20160202-三星证券-Steel_NEUTRAL___Rebar_review_11页_596kb

Sector Update Summary

Core Content

This document provides an analysis of the steel sector in South Korea, focusing on two major steel companies: Daehan Steel and KISCO. It outlines their recent financial performance, market conditions, and future outlook, along with valuation metrics and key financial indicators.

Main Points

4Q Performance

• Daehan Steel:
  • Consolidated sales decreased by 0.1% q-q to KRW223.5b.
  • Operating profit increased by 13.7% q-q to KRW22b, meeting consensus.
• KISCO:
  • Sales declined by 5.7% q-q to KRW165.8b.
  • Operating profit rose by 11.2% q-q to KRW20.9b, also in line with expectations.

Rebar Market Dynamics

• The rebar base price fell by KRW15,000/tonne q-q in 4Q.
• Scrap prices dropped over KRW50,000/tonne q-q, contributing to solid operating profits despite the decline in rebar prices.
• Sales volume at Daehan Steel increased by 3% q-q, while KISCO saw a 7% decline.
• The decline in ASP (average selling price) is expected to be less than KRW30,000/tonne due to reduced discounts.

Future Outlook

• A year-on-year decline in apartment presale volume is anticipated, which may affect demand.
• However, construction start area growth is expected to remain strong, supporting rebar demand.
• Both companies are attractive valuations, trading at 0.4x 2017 P/B, which supports the BUY recommendation.

Key Information

Target Prices

• Daehan Steel: KRW9,500 (17% upside).
• KISCO: KRW45,000 (22.4% upside).

Financial Performance (Daehan Steel)

• Sales: Declined by 3.2% in 1Q16E, with a 13.4% increase in 2016E compared to 2015A.
• Operating profit: Increased by 6.7% in 1Q16E and is expected to decline slightly in subsequent quarters.
• Gross margin: Rose from 13.2% in 1Q16E to 13.4% in 2016E.
• Net margin: Increased from 3.7% in 1Q16E to 4.3% in 2016E.

Financial Performance (KISCO)

• Sales: Declined by 5.2% in 1Q16E, with a 12.0% increase in 2016E compared to 2015A.
• Operating profit: Increased by 10.7% in 1Q16E, but is expected to decline in later quarters.
• Gross margin: Improved from 16.2% in 1Q16E to 17.2% in 2016E.
• Net margin: Increased from 8.7% in 1Q16E to 8.9% in 2016E.

Valuation Metrics

• P/B (Price to Book): Both companies trade at 0.4x 2017 P/B, indicating attractive valuations.
• P/E (Price to Earnings): Daehan Steel and KISCO trade at 5.2x and 5.5x respectively.
• EV/EBITDA: Daehan Steel and KISCO trade at 3.2x and 3.5x respectively.

Financial Ratios

• ROE (Return on Equity): Daehan Steel at 9.1%, KISCO at 10.7%.
• ROA (Return on Assets): Daehan Steel at 4.5%, KISCO at 14.6%.
• ROIC (Return on Invested Capital): Daehan Steel at 10.6%, KISCO at 14.6%.
• Net debt to equity: Daehan Steel at 13.8%, KISCO at 12.1%.
• Interest coverage ratio: Daehan Steel at 7.2x, KISCO at 10.7x.

Conclusion

Despite the anticipated year-on-year decline in apartment presale volume and seasonal demand weakness, the steelmakers are expected to maintain stable operating profits due to lower scrap prices and reduced discounts. The BUY recommendation is based on the solid construction start area growth and attractive valuations. Both Daehan Steel and KISCO are currently trading at 0.4x 2017 P/B, suggesting potential for value appreciation.