20160404-三星证券-Commodity_rally_adding_momentum_22页_2mb

Sector Update Summary

Core Content

This document provides an update on the performance and outlook of Korean trading companies, particularly focusing on LG International, Posco Daewoo, and SK Networks. It highlights the impact of the ongoing commodity price rally, the effect of impairment losses from previous years, and the potential for future earnings growth. The report also compares these firms to their global peers and includes financial data and valuations.

Main Points

Commodity Rally Impact

• Commodity prices, especially oil, have experienced a strong rally, contributing to improved earnings for domestic trading firms.
• The rally is expected to continue, which should positively impact the long-term earnings of companies like LG International and Posco Daewoo.
• The commodity rally has eased concerns about asset impairment losses and boosted investor sentiment.

Posco Daewoo

• The firm's target price has been raised to KRW25,000 due to the discovery of a second gas field in Myanmar and rising oil prices.
• The firm has recorded impairment losses in 2015, but the new gas field discovery is seen as a positive development.
• The firm's outlook remains uncertain due to the government's decision on DFS licenses.

LG International

• Shares have rebounded 30% from a January low, driven by recovering commodity prices.
• The firm has raised its target price to KRW42,000, reflecting expectations of improved earnings from the gas-to-liquids (GTL) project in Turkmenistan and better performance from Pantos Logistics.
• The firm's E&P business is heavily impacted by coal prices, which have not yet recovered significantly.

SK Networks

• The firm's share price dropped 35% after a failed bid for a DFS license but has since risen 30% due to expectations of re-entry into the DFS business and stable earnings from other operations.
• The DFS business remains in limbo, with the government delaying its decision on new licenses until end-April.
• The firm's target price has been raised by 7% to KRW6,500, reflecting improved global peer valuations, but the stock is kept at HOLD due to DFS uncertainties.

Key Information

Financial Performance

• LG International:

  • Current price: KRW33,300
  • Target price: KRW42,000 (up by 10.5%)
  • 2016E EPS: KRW2,919 (up by 19.0% from 2015)
  • 2017E EPS: KRW3,726 (up by 14.0% from 2016)
  • Net profit (2016E): KRW86b
  • Operating profit (2016E): KRW196b
  • P/E (2016E): 11.4
  • ROE (2016E): 7.1%

• Posco Daewoo:

  • Current price: KRW20,200
  • Target price: KRW25,000 (up by 23.8%)
  • 2016E EPS: KRW2,919
  • Net profit (2016E): KRW167b
  • Operating profit (2016E): KRW354b
  • P/E (2016E): 10.9
  • ROE (2016E): 8.5%

• SK Networks:

  • Current price: KRW6,230
  • Target price: KRW6,500 (up by 4.3%)
  • 2016E EPS: KRW2,682
  • Net profit (2016E): KRW85b
  • Operating profit (2016E): KRW216b
  • P/E (2016E): 14.3
  • ROE (2016E): 4.6%

Impairment Losses

• LG International:

  • Book value at end-2014: KRW1,190.4b
  • Impairment losses in 2015: KRW300.0b
  • Book value at end-2015: KRW890.4b

• Posco Daewoo:

  • Book value at end-2014: KRW2,407.8b
  • Impairment losses in 2015: KRW153.4b
  • Book value at end-2015: KRW2,252.0b

• SK Networks:

  • Book value at end-2014: KRW370.8b
  • Impairment losses in 2015: KRW35.0b
  • Book value at end-2015: KRW123.0b

Valuation Comparison

• LG International:

  • Sales (2016E): KRW14,935b
  • Operating profit (2016E): KRW196b
  • Net profit (2016E): KRW86b
  • EPS Growth rate (CAGR): 36.4%
  • P/E (2016E): 11.4
  • ROE (2016E): 7.1%
  • P/B (2016E): 0.8
  • EV/EBITDA (2016E): 9.5

• Posco Daewoo:

  • Sales (2016E): KRW16,854b
  • Operating profit (2016E): KRW354b
  • Net profit (2016E): KRW167b
  • EPS Growth rate (CAGR): 50.0%
  • P/E (2016E): 10.9
  • ROE (2016E): 8.5%
  • P/B (2016E): 0.9
  • EV/EBITDA (2016E): 11.5

• SK Networks:

  • Sales (2016E): KRW20,771b
  • Operating profit (2016E): KRW216b
  • Net profit (2016E): KRW85b
  • EPS Growth rate (CAGR): 26.3%
  • P/E (2016E): 14.3
  • ROE (2016E): 4.6%
  • P/B (2016E): 0.6
  • EV/EBITDA (2016E): 8.4

Company-Specific Highlights

LG International

• Earnings Normalization: The company is expected to see normalization in its non-ferrous metal trade business as premiums for inventory assets lower.
• GTL Project: A USD4b gas-to-liquids project in Turkmenistan is expected to boost project management profits.
• Pantos Logistics: Improved performance from Pantos Logistics is expected to enhance overall earnings.
• Valuation: The firm's target price is raised to KRW42,000 based on growing valuations of global peers.

Posco Daewoo

• Gas Field Discovery: A second gas field in Myanmar has led to a higher valuation of the firm's operations.
• Rising Oil Prices: The firm benefits from rising oil prices, which should improve its earnings.
• Uncertainty: The firm's outlook is still uncertain due to DFS license decisions.

SK Networks

• DFS Uncertainty: The firm's shares have been affected by the failed DFS license renewal, but there is optimism about re-entry into the DFS business.
• Stable Earnings: Other business segments have shown stable earnings, contributing to the recent share price recovery.
• Valuation: The target price is raised to KRW6,500, but the stock is maintained at HOLD due to DFS-related uncertainties.

Summary of Key Financial Metrics

Outlook

• The commodity rally is expected to continue, which will support the earnings and share prices of domestic trading firms.
• LG International and Posco Daewoo are expected to benefit from the rally, with LG International having a more positive outlook due to its GTL project and Pantos Logistics.
• SK Networks remains uncertain due to the DFS business, which is still pending government approval.
• The overall sector is seen as having limited downside if commodity prices stabilize, but opportunities for growth exist with continued price increases.