and Korea Iron & Steel (Kisco). The report highlights their financial performance, outlook, and valuation metrics. The analysts recommend a "BUY" for both companies, citing strong near-term growth potential and favorable market conditions.

Main Points

1. Near-Term Outlook

• Daehan Steel:
  • Consolidated sales and operating profit increased by 9.2% and 8.2% quarter-over-quarter (QoQ) to KRW283.9b and KRW10.2b.
  • Sales volume remained steady due to increased sales of processed rebar.
  • Operating profit growth was attributed to SG&A cost controls and rising rebar base prices.
• Kisco:
  • Parent-based sales decreased by 11.3% QoQ, but operating profit increased slightly by 0.7% QoQ to KRW8.2b.
  • Sales volume contraction was due to seasonality, but the company is expected to see improved performance in the second quarter.

2. Market Trends and Outlook

• Chinese rebar imports may rebound, but the analysts believe that Korean firms will benefit from:
  • Seasonality and increased domestic construction starts.
  • A rise in rebar base prices by KRW15,000/tonne QoQ.
  • Stable steel scrap prices, due to shutdowns in China, lower prices in Japan, and higher inventories in Korea.
• The rebar-scraps spread is expected to widen in 2Q, which will positively impact margins.

3. Recommendation

• Daehan Steel: Reiterate "BUY" with a 12-month target price of KRW12,000 (18.2% upside).
• Kisco: Reiterate "BUY" with a 12-month target price of KRW45,000 (10.8% upside).
• Investors are advised to trade the stocks up to the target prices, but to be cautious beyond that due to potential slowing growth in construction starts and presale volumes from 2H17 or 2018.

Key Information

1. Financial Performance (1Q17)

• Daehan Steel:
  • Sales: KRW283.9b
  • Operating profit: KRW10.2b
• Kisco:
  • Sales: KRW161.0b
  • Operating profit: KRW8.2b

2. Valuation Metrics

• Daehan Steel:
  • P/E: 6.6
  • P/B: 0.6
  • EV/EBITDA: 2.7
• Kisco:
  • P/E: 6.6
  • P/B: 0.6
  • EV/EBITDA: 2.4

3. Growth Forecasts

• Daehan Steel:
  • 2017E Sales: KRW1,069.4b
  • 2018E Sales: KRW1,025.1b
  • 2017E Net profit: KRW42.0b
  • 2018E Net profit: KRW36.9b
• Kisco:
  • 2017E Sales: KRW705.0b
  • 2018E Sales: KRW699.3b
  • 2017E Net profit: KRW43.0b
  • 2018E Net profit: KRW39.6b

4. Margin Analysis

• Daehan Steel:
  • Operating profit margin: 5.2% (2Q17E)
  • Net profit margin: 3.9% (2Q17E)
• Kisco:
  • Operating profit margin: 7.2% (2Q17E)
  • Net profit margin: 6.1% (2Q17E)

5. Cash Flow and Balance Sheet

• Daehan Steel:
  • Free cash flow: KRW43b (2017E)
  • Net debt to equity: -17.6%
  • Interest coverage: 22.7x (2017E)
• Kisco:
  • Free cash flow: KRW89.0b (2017E)
  • Net debt to equity: -17.6%
  • Interest coverage: 28.6x (2017E)

6. Key Charts and Tables

• Charts show rebar sales volume vs. construction starts, rebar prices vs. imports, and scrap prices.
• Tables present detailed financial results and forecasts for both companies, including sales, operating profit, net profit, and margins.

Conclusion

The report highlights that both Daehan Steel and Kisco are expected to benefit from near-term improvements in the steel market, driven by seasonality, increased construction activity, and rising rebar prices. Despite 1Q17 performance weakness, the analysts remain optimistic about the second quarter and beyond, recommending a "BUY" for both stocks with specific target prices. Investors are advised to consider buying during the 1Q weakness and to be cautious as growth may slow in the latter half of 2017 or 2018.