Sector Update Summary
Core Content
This document provides an analysis of the Korean steel and non-ferrous metals sector, focusing on current market conditions, expected changes, and investment strategies. It highlights the challenges faced by the industry due to weak demand, especially from China, and the potential for improvement through factors such as the base effect and the implementation of China's New Silk Road development strategy.
Main Points
1. Market Conditions
- Weak Demand: Steel and non-ferrous metal prices have declined due to lackluster demand, particularly in China, which is a major consumer of steel and non-ferrous metals.
- Valuation Adjustments: Share prices have already reflected the negative impacts of weak demand and weak commodity prices, leading to eased valuation burdens.
- Exchange Rate Impact: Won depreciation has negatively impacted operating profits of large steelmakers like Posco and Hyundai Steel, with estimates showing significant declines in operating profit.
2. Expected Positives
- China's New Silk Road Strategy: The Chinese government is expected to boost infrastructure investment, which could increase steel and non-ferrous metal demand. The strategy is projected to raise China's steel market size by 8.3% by 2016, with a potential 16% widening of the steel-iron ore spread.
- Construction Start Area Growth: The growth in construction starts in Korea, driven by reconstruction and redevelopment projects, is expected to boost demand for rebar and other construction-related steel products.
- Rebar Demand: Rebar makers such as Korea Iron & Steel (Kisco) and Daehan Steel are expected to benefit from this trend, with significant increases in operating profit forecasted for 2016.
3. Investment Strategy
- Top Pick: Korea Zinc is highlighted as the top pick due to its strong net cash holdings and free cash flows, which can help lift enterprise value even amid weak commodity prices.
- Posco: Recommended for a short-term trading-buy approach due to its high dividend yield, despite expected non-operating losses and weak earnings visibility.
- New Coverage: Coverage is initiated for Korea Iron & Steel and Daehan Steel, with a BUY rating based on the growth in construction start areas.
Key Information
Target Prices
| Company |
Target Price (KRW) |
Change (%) |
| Posco |
250,000 |
-21.9% |
| Hyundai Steel |
70,000 |
-36.4% |
| Korea Zinc |
650,000 |
-35.0% |
| Seah Besteel |
40,000 |
-31.6% |
| Korea I&S |
70,000 |
-23.7% |
| Daehan Steel |
15,000 |
-35.1% |
| Poongsan |
28,000 |
-8.9% |
| Seah Steel |
75,000 |
-6.4% |
Earnings Impact from Won Depreciation
| Company |
Operating Profit Change (%) |
Pre-tax Profit Change (%) |
EPS Change (%) |
| Posco |
-8.3% |
-521.1% |
-34.5% |
| Hyundai Steel |
-3.6% |
-317.3% |
-42.8% |
Expected Growth from Policy and Demand Factors
| Company |
2016 Operating Profit Growth (%) |
2016 Operating Margin Growth (%) |
| Posco |
81.9% |
3.2% |
| Hyundai Steel |
91.2% |
5.3% |
| Kisco |
19.5% |
3.2% |
| Daehan Steel |
28.6% |
3.2% |
Valuation Metrics
| Company |
P/B (2015E) |
ROE (2015E) |
EBITDA Growth (CAGR) |
| Korea Zinc |
1.8 |
10.4 |
11.6% |
| Poongsan |
0.7 |
5.6 |
4.5% |
| Kisco |
0.6 |
9.5 |
19.5% |
| Daehan Steel |
0.8 |
10% |
355.5% |
Summary of Key Recommendations
- Korea Zinc: Top pick due to strong financial position and potential for enterprise value growth.
- Posco: Recommended for a trading-buy approach due to high dividend yield and low base.
- Kisco and Daehan Steel: Initiated coverage with a BUY rating due to strong demand in construction start areas.
- Investor Caution: While positive momentum is expected from policy and base effects, investors should focus on fundamentals and visible improvements rather than vague expectations.
Conclusion
The Korean steel and non-ferrous metals sector is currently under pressure due to weak demand and commodity price declines. However, there is potential for recovery through the base effect and the implementation of China's New Silk Road policy, which is expected to boost steel and non-ferrous metal demand. Investors are advised to consider fundamentals and long-term strategies, with Korea Zinc, Posco, Kisco, and Daehan Steel as key investment targets.
