Oil Refining/Chemicals Positioning for 2015
Limited recovery expected until year-end; Top picks are LG Chem, Hyosung, Neutral (Downgrade) Toray Chemical, & SK Innovation The chemicals industry has slowed since mid-August, largely due to: 1) weakening Industry Report demand from China and Europe, 2) oversupply of non-ethylene and downstream October 6, 2014 products, and 3) uncertainty over China’s economic policies. Supply is likely to expand further once the peak season ends and naphtha cracking center (NCC) maintenance is
completed; therefore, the market is forecast to remain rather stagnant until year-end . Daewoo Securities Co.,CCCo., Ltd. Meanwhile, oil refining margins and oil prices have fallen due to tepid demand from emerging markets. Further d eclines seem unlikely, but we also do not expect any sharp [Oil Refining/Chemicals] recovery, given 1) structural demand contraction, and 2) capacity expansions scheduled
Yeon-ju Park for year-end or early next year in the Middle East. +822-768-3061 We maintain LG Chem, Hyosung, Toray Chemical Korea, and SK Innovation (attractively [email protected] valued) as our top picks. These stocks are likely to perform strongly in spite of
Young-jee Bae unfavorable market conditions. +822-768-4123 Positioning for 2015 [email protected] We present the following investment strategies to counter the deteriorating market conditions.
1) Hyosung’s polyketone business deserves attention. Hyosung (Buy/TP: W95,000) is the first company to commercially produce polyketone. Its use of carbon monoxide and ethylene/propylene as feedstock has dramatically reduced production costs. Polyketone produced at Hyosung’s pilot facilities received positive feedback from several customers (including European compounding companies). As a result, the company has decided to complete construction of its mass production facilities (a 50,000-tonne plant) earli er than scheduled (June 2015 ‰ March 2015). The performance of the new plant will be assessed from March-July 2015. If successful, the project is likely to provide a significant boost to Hyosung’s enterprise value, but such expectations have not yet been p riced in. Furthermore, even considering the downbeat earnings outlook for 2H, the stock still looks inexpensive. We thus believe downside risks to the stock are limited.
2) Kumho Petrochemical (Trading Buy/TP: W90,000) is anticipated to bottom in 4Q. Increased supply, rather than low demand, is causing the synthetic rubber industry’s downturn. Tire demand has risen in 2014 , but synthetic rubber supply has risen even further. However, we expect synthetic rubber capacity growth to fall in 2015 after peaking in 2014, and thus believe the industry is bottoming. Also positive is that Kumho is expected to double its energy capacity by 2016. Butadiene prices will likely decline in 4Q due to low seasonal demand, but Kumho Petrochemical’s share price is anticipated to bottom along with butadiene prices.
Polyketone (newly developed by Hyosung) characteristicscharacteristics and applications
Source: Hyosung, KDB Daewoo Securities
Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
October 6, 2014 Oil Refining/Chemicals
C O N T E N T S
Oil refining and chemicals 3 1. Expect limited recovery until year-end 3 2. Three strategies in preparation for 2015 7
Key Recommendations 17 LG Chem (051910 KS) 18 Hyosung (004800 KS) 21 Toray Chemical Korea (008000 KS) 24 Huchems Fine Chemical (069260 KS) 27 Lotte Chemical (011170 KS) 30 Kumho Petrochemical (011780 KS) 33 SK Innovation (096770 KS) 36 GS Holdings (078930 KS) 39 S-Oil (010950 KS) 42 OCI (010060 KS) 45 Hanwha Chemical (009830 KS) 48
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October 6, 2014 Oil Refining/Chemicals
Oil refining and chemicals
1. Expect limited recovery until year-end
The oil refining and chemicals industries are anticipated show limited recovery through the end of this year. We maintain LG Chem, Hyosung, Toray Chemical Korea, and SK Innovation (attractively valued) as our top picks, because these stocks are likely to perform strongly in spite of unfavorable market conditions.
1) Chemicals: End of a strong season and supply growth The chemicals industry has slowed since mid-August, largely due to: 1) weakening demand from China and Europe, 2) oversupply of non-ethylene and downstream products, and 3) uncertainty over China’s economic policies.
For chemical producers, the third quarter is typically the peak season, but this year was an exception, because: 1) Chinese polyester producers have seen reduced capacity utilization, 2) Europe’s apparel sales have fallen, and 3) China’s apparel sales (by retailers) have grown at a slower pace. Since August, Europe’s tire replacement demand growth has decelerated, sending natural rubber prices to the lowest level in recent years. Synthetic rubber prices have also failed to rebound.
Figure 111.1. MEG spread bottomed out in JuneJune,,,, but the pace of Figure 222.2. Chinese polyester makermakers’s’s’s’ utilization ratioratioratio hashashas recovery has slowed since August remained lowlowlow
(US$/tonne) (US$/tonne) (%) 1,500 MEG (L) 600 85 2014 Spread (R) 5-year avg.
80 1,200 400
75 900 200
70
600 0 65
300 -200 60 05 06 07 08 09 10 11 12 13 14 1 4 7 10 (month)
Source: Cischem, KDB Daewoo Securities Research Source: Wind, KDB Daewoo Securities Research
Figure 333.3. Sluggish Europe apparel sales Figure 444.4. China PMIPMIPMI and Europe PMI have both slowed
(1/2010=100) (index) (index) 140 Europe apparel sales index (L) 70 60 US ISM Europe PMI China PMI Europe PMI (R)
130 60 55 120 50 110 50 40 100
90 30 45 07 08 09 10 11 12 13 14 11 12 13 14
Source: CEIC, KDB Daewoo Securities Research Source: CEIC, KDB Daewoo Securities Research
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We believe that increased supply, rather than low demand, is causing the chemicals industry’s downturn. Although demand has been weaker than expected, China’s chemical products demand has grown.
During the five-month period between March and July, China’s nominal demand (production + net imports) for petrochemical products steadily increased. During the same period, the country’s ethylene demand jumped 6.5% YoY. Synthetic rubber demand also expanded, but production increased faster, causing imports to stay flat.
Ethylene spread has widened since early this year, but other products have reported narrow spreads, which we attribute to the increased supply of non-ethylene products. China’s nationwide economic stimulus stoked strong demand for non-ethylene and downstream products. As such, capacity expansions increased, causing supply to expand full swing in 2013-14.
Heightened uncertainly over China’s economic policies (whether it will address problems through restructuring or through economic stimulus) was also negative for the industry, increasing the volatility of oil prices and the chemicals industry.
Since supply is likely to expand further once the peak season ends and maintenance of Asian NCCs is completed, the market is forecast to remain rather stagnant until the end of this year. Butadiene and propylene supply is projected to increase, driven by higher LPG prices (butadiene) and China’s PDH capacity expansion (propylene).
Nevertheless, if China or Europe decides to boost their economies, the chemicals market is likely to turn around. China has announced that it will restrain from adopting additional boosting measures, and thus, Europe’s course will be the more decisive factor.
Figure 555.5. Ethylene demand in China to grow in 2014 Figure 666.6. China synthetic rubber production and net importimportssss
(%) (x) ('000 tonnes) 2,500 Production 30 Demand growth (L) 3 Net imports Elasticity (R) 2,000 20 2
1,500
10 1 1,000
0 0 500
-10 -1 0 03 04 05 06 07 08 09 10 11 12 13 14 06 07 08 09 10 11 12 13 14
Notes: Demand growth calculated based on Mar.-Sept. data each year due to Notes: Demand growth calculated based on Mar.-Sept. data each year due to inconsistency of Jan. & Feb. data inconsistency of Jan. & Feb. data Source: CEIC, KDB Daewoo Securities Research Source: CEIC, KDB Daewoo Securities Research
Figure 777.7. China PMI shows seasonal weakness in 4Q Figure 888.8. Asia NCC maintenance peaks in October
(index) ('000 tonnes) 56 2012 2,500 2013 2014 Avg. 2,000 54
1,500
52 1,000
50 500
48 0 1 4 7 10 (month) 1 4 7 10 (month)
Source: CEIC, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
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October 6, 2014 Oil Refining/Chemicals
2) Oil refining: Refining margins unlikely to fall further or improve markedly For 3Q, oil refineries will likely post poor earnings due to a sharp decline in refining margins and oil prices stemming from slow demand from emerging countries.
For the first eight months of 2014, nominal demand (production + net imports) for Chinese petrochemical products inched down 0.3% YoY. In particular, diesel demand fell by 1.2% YoY. The GDP elasticity of petrochemical products fell from 0.3-0.4x to negative territory. Once-solid diesel margins plunged in July-August due to lower-than-expected demand from emerging markets.
Lower emerging market demand also dampened oil prices. The International Energy Agency (IEA) revised down its 2014 estimate of global crude oil demand growth to 900,000 bbl/d in September despite the US’s solid annual oil production growth of 1.2-1.4mn bbl/d since 2012. Oil prices remained flat until end-August thanks to production disruptions, particularly in Libya. In September, however, Libya’ oil production recovered, while potential supply issues, including geopolitical tension in Iraq, were addressed, leading to a sharp decline in oil prices.
TableTableTable 111.1. China petroleum product demand growth (January(January----August)August) (‘000 tonnes, %) Demand DDDemandDemand growth TotalTotalTotal Gasoline Diesel Fuel oil TotalTotalTotal Gasoline Diesel Fuel oil 2008 246,781 42,050 94,501 15,055 7.2 15.8 16.0 -28.2 2009 250,295 44,685 88,466 17,261 1.4 6.3 -6.4 14.7 2010 280,662 46,384 100,516 14,601 12.1 3.8 13.6 -15.4 2011 305,501 49,947 110,863 16,191 8.9 7.7 10.3 10.9 2012 311,312 56,115 112,085 15,195 1.9 12.3 1.1 -6.2 2013 326,690 61,693 112,648 13,735 4.9 9.9 0.5 -9.6 2014 325,857 68,187 111,322 10,237 -0.3 10.5 -1.2 -25.5 Source: CEIC, KDB Daewoo Securities Research
TableTableTable 222.2. IEAIEAIEA’IEA ’’’ss global crude oil demand and US supply forecast ((aass of SeptSept.... 2014) (mn bbl/d, %, x) 070707 080808 090909 101010 111111 121212 131313 14F14F14F 15F15F15F Global Demand 86.5 86.1 85.0 88.4 89.0 90.5 91.7 92.6 93.8 Demand growth (mn -0.38 -1.15 3.42 0.60 1.54 1.17 0.90 1.23 bbl/d) Demand growth (%) -0.44 -1.34 4.02 0.68 1.73 1.29 0.98 1.33
GDP growth 3.9 1.6 -2.3 4.0 3.0 2.1 2.2 2.5 3.0
GDP elasticity -0.3 0.6 1.0 0.2 0.8 0.6 0.4 0.4
North Supply 14.3 13.3 13.6 14.1 14.6 15.8 17.2 18.6 19.6 America Supply growth -1.00 0.30 0.50 0.50 1.20 1.40 1.40 1.00
Source: IEA, KDB Daewoo Securities Research
Figure 999.9. Refining marginmarginssss tumbled in 3Q on weak demand in Figure 101010.10 . ChinChinChineseChin eseeseese diesel demand growth has slowed emerging markets
(US$/bbl) (%) 15 Korea complex refining margin 30 Gasoline Quarterly avg. Diesel
12 20
9 10
6 0
3 -10
0 -20 05 07 09 11 13 05 06 07 08 09 10 11 12 13 14 Source: Petronet, KDB Daewoo Securities Research Source: CEIC, KDB Daewoo Securities Research
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We expect crude oil demand to move in line with global GDP growth, but the GDP elasticity of crude oil demand will likely remain low compared to the past. Lower Chinese diesel demand is attributable to decreased investments in fixed assets, including real estate, arising from the Chinese government’s policy of boosting consumption rather than investments. In the medium term, rising EV vehicle sales and gas mileage are likely to weigh on a demand recovery in developed markets.
Even so, both refining margins and oil prices are unlikely to plunge further. Refining margins picked up in September following a plunge in July-August. Indeed, the level seen in July-August is unlikely to occur again for any prolonged period, as refineries would not make profits at that level.
Oil prices are expected to decline due to 1) lower demand growth resulting from increasing EV vehicle sales and 2) higher US oil production. However, the decline is likely to slow. Since Dubai crude has already neared the OPEC fiscal break-even oil price, there are mounting calls for production cuts from OPEC members, particularly Iran. In addition, the production of tight oil, which is increasing in the US, is likely to be suspended in the event of a plunge in WTI crude, given its high production costs.
Figure 121212.12 . OPECOPECOPEC’OPEC ’’’ss fiscal breakeven oil prices (((the(the price at Figure 111111.11 . Dubai oil has plungeplungedd on weak demand which the budget is balancedbalanced))))
(US$/bbl) (US$/W) (US$/bbl) 115 Dubai oil (L) 1,180 160 Fiscal balance US$/W rate (R) Current account 140 1,150 110 120
1,120 100 105 80 1,090 100 60 1,060 40 95 1,030 20 0 90 1,000 Algeria Bahrain Iran Iraq Kuwait Libya Oman Qatar Saudi UAE 1/13 4/13 7/13 10/13 1/14 4/14 7/14 10/14 Arabia
Source: Petronet, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
Figure 131313.13 . US crude oil production has risen since 2011 Figure 141414.14 . LLLiLiiibbbbyyyyaaaa’’’’ss production hashashas normalized
('000 bbl/d) (mnbbl/d) 9 4 Iraq Nigeria Libya 8 3 Iran Non-OPEC
7 2
6 1
5 0 11 12 13 14 11 12 13 14
Source: Petronet, KDB Daewoo Securities Research Source: EIA, KDB Daewoo Securities Research
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October 6, 2014 Oil Refining/Chemicals
2. Three strategies in preparation for 2015
1) Hyosung’s polyketone is a potential game changer Having succeeded in the mass production of polyketone in 2013, Hyosung is now operating a pilot facility with an annual capacity of 1,000 tonnes. The company is currently constructing a 50,000 tonne- plant, which is scheduled to begin operations in July 2015. If Hyosung succeeds in commercial production and market development for polyketone, it should see a sharp rise in enterprise value.
Polyketone is an engineering plastic (a group of materials with superior mechanical and/or thermal properties compared to commodity plastics). Going forward, it is anticipated to replace PA (polyamide), PBT (polybutylene terephthalate), and POM (polyoxymethylene). The key strengths of polyketone are 1) its strong cost competitiveness and eco-friendliness and 2) its superior properties.
Polyketone is produced through the copolymerization of carbon monoxide (an air pollutant) and olefins (ethylene and propylene). As the prices of olefins range from only US$1,300-1,500/tonne (vs. the average engineering pastics price of US$3,000-5,000/tonne), production costs for polyketone are very low. In addition, because the production of 50,000 tonnes of polyketone requires 25,000 tonnes of carbon monoxide, polyketone production could provide carbon emission rights (CER) business opportunities to Hyosung.
The superior properties of polyketone include its 1) impact strength (2.3 times higher than PA), 2) chemical resistance (over 30% stronger than PA), and 3) abrasion resistance (14 times higher than POM). Thanks to its excellent gas barrier properties, polyketone can be used for fuel tanks and pipes. Furthermore, the material is expected to replace aramid fiber due to its strong tenacity and elasticity.
Figure 151515.15 . Polyketone produced fromfromfrom carbon monoxide and Figure 161616.16 . Polyketone is expected to replace other enenen gineering olefin (ethylene, propylene) plastic products
Source: Hyosung, KDB Daewoo Securities Research Source: Hyosung, KDB Daewoo Securities Research
Figure 181818.18 . Polyketone shows advantages over other Figure 171717.17 . Applications of pppolyketonepolyketone engineering plaplassssticsticsticstics
Source: Hyosung, KDB Daewoo Securities Research Source: Hyosung, KDB Daewoo Securities Research
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October 6, 2014 Oil Refining/Chemicals
Polyketone was first developed by Shell in 1996. However, the company transferred the technology to SRI, a consulting firm, after it discontinued the polyketone business in 2000. Then, in 2005, Japan-based Asahi Kasei Fibers carried out research on polyketone based on SRI’s technology, but the company failed to mass produce the chemical.
Meanwhile, Hyosung has prior experience with engineering plastics, including the production of PA through a joint venture with BASF and of POM through a joint venture with Mitsubishi Chemical. Although the company withdrew from these businesses in the aftermath of the global financial crisis, it did not cease its efforts to develop new materials. As for polyketone, Hyosung is believed to have achieved mass production by upgrading technologies related to catalysts. The company has spent W50bn on polyketone-related investments over the past 10 years, and has applied for or completed registering 133 patents in Korea and 27 overseas.
It remains to be seen whether the 50,000-tonne mass production facilities will perform successfully, and how quickly polyketone will replace PA, PBT, and POM.
Even though mass production was successful in the pilot stage, engineering plastics may run into various problems (such as low production yields) once commercial production begins full swing. Product testing takes longer than usual due to the high stability standards required by clients such as automakers. And being the only supplier on the market (as Hyosung is) also raises concerns about supply stability. These concerns will likely ease once Hyosung completes its production facilities in March 2015 and secures sufficient pre-orders for mass production to begin in July.
We believe that Hyosung’s polyketone business will take off strongly, in light of the following:
Mass production was successful in the pilot stage, and European compounding companies are already running tests. Product testing is expected to progress well, given that Shell and Asahi Kasei had previously conducted tests. The strengthening of gas mileage rules is also positive, as demand for lighter vehicles should increase. The fact that Hyosung is the only supplier capable of producing polyketone may be a risk, but as long as the company can deliver high-quality materials in a stable manner, supplier risk will be minimized.
The global engineering plastic market shipped 7.7mn tonnes of products in 2013, and polyketone has the potential to replace 4mn tonnes (of PA, POM, and PBT combined). Hyosung aims to expand its polyketone capacity to 500,000 tonnes by 2020, after its 50,000-tonne facilities begin operating effectively. The 50,000-tonne factory is anticipated to generate annual revenue of around W200bn, with a double-digit OP margin. Once production begins full swing, the growth potential of the polyketone business will likely boost the firm’s enterprise value.
Hyosung’s 3Q and 4Q earnings are likely to fall shy of expectations due to weak demand for tires. And whether the mass production facilities will perform successfully cannot be confirmed until March-July 2015. Nevertheless, the stock’s temporary pullback will present a good buying opportunity given its low valuation. Even if polyketone production does not go as planned, we believe downside risks are limited, because the stock does not reflect the value of the polyketone business.
TableTableTable 333.3. Engineering plastic and pppolyketonepolyketone market forecasts (‘000 tonnes, %, US$/kg, Wbn) 201320132013 201420142014 201520152015 201620162016 201720172017 202020202020 PC 3,330 3,450 3,570 3,690 3,820 4,240 PA 2,260 2,350 2,450 2,550 2,660 3,010 POM 950 980 1,015 1,050 1,085 1,200 PBT 850 890 930 970 1,015 1,160 Other 318 329 341 354 367 428 Total 7,708 7,999 8,306 8,614 8,947 10,038 PA/POM/PBT 4,060 4,220 4,395 4,570 4,760 5,370 % of polyketone 1 2 5 10 Volume 44 91 238 537 ASP 4,000 4,000 4,000 4,000 Market size 176 366 952 2,148 Hyosung’s capacity addition (planned) 50 500 Note: EP market forecasts based on Yano Research Institute estimates; market share of polyketone is our estimate Source: KDB Daewoo Securities Research
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2) Bottoming of Kumho Petrochemical The chemicals market is bottoming slowly but steadily, and Kumho Petrochemical is anticipated to bottom in 4Q.
The synthetic rubber market has slowed after peaking in 2011 (due to falling Chinese demand in 2011-12, and increased supply since 2013). However, new facilities have started production in 2013-14, and additional expansions are limited in 2015 and beyond. Thus, the market is likely to pick up if demand continues to rise in 2015.
Butadiene experienced significant capacity ramp-ups this year (700,000-800,000 tonnes in 2014 vs. 400,000-500,000 in global demand growth). From 2015, however, capacity additions are projected to fall below 300,000 tonnes per year (excluding BDH). Synthetic rubber capacity jumped by more than 10% in 2013-14, but this figure should also fall sharply starting in 2015. As a result, the market is anticipated to recover gradually.
BPA and ABS are believed to have bottomed out. In 2013, BPA producers reported significant operating losses as supply soared by more than 10% following a boom in early-2011, but they swung to an operating profit in 3Q14 after capacity utilization decreased. ABS will be able to post a margin of 2-3%.
Figure 202020.20 . Synthetic rubber production growth outweighs Figure 191919.19 . Michelin’s tire demand forecasts demand growth in China
('000 tonnes) 2,500 Production Net imports
2,000
1,500
1,000
500
0 06 07 08 09 10 11 12 13 14
Source: Michelin, KDB Daewoo Securities Research Source: CEIC, KDB Daewoo Securities Research
Figure 212121.21 . Butadiene supply likely to peak in 2014 Figure 222222.22 . Synthetic rubber supply and demand forecast
('000 tonnes) (US$/tonne) ('000tonnes) (US$/tonne) 400 1,000 1,500 Demand growth (L) 2,000 Supply growth (L) Spread (R) 300 1,000 800 1,500 200 500 600 1,000 100 0 400 0 500 Demand growth (L) -500 200 -100 Supply growth (L) Spread (R) -1,000 0 -200 0 07 08 09 10 11 12 13 14 15 16 07 09 11 13 15
Source: Industry data, KDB Daewoo Securities Research Source: Industry data, KDB Daewoo Securities Research
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Kumho’s energy business is anticipated to provide downside support for the stock. Its energy unit, which uses scrap tires and coal to produce electricity and steam, generates W120bn in annual operating profit. The firm plans to double its energy production capacity by early 2016, which will translate into roughly W200bn in operating profit (a conservative estimate).
Butadiene prices fall seasonally in 4Q, and synthetic rubber demand tends to slacken in December due to destocking at tire producers. But we expect Kumho Petrochemical’s share price to bottom along with butadiene prices in 4Q.
We have maintained a Trading Buy rating on Kumho because of heightened expectations for the firm’s earnings and demanding valuation in spite of oversupply. But expectations are weakening, and the valuation burden is easing. Thus, the stock is likely to bottom in 4Q.
Figure 232323.23 . BPA spread has been improving on utilization Figure 242424.24 . ABS spread has bottomed out adjustment
(US$/tonne) (US$/tonne) 1,500 BPA-benzene (-1M lagging) 700 ABS spread Quarterly avg. Quarterly avg. 600 1,200 500
900 400
300 600
200 300 100
0 0 05 06 07 08 09 10 11 12 13 14 05 06 07 08 09 10 11 12 13 14
Source: Cischem, KDB Daewoo Securities Research Source: Cischem, KDB Daewoo Securities Research
Figure 262626.26 . Kumho PetrochemicaPetrochemical’l’l’l’ s operating profit by business Figure 252525.25 . Butadiene price rises in summer and falls in winterwinter division
(US$/tonne) (Wbn) 1,200 10Y avg. 1,000 Energy/other 2013 Phenol derivatives 1,000 2014 Synthetic resins (ABS, etc.) 800 Synthetic rubber 800
600 600
400 400
200 200 0
-200 0 1 4 7 10 (mo.) 02 04 06 08 10 12 14F 16F
Source: Cischem, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
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3) Likelihood of polysilicon prices picking up and investment strategy Polysilicon prices have stopped falling thanks to a gradual recovery in Chinese demand. Although the Chinese government announced a 2014 solar installation target of 14GW early this year, the installations did not go as planned due to a lack of economic viability and liquidity, driving down polysilicon prices.
However, in early August, the Chinese government reaffirmed its plan to add solar power (with a revised 2014 installation target of 13GW), and in early September announced measures to boost demand for distributed solar PV generation; these include the government’s plans to purchase excess solar power and promote financing for installations. Since then, Chinese solar PV demand has been gradually improving.
A rebound in polysilicon prices has been delayed due to 1) the slow demand recovery and 2) massive inventories in the supply chain. However, once inventories are exhausted, polysilicon prices will likely rebound, given that 1) polysilicon makers are operating at full capacity and 2) no major capacity expansion is planned until year-end. GCL-Poly is currently building a 10,000 tonne/year fluidized bed reactor (FBR) facility, while Daqo is expanding the annual capacity of its existing facility by 6,000 tonnes. Even so, given their ramp-up periods after construction, they are unlikely to go into full operation until 2015.
A rebound in polysilicon prices is expected to give a boost to shares of OCI in light of their high correlation. Meanwhile, Hanwha Chemical is likely to deliver only limited earnings improvement even in the event of a pickup in the solar PV market due to continued oversupply of modules.
TableTableTable 444.4... Polysilicon supply forecast (GW) 1Q141Q141Q14 2Q142Q142Q14 3Q14F 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F Production 11.8 12.2 12.6 12.6 14.4 15.0 15.4 15.8 capacity Demand Total 9.0 9.0 10.5 14.5 9.5 10.5 12.5 16.5 China 2.0 2.0 3.0 6.0 2.0 2.0 3.0 6.0 US 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Japan 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 Europe 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Other 1.5 1.5 2.0 3.0 2.0 3.0 4.0 5.0 Source: KDB Daewoo Securities Research
Figure 282828.28 . Shares ofofof sssolarsolar module makermakerssss havehavehave picked up on Figure 272727.27 . PPPolysiliconPolysilicon and wafer price declinedecliness has haveha veveve stopped demand recovery expectations
(US$/kg) (US$/watt) (-2Y) 500 24 Polysilicon price (L) 1.30 Trina Solar Wafer price (R) Yingli Green 400 1.25 21 300 1.20 200 18 1.15 100
15 1.10 0 1/13 7/13 1/14 7/14 10/12 4/13 10/13 4/14 10/14
Source: PV Insights, KDB Daewoo Securities Research Source: Datastream, KDB Daewoo Securities Research
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Nevertheless, we recommend a trading approach for OCI, due to 1) low demand visibility for 2015 and beyond and 2) the company’s weakened competitiveness.
The market will likely improve through 2014 due to the absence of new supply and improving demand. However, demand visibility for 2015 and beyond seems weak, as demand largely depends on policies, and supply is forecast to increase in 2015 (unlike other cyclical industries).
Generally, cyclical industries do not make new investments when suffering deficits. However, polysilicon makers are continuing new investments, as: 1) demand is forecast to grow over the medium to long term, 2) capacity ramp-ups will likely help cut costs, and 3) Chinese makers are managing to reduce costs quickly.
Facilities that are scheduled to commence operations in 2015 include a debottlenecking-based facility of OCI, an FBR-based facility of GCL-Poly, and a US polysilicon factory of Wacker Chemie. OCI plans to cut overall costs by US$2/kg through the debottlenecking process, while GCL-Poly plans to decrease overall costs to under US$9/kg by using the FBR technology. Wacker Chemie also plans to take advantage of the low electricity bills of the US.
With improved cost competitiveness (resulting from improved equipment and low electricity bills), Chinese producers are ramping up capacity to meet increasing domestic demand. GCL-Poly, which curtailed costs to US$15.7/kg in 1H14, aims to further reduce costs to less than US$9/kg by completing its FBR technology-based facility, with a capacity of 10,000 tonnes. Daqo also lowered costs to US$14/kg in 2Q and hopes to cut costs to US$12/kg by increasing capacity by 6,000 tonnes.
Table 555.5. Poly. PolysiliconPoly silicon supply and demand forecasts (‘000 tonnes) CCCapacityCapacity 090909 101010 111111 121212 131313 14F14F14F 15F15F15F 16F16F16F 17F17F17F Hemlock 19.0 27.5 37.5 36.0 36.0 36.0 36.0 36.0 36.0 Wacker Chemie 19.2 27.0 35.8 52.0 52.0 52.0 52.0 72.0 72.0 OCI 17.0 20.1 34.5 42.0 42.0 42.0 47.0 52.0 52.0 GCL-Poly 7.5 17.3 29.4 61.0 67.0 67.0 77.0 87.0 87.0 MEMC 8.5 12.5 8.0 20.0 8.0 8.0 6.0 6.0 6.0 REC 11.5 13.5 16.9 22.4 20.0 20.0 20.0 20.0 20.0 Tokuyama 8.0 8.2 8.2 8.2 8.2 14.4 28.2 28.2 28.2 Mitsubishi 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 Sumitomo 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 LDK - 17.0 17.0 17.0 - 5.0 5.0 5.0 5.0 ReneSola - 3.0 3.5 3.5 - 6.0 6.0 6.0 6.0 Daqo New Energy - - 3.0 3.0 6.0 6.0 12.0 12.0 12.0 TBEA - - - 5.0 5.0 12.0 12.0 12.0 12.0 Asia Silicon 2.0 2.0 2.0 5.0 5.0 5.0 5.0 5.0 5.0 Samsung-MEMC ------10.0 10.0 10.0 Hanwha Chemical - - - - - 5.0 10.0 10.0 10.0 Powertec Energy ------Other - - 50.0 30.0 - - - - - Total 97.4 152.8 250.5 309.8 254.0 283.2 331.0 366.0 366.0 Semiconductor-use (tonnes) 27.5 29.0 30.5 32.0 33.6 35.3 37.1 38.9 40.9 Solar-use (tonnes) 69.9 123.8 220.0 277.8 220.3 247.8 293.9 327.0 325.1 Usage per watt (GW) 8.0 7.2 6.3 6.0 5.8 5.8 5.7 5.6 5.6 Bulk type capacity (GW) 8.7 17.2 35.2 46.3 38.0 42.7 51.6 58.4 58.0 Solar demand (GW) 6.0 16.0 27.5 30.6 36.3 44.4 49.9 54.4 60.9 Bulk type (GW) 5.0 14.5 25.3 27.8 32.8 40.4 44.9 48.4 53.9 Thin film type (GW) 1.0 1.5 2.2 2.8 3.5 4.0 5.0 6.0 7.0 Source: KDB Daewoo Securities Research
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October 6, 2014 Oil Refining/Chemicals
Share prices are reflecting changes in the competitiveness of producers. Global solar PV shares are recovering. China-based Daqo surged, and GCL-Poly and Wacker Chemie also rose. Although OCI shares pulled back due to non-operating issues, they could rise if momentum picks up (e.g., a rise in polysilicon prices). However, OCI shares are still likely to lag behind Chinese competitors.
Table 666.6. Polysilicon makers in China Company NoteNoteNote - Capacity of 67,000 tonnes/year has been fully operating since 1H14. Total ASP GCL-Poly of US$15.7/kg - Building an FBR facility with capacity of 10,000 tonnes by end-2014, with ASP
of under US$9/kg - Capacity of 6,000 tonnes/year has been fully operating since 2Q14. Total ASP Daqo New Energy of US$14.1/kg as of 2Q14 - Located in Xinjiang (power rates of Rmb0.3/kWh in Xinjiang, Rmb0.7/kWh in
Jiangsu ) - Plans to increase capacity by 6,000 tonnes to 12,000 tonnes by end-2014, with
ASP dropping to US$12/kg - The company, located in Xinjian, expanded its capacity to 12,000 tonnes in TBEA Xinjiang Silicon 2013. It possesses its own electricity production f acilities (coal -based). Luoyang China Silicon - Currently operating 6,000 tonnes/year as of 2Q14 LDK Resumed operation (capacity of 5,000 tonnes/year) in August 2014 Resumed operation after process upgrade; full operation in 2Q14 (6,000 ReneSola tonnes /year) Source: News releases, KDB Daewoo Securities Research
Figure 292929.29 . GCLGCLGCL-GCL ---PolyPolyPolyPoly’’’’ssss polysilicon ASP and production costcostcost Figure 303030.30 . DaqoDaqoDaqo’Daqo ’’’ss polysilicon ASP and production costcostcost
(US$/kg) (US$/kg) 24 ASP Production cost 25 ASP Production cost 22 20 20
18 15
16 10 14
12 5 1H12 2H12 1H13 2H13 1H14 1Q14 2Q14 2Q15 target Source: GCL-Poly, KDB Daewoo Securities Research Source: Daqo, KDB Daewoo Securities Research
Figure 313131.31 . Shares of ppolysiliconolysilicon makermakerssss have been picking up Figure 323232.32 . DaqoDaqoDaqo’Daqo ’’’ss share performance
(-2Y) (-2Y) 250 GCL-Poly 1,400 Wacker OCI 1,200 200 1,000
150 800
600 100
400 50 200
0 0 10/12 4/13 10/13 4/14 10/14 10/12 4/13 10/13 4/14 10/14 Source: Datastream, KDB Daewoo Securities Research Source: Datastream, KDB Daewoo Securities Research
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October 6, 2014 Oil Refining/Chemicals
TableTableTable 777.7. Global peer valuation (x, %) PPP/P///EEEE PPP/P///BBBB ROEROEROE 131313 14F14F14F 15F15F15F 131313 14F14F14F 15F15F15F 131313 14F14F14F 15F15F15F GCL-Poly 40.4 20.6 14.1 2.8 2.5 2.2 7.1 12.7 15.9 OCI - 66.4 20.9 1.2 1.2 1.1 -2.9 1.9 6.0 Wacker Chemie 56.3 30.4 30.3 2.3 2.1 2.0 4.0 6.6 7.0 Tokuyama 10.7 14.5 17.6 0.5 0.5 0.5 5.2 3.8 2.8 REC - - 56.9 1.1 1.1 1.1 -24.9 -2.0 3.0 First Solar 15.6 26.1 14.8 1.5 1.5 1.3 8.5 5.6 8.6 Trina Solar 15.2 14.6 9.9 1.2 1.1 1.0 6.7 7.0 13.1 Gintech 1,345.0 140.1 47.7 0.8 0.8 0.8 0.5 4.3 8.1 Yingli - - 42.2 10.0 2.4 2.7 -175.5 -25.8 13.7 SHARP 15.7 19.0 14.1 2.7 2.4 2.0 17.3 15.3 19.0 SunPower 29.8 27.4 20.6 3.4 3.6 3.2 18.2 13.0 11.6 Source: Bloomberg, KDB Daewoo Securities Research
TableTableTable 888.8. Global peer earnings consensus (US$mn) Revenue Operating profit Net profit 131313 14F14F14F 15F15F15F 131313 14F14F14F 15F15F15F 131313 14F14F14F 15F15F15F GCL-Poly 3,603 4,421 4,724 249 697 898 -94 304 444 OCI 2,956 3,201 3,462 -106 137 285 -328 48 157 Wacker Chemie 6,511 6,434 6,830 204 516 464 4 178 212 Tokuyama 3,131 2,981 3,108 221 181 175 111 84 69 REC 457 530 550 -84 -6 41 -386 -8 18 First Solar 3,623 3,926 4,337 403 325 580 387 274 482 Trina Solar 1,943 2,412 2,835 -42 120 185 -79 76 118 Gintech 557 582 619 -10 20 38 -22 8 27 Yingli 2,427 2,546 3,287 -202 6 135 -352 -128 18 SHARP 31,897 27,983 28,104 1,183 932 1,044 126 285 396 SunPower 2,745 2,669 2,968 177 191 251 105 202 269 Source: Bloomberg, KDB Daewoo Securities Research
Figure 333333.33 . Global polysilicon makersmakers’’’’ operating profit revision Figure 343434.34 . Global solar module makersmakers’’’’ operating profit
(compared to ---1M,-1M, ---3M)-3M)3M)3M) revision (compared to ---1M,-1M, ---3M)-3M)3M)3M)
(%) (%) 40 -1M -3M 10 -1M -3M
30 5
20 0
10 -5
0 -10 -10 -15 -20 -20 -30 First Solar Trina Solar JA Solar ReneSola GCL-Poly OCI Wacker Chemie
Source: Bloomberg, KDB Daewoo Securities Research Source: Bloomberg, KDB Daewoo Securities Research
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October 6, 2014 Oil Refining/Chemicals
Figure 353535.35 . Synthetic fiber chain overview
Natural fibers Raw cotton
Synthetic Ethylene fibers Polyester EG
Lotte Chemical LG Chem Samsung Total
PTA PX Xylene
Lotte Chemical Lotte Chemical Taekwang Industrial SK Global Chemical Hyosung S-Oil Nylon Samnam Petrochemical GS Caltex Samsung Petrochemical Samsung Total SK Petrochemical Hyundai Cosmo Acryl
Source: KDB Daewoo Securities Research
Figure 363636.36 . Synthetic rubber chain overview
Natural rubber
Synthetic rubber SBR SM Benzene
Kumho Petrochemical LG Chem LG Chem Lotte Chemical SKC SK Global Chemical Samsung Total YNCC Dongbu HiTek
BR Butadiene
Kumho Petrochemical LG Chem
Source: KDB Daewoo Securities Research
Figure 373737.37 . Petrochemical products overview
Monomer Intermediates Resin/products Major producers Use
Olefin
Crude Oil Korea Petrochemical, Lotte Ethylene HDPE Chemical Films, forming Hanwha Chemical, LG LDPE Chem Agricultural films LG Chem, Hanwha PVC Chemical Construction pipes, films EG Lotte Chemical, LG Chem Polyester fibers
Naphtha Propylene PP Lotte Chemical Films, forming
PO PPG SKC, Kumho Petrochemical Polyurethane
Butadiene Kumho Petrochemical, LG Tires and shoes SBR, BR Chem
Gasoline Kumho Petrochemical, LG IT, home appliances Diesel Benzene SM ABS Chem Kerosene Fuel oil Toluene DNT TDI KPX Fine Chemical, OCI Polyurethane Asphalt Xylene PX TPA Lotte Chemical Polyester fibers
Aromatics
Source: KDB Daewoo Securities Research
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October 6, 2014 Oil Refining/Chemicals
Figure 383838.38 . LG Chem (1)(1):: Revenue breakdown by business Figure 393939.39 . LG Chem (2)(2):: C: ChemicalC hemicalhemicalssss division revenue breakdown division
Battery Acryl/plasticizer 11% 13% NCC/PO 27% I&E 14%
ABS/EP 31%
Rubber/special Chemicals resin 75% 18% PVC 11%
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
Figure 404040.40 . Kumho PetrochemicalPetrochemical’’’’ss revenue breakdown by Figure 414141.41 . LotteLotteLotte ChemicalChemical’’’’ss revenue breakdown by business business division division
Other Other 7% 10% Energy PE 3% 23% PTA/PET Phenol 14% derivatives (BPA, etc) Synthetic 19% rubber 45%
PP 16%
NC/BTX Synthetic resins 20% (ABS, PS, etc) EO/EG 26% Butadiene/SM 8% 9%
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
Figure 424242.42 . Hanwha ChemicaChemical’l’l’l’ss revenue breakdown by business Figure 434343.43 . OCIOCIOCI’OCI ’’’ss revenue breakdown by business division division
Distribution Other 6% 0.4% Other 25% Polysilicon L&C 29% 21% PVC, LDPE, caustic soda (parent) 46%
OCI materials 6% Carbon Solar chemical 22% 40% Ninbo PVC 5%
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
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October 6, 2014 Oil Refining/Chemicals
Key Recommendations
LG Chem (051910 KS/Buy) A stock with a compelling growth story
ò 3Q preview: Operating profit to fall shy of consensus estimates ò Expect relatively solid earnings in 4Q despite low seasonality ò Trim TP in light of lower oil price outlook, but still our top pick
Hyosung (004800 KS/Buy) Polyketone, a potential game changer
ò Polyketone business deserves attention ò 3Q preview: Earnings to fall short of consensus due to weak tire demand ò Limited downside risk
Toray Chemical Korea (008000 KS/Buy) Turnaround is ongoing
ò 3Q preview: In-line operating profit of W10.2bn ò Enterprise value on the rise ò Maintain TP of W17,000; Turnaround is ongoing
SK Innovation (096770 KS/Buy) Downward earnings revision coming to an end
ò 3Q preview: Weak OP likely due to lower refining margins and oil prices ò 4Q OP to rise QoQ to W306.8bn thanks to lower oil refining losses ò Lower TP to W120,000; Recent share price pullback seems excessive
KDB Daewoo Securities Research 17
October 6, 2014 Oil Refining/Chemicals
LG Chem (051910 KS) A stock with a compelling growth story
Chemicals 3Q preview: Operating profit to fall shy of consensus estimates
We expect LG Chem to report 3Q operating profit of W389.4bn, falling shy of the (Maintain) Buy consensus. Chemicals earnings should improve QoQ but only slightly, due to tepid Chinese demand. China’s sluggish construction market has weighed on PVC demand, and Target Price (12M, W) 330,000 synthetic rubber experienced dismal demand and oversupply.
For information & electronic materials (I&E) and batteries, seasonal demand appears to Share Price (10/02/14, W) 241,000 have been weaker than usual. Polarizer production costs are estimated to have declined as the Japanese yen depreciated, but price competition appears to have intensified. Expected Return 37% Coating solutions revenue was not generated due to quality issues. Production yield is steadily improving for LCD glass, but the business likely remains in the red because ASP OP (14F, Wbn) 1,476 has decreased amid a weakening yen. Small-sized batteries are forecast to post solid Consensus OP (14F, Wbn) 1,532 earnings thanks to a customer’s new model launch, but EV battery revenue is likely to EPS Growth (14F, %) -13.8 have expanded only slightly QoQ. Market EPS Growth (14F, %) 8.1 Expect relatively solid earnings in 4Q despite low seasonality P/E (14F, x) 16.3 Market P/E (14F, x) 12.0 The fourth quarter is typically a slow season for LG Chem, but this year, the firm is KOSPI 1,976.16 anticipated to post a relatively healthy operating profit of W365.3bn. Small-sized Market Cap (Wbn) 15,971 battery shipments are projected to increase in 4Q, as new model sales by one of its Shares Outstanding (mn) 74 customers will be concentrated in the quarter. LG Chem is a major supplier, satisfying a Free Float (%) 65.9 significant portion of the customer’s battery needs. Large-sized battery revenue is Foreign Ownership (%) 34.3 anticipated to recover in 4Q, with losses narrowing. Overall, the battery unit’s 4Q Beta (12M) 1.50 operating profit is likely to remain flat QoQ, at W37.9bn, which is higher than usual. 52-Week Low 238,500 Chemicals operating profit is projected to contract QoQ due to regular maintenance and 52-Week High 323,000 low seasonal demand, and I&E operating profit is anticipated to remain steady QoQ (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M (coating solution sales should resume). Absolute -8.2 -8.9 -20.6 Relative -4.7 -7.9 -19.7 Trim TP in light of lower oil price outlook, but still our top pick
110 LG Chem KOSPI We cut our target price for LG Chem by 6%, to W330,000 (from W350,000), in light of 100 lower oil price forecasts (from US$105 to US$95). Nevertheless, the stock remains our 90 top pick. In deriving our target price, we applied a sum-of-the-parts valuation
80 methodology (based on 2015F earnings estimates), and reflected a business value of
70 W3.8tr for the medium- to large-sized battery unit (based on 2017 earnings estimates). 60 The chemicals market is unlikely to pick up until early next year (because the strong 9.13 1.14 5.14 9.14 season is over for the year), but LG Chem is still anticipated to outperform its peers,
driven by increasing small-sized battery shipments, and the growth potential of its medium- to large-sized battery unit.
FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Revenue (Wbn) 22,676 23,263 23,144 23,091 24,257 26,120 OP (Wbn) 2,819 1,910 1,743 1,476 1,860 2,536 OP margin (%) 12.4 8.2 7.5 6.4 7.7 9.7 NP (Wbn) 2,138 1,494 1,266 1,092 1,427 1,963 EPS (W) 28,930 20,223 17,131 14,770 19,305 26,559 ROE (%) 24.8 14.8 11.4 9.1 11.1 13.8 P/E (x) 11.0 16.3 17.5 16.3 12.5 9.1 P/B (x) 2.5 2.3 1.9 1.4 1.3 1.2 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
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October 6, 2014 Oil Refining/Chemicals
TableTableTable 999.9. QQQuarterlyQuarterly and annual earnings (Wbn, %, %p, US$/bbl, US$/W) 201320132013 201420142014 2012012013201 333 2012012014F201 4F4F4F 2012012015201 555FFFF 1Q1Q1Q 2Q2Q2Q 3Q3Q3Q 4Q4Q4Q 1Q1Q1Q 2Q2Q2Q 3QF3QF3QF 4QF4QF4QF Revenue Total 5,721 5,917 5,865 5,641 5,673 5,869 5,792 5,757 23,144 23,091 24,257 Petrochemical 4,353 4,536 4,426 4,300 4,415 4,375 4,296 4,174 17,614 17,260 16,928 I&E 827 813 788 737 670 716 748 807 3,166 2,941 3,563 Battery/other 592 619 708 665 681 724 748 776 2,583 2,929 3,766 Operating Total 409 502 516 316 362 360 389 365 1,743 1,476 1,860 profit Petrochemical 324 367 380 262 308 291 308 262 1,332 1,169 1,326 I&E 97 119 102 61 37 47 49 58 379 191 333 Battery/other -12 16 34 -6 17 25 32 46 32 120 201 OP margin Total 7.1 8.5 8.8 5.6 6.4 6.1 6.7 6.3 7.5 6.4 7.7 Petrochemical 7.4 8.1 8.6 6.1 7.0 6.6 7.2 6.3 7.6 6.8 7.8 I&E 11.8 14.6 13.0 8.2 5.5 6.6 6.5 7.2 12.0 6.5 9.3 Battery/other -2.0 2.6 4.8 -0.9 2.6 3.5 4.3 5.9 1.3 4.1 5.3 Net profit 339 398 352 177 288 227 297 279 1,266 1,092 1,427 Dubai oil 108 101 106 106 104 106 102 95 105 102 95 US$/W 1,111 1,142 1,075 1,055 1,065 1,012 1,020 1,025 1,055 1,025 1,050 Source: KDB Daewoo Securities Research
TableTableTable 101010.10 . 3Q14F earnings preview (Wbn, %, %p) 3Q14F Growth 3Q133Q133Q13 2Q142Q142Q14 KDB Daewoo Consensus YoYYoYYoY QoQQoQQoQ Revenue 5,865 5,869 5,792 6,026 -1.2 -1.3 Operating profit 516 360 389 437 -24.6 8.3 Net profit 8.8 6.1 6.7 7.2 -2.1 0.6 OP margin 441 290 380 432 -13.9 31.0 Net margin 352 227 297 329 -15.6 30.7 Source: WISEfn, KDB Daewoo Securities Research
TableTableTable 111111.11 . EEEarningsEarnings forecast revisions (Wbn, %, %p) Previous Revised % chg% chg.chg ... 14F14F14F 15F15F15F 14F14F14F 15F15F15F 14F14F14F 15F15F15F Revenue 23,392 25,145 23,091 24,257 -1.3 -3.5 Operating profit 1,578 2,151 1,476 1,860 -6.4 -13.5 OP margin 1,184 1,672 1,092 1,427 -7.8 -14.7 Pretax profit 6.7 8.6 6.4 7.7 -0.4 -0.9 Net profit 5.1 6.6 4.7 5.9 -0.3 -0.8 Source: KDB Daewoo Securities Research
TableTableTable 121212.12 . Valuation (2015F) (Wbn, x, mn shares, W) 11151555FF EBITDA TTTargetTarget EV/EBITDA (x)(x)(x) FVFVFV NotesNotesNotes Value of Chemicals 1,826.0 7.0 12,782.3 - Applied avg. multiple of chemicals companies operations I&E 510.2 7.0 3,571.4 - Applied avg. multiple of hybrid chemicals companies
Small batteries 412.9 7.0 2,890.4 - Applied avg. multiple of battery companies
Medium/large batteries 557.1 7.0 3,899.7 - Discounted 2017F EBITDA LCD glass 144.3 7.0 1,010.3 - Discounted 2017F EBITDA Total 2,893.5 8.3 24,154.1 Value of non-operating assets (Wbn) 250.3 Net borrowings (Wbn) 1,197.0 - As of end-2Q14 Market cap of preferred shares (Wbn) 1,369.0 Target market cap (Wbn) 21,838.4 Shares 66.3 outstanding Target price (W) 329,387.3 Source: KDB Daewoo Securities Research
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October 6, 2014 Oil Refining/Chemicals
LG Chem (051910 KS/Buy/TP: W330,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F (Wbn) 12/13 12/14F 12/15F 12/16F Revenue 23,144 23,091 24,257 26,120 Current Assets 8,0328,0328,032 8,1868,1868,186 8,4528,4528,452 9,3999,3999,399 Cost of Sales 19,835 19,991 20,773 21,960 Cash and Cash Equivalents 1,399 2,125 2,011 2,463 Gross Profit 3,3093,3093,309 3,1003,1003,100 3,4843,4843,484 4,1604,1604,160 AR & Other Receivables 3,305 3,481 3,700 3,984 SG&A Expenses 1,5661,5661,566 1,6241,6241,624 1,6241,6241,624 1,6241,6241,624 Inventories 2,564 2,580 2,742 2,953 Operating Profit (Adj) 1,7431,7431,743 1,4761,4761,476 1,8601,8601,860 2,5362,5362,536 Other Current Assets 764 0 -1 -1 Operating Profit 1,7431,7431,743 1,4761,4761,476 1,8601,8601,860 2,5362,5362,536 NonNonNon-Non ---CurrentCurrent Assets 9,4159,4159,415 9,9509,9509,950 10,714 11,380 NonNonNon-Non ---OperatingOperating Profit ---142 -142142142 ---95-959595 ---36-363636 ---26-262626 Investments in Associates 448 457 486 523 Net Financial Income -30 -37 -36 -26 Property, Plant and Equipment 8,560 8,859 9,620 10,272 Net Gain from Inv in Associates 5 11 0 0 Intangible Assets 263 474 447 423 Pretax Profit 1,601 1,381 1,824 2,510 Total Assets 17,446 18,136 19,166 20,779 Income Tax 331 293 401 552 Current Liabilities 4,5984,5984,598 4,6154,6154,615 4,6964,6964,696 4,8194,8194,819 Profit from Continuing Operations 1,271 1,087 1,423 1,958 AP & Other Payables 1,268 1,279 1,288 1,318 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 2,207 2,190 2,190 2,190 Net Profit 1,2711,2711,271 1,0871,0871,087 1,4231,4231,423 1,9581,9581,958 Other Current Liabilities 1,123 1,146 1,218 1,311 Controlling Interests 1,266 1,092 1,427 1,963 NonNonNon-Non ---CurrentCurrent Liabilities 1,1231,1231,123 1,1131,1131,113 933933933 760760760 Non-Controlling Interests 5 -4 -4 -5 Long-Term Financial Liabilities 804 787 587 387 Total Comprehensive Profit 1,2691,2691,269 983983983 1,4231,4231,423 1,9581,9581,958 Other Non-Current Liabilities 319 326 346 373 Controlling Interests 1,263 1,020 1,488 2,048 Total Liabilities 5,7215,7215,721 5,7285,7285,728 5,6295,6295,629 5,5795,5795,579 Non-Controlling Interests 7 -36 -65 -90 Controlling Interests 11,597 12,297 13,429 15,097 EBITDA 2,788 2,623 3,125 3,908 Capital Stock 370 370 370 370 FCF (Free Cash Flow) 822 690 409 985 Capital Surplus 1,158 1,158 1,158 1,158 EBITDA Margin (%) 12.0 11.4 12.9 15.0 Retained Earnings 10,173 10,970 12,102 13,770 Operating Profit Margin (%) 7.5 6.4 7.7 9.7 NonNonNon-Non ---ControllingControlling Interests 129129129 111111111 108108108 103103103 Net Profit Margin (%) 5.5 4.7 5.9 7.5 Stockholders' Equity 11,726 12,408 13,537 15,200
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1312/1312/13 12/14F 12/15F 12/16F 12/1312/1312/13 12/14F 12/15F 12/16F Cash Flows from Op Activities 2,183 2,305 2,409 2,985 P/E (x) 17.5 16.3 12.5 9.1 Net Profit 1,271 1,087 1,423 1,958 P/CF (x) 8.8 7.2 5.7 4.6 Non-Cash Income and Expense 1,247 1,383 1,702 1,951 P/B (x) 1.9 1.4 1.3 1.2 Depreciation 1,021 1,117 1,239 1,348 EV/EBITDA (x) 8.0 6.9 5.8 4.4 Amortization 24 29 26 24 EPS (W) 17,131 14,770 19,305 26,559 Others 202 237 437 579 CFPS (W) 34,072 33,424 42,292 52,887 Chg in Working Capital -287 52 -280 -345 BPS (W) 157,137 166,608 181,928 204,502 Chg in AR & Other Receivables -114 -270 -213 -277 DPS (W) 4,000 4,000 4,000 4,000 Chg in Inventories 47 -36 -162 -211 Payout ratio (%) 20.7 24.2 18.5 13.5 Chg in AP & Other Payables -245 69 9 30 Dividend Yield (%) 1.3 1.7 1.7 1.7 Income Tax Paid ---328 -328328328 ---307-307307307 ---401-401401401 ---552-552552552 Revenue Growth (%) -0.5 -0.2 5.0 7.7 Cash Flows from Inv Activities -1,310 -1,362 -2,000 -2,001 EBITDA Growth (%) 0.1 -5.9 19.1 25.1 Chg in PP&E -1,353 -1,609 -2,000 -2,000 Operating Profit Growth (%) -8.7 -15.3 26.0 36.3 Chg in Intangible Assets -41 0 0 0 EPS Growth (%) -15.3 -13.8 30.7 37.6 Chg in Financial Assets 132 529 0 -1 Accounts Receivable Turnover (x) 7.3 7.0 6.9 7.0 Others ---48 -484848 ---282-282282282 000 000 Inventory Turnover (x) 8.9 9.0 9.1 9.2 Cash Flows from Fin Activities -199 -217 -495 -495 Accounts Payable Turnover (x) 14.2 15.7 16.2 16.9 Chg in Financial Liabilities 63 -34 -200 -200 ROA (%) 7.5 6.1 7.6 9.8 Chg in Equity 0 0 0 0 ROE (%) 11.4 9.1 11.1 13.8 Dividends Paid -308 -296 -295 -295 ROIC (%) 11.2 9.1 10.7 13.6 Others 464646 113113113 000 000 Liability to Equity Ratio (%) 48.8 46.2 41.6 36.7 Increase (Decrease) in Cash 678 726 -115 452 Current Ratio (%) 174.7 177.4 180.0 195.0 Beginning Balance 721 1,399 2,125 2,011 Net Debt to Equity Ratio (%) 9.2 6.9 5.7 0.8 Ending Balance 1,3991,3991,399 2,1252,1252,125 2,0112,0112,011 2,4632,4632,463 Interest Coverage Ratio (x) 26.7 18.1 24.4 35.8 Source: Company data, KDB Daewoo Securities Research estimates
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October 6, 2014 Oil Refining/Chemicals
Hyosung (004800 KS) Polyketone, a potential game changer
Chemicals Polyketone business deserves attention
Hyosung in 2013 became the first company to commercially produce polyketone (Maintain) Buy (current capacity: 1,000 tonnes). Its use of carbon monoxide and ethylene/propylene as feedstock has dramatically reduced production costs. Polyketone produced at Hyosung’s Target Price (12M, W) 95,000 pilot facilities received positive feedback from several customers (including European compounding companies). As a result, the company has decided to complete Share Price (10/02/14, W) 76,500 construction of its mass production facilities (a plant with a capacity of 50,000 tonnes) earlier than scheduled (June 2015 ‰ March 2015).
Expected Return 24% The 50,000-tonne factory is anticipated to generate annual revenue of around W200bn, with a double-digit OP margin. If successful, the polyketone business is likely to provide a OP (14F, Wbn) 592 significant boost to Hyosung’s enterprise value. The performance of the new plant Consensus OP (14F, Wbn) 597 (including the production yield) will be assessed from March to July 2015. EPS Growth (14F, %) - 3Q preview: Earnings to fall short of consensus due to weak tire demand Market EPS Growth (14F, %) 8.1 P/E (14F, x) 8.9 We expect Hyosung to post 3Q operating profit of W154.bn, slightly missing the consensus. Market P/E (14F, x) 12.0 Polyester and tire demand slowed in 3Q, which seems to have affected Hyosung’s textile and KOSPI 1,976.16 industrial materials sales. Power & industrial systems earnings are projected to have Market Cap (Wbn) 2,686 decreased QoQ due to relatively small revenue recognition in the quarter. Shares Outstanding (mn) 35 The fourth quarter is a slow season, but earnings will likely stay healthy. Spandex spread Free Float (%) 63.4 is projected to remain wide, as no additional capacity is scheduled to be added by year- Foreign Ownership (%) 27.1 end. Power & industrial systems earnings are anticipated to improve (exports to the US Beta (12M) 1.21 increased in 1H). Industrial materials earnings can improve only if tire demand picks up, 52-Week Low 62,500 given that producers did not ramp up capacity over the past two to three years. 52-Week High 82,000
(%)(%)(%) 1M1M1M 6M6M6M 12M12M12M Limited downside risk Absolute -2.9 0.8 12.5 Once the polyketone business takes off full swing, Hyosung’s enterprise value should Relative 0.8 1.9 13.8 climb sharply. However, whether its mass production facilities will perform successfully
120 Hyosung KOSPI cannot be confirmed until March-July 2015. And 3Q and 4Q earnings are anticipated to 110 be weaker than expected due to sluggish tire demand.
100 The potential value of the polyketone business has not yet been priced in. As such, even 90 if production does not progress smoothly as scheduled, downside risks to the stock are 80 limited. 70 9.13 1.14 5.14 9.14 The stock’s temporary pullback (due to disappointing operating results in 3Q and 4Q) should present a good buying opportunity. We maintain our Buy rating with a target price of W95,000. We derived our target price by applying a P/B of 1.1x (ROE of 11%) to our 2015 earnings estimates.
FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Revenue (Wbn) 11,342 12,612 12,579 12,137 11,973 12,169 OP (Wbn) 278 223 486 592 606 594 OP margin (%) 2.5 1.8 3.9 4.9 5.1 4.9 NP (Wbn) -45 157 -229 300 321 317 EPS (W) -1,281 4,460 -6,526 8,557 9,151 9,028 ROE (%) -1.5 5.4 -8.3 11.1 10.8 9.7 P/E (x) - 16.5 - 8.9 8.4 8.5 P/B (x) 0.6 0.9 0.9 0.9 0.9 0.8 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 21
October 6, 2014 Oil Refining/Chemicals
TableTableTable 131313.13 . Quarterly and annual earnings (US$/W, Wbn, %) 1Q131Q131Q13 2Q132Q132Q13 3Q133Q133Q13 4Q134Q134Q13 1Q141Q141Q14 2Q142Q142Q14 3Q14F 4Q14F 201320132013 2014F2014F2014F 2015F2015F2015F US$/W rate 1,111 1,142 1,075 1,055 1,065 1,012 1,020 1,025 1,055 1,025 1,050 Revenue Total 2,913 3,358 3,199 3,109 2,792 3,109 3,078 3,158 12,579 12,137 11,973 Textiles 512 572 559 538 534 559 544 539 2,181 2,175 2,038 Industrial materials 579 622 602 566 612 600 586 582 2,368 2,380 2,290 Chemicals 365 419 380 343 337 372 353 311 1,507 1,373 1,448 Power & industrial 550 705 633 645 438 594 570 710 2,533 2,311 2,300 systems Construction 107 151 147 149 107 187 147 149 553 590 590 Other 800 890 879 868 764 797 879 868 3,437 3,308 3,308 Operating Total 96 207 165 17 109 195 154 134 486 592 606 profit Textiles 49 69 75 75 83 94 90 85 268 352 298 Industrial materials 29 38 29 -14 20 32 25 20 81 98 114 Chemicals 15 44 35 14 -1 30 22 8 108 58 104 Power & industrial -8 15 0 -13 -5 31 0 7 -6 32 41 systems Construction 5 12 6 -38 5 8 7 4 -15 25 24 Other 15 29 20 -13 8 1 9 9 51 26 26 OP margin Total 3.3 6.2 5.2 0.6 3.9 6.3 5.0 4.2 3.9 4.9 5.1 Textiles 9.5 12.1 13.5 13.9 15.5 16.8 16.6 15.9 12.3 16.2 14.6 Industrial materials 4.9 6.2 4.8 -2.5 3.3 5.4 4.3 3.4 3.4 4.1 5.0 Chemicals 4.1 10.5 9.3 4.1 -0.4 8.0 6.2 2.7 7.2 4.3 7.2 Power & industrial -1.5 2.2 0.0 -2.0 -1.2 5.1 0.0 1.0 -0.2 1.4 1.8 systems Construction 4.9 8.0 4.2 -25.5 4.9 4.0 5.0 3.0 -2.7 4.2 4.0 Other 1.9 3.2 2.2 -1.5 1.0 0.1 1.0 1.0 1.5 0.8 0.8 Pretax profit 4 19 471 2 31 70 23 19 257 454 412 Net profit -5 73 -235 -49 -9 163 81 66 -229 300 321 Source: KDB Daewoo Securities Research
TableTableTable 141414.14 . EEEarningsEarnings forecast revisions (Wbn, %, %p) Previous Revised % chg% chg.chg ... 14F14F14F 15F15F15F 14F14F14F 15F15F15F 14F14F14F 15F15F15F Revenue 12,174 12,028 12,137 11,973 -0.3 -0.5 Operating profit 619 603 592 606 -4.4 0.5 Net profit 319 312 300 321 -5.8 3.0 OP margin 5.1 5.0 4.9 5.1 -0.2 0.1 Net margin 2.6 2.6 2.5 2.7 -0.1 0.1 Source: KDB Daewoo Securities Research
Figure 454545.45 . Hyundai Heavy IndustriesIndustries’’’’ electric and electronic Figure 444444.44 . Tire cord price has declined on weak tire demand products division earnings have been improving
(US$/tonne) ('000 tonnes) (Wbn) (%) 5,000 Volume (R) 9,000 1,000 Revenue (L) OP margin (R) 9 Price (L)
8,000 800 6 4,500
7,000 600 3 4,000 6,000 400 0
3,500 5,000 200 -3
3,000 4,000 0 -6 05 06 07 08 09 10 11 12 13 14 15 1Q12 3Q12 1Q13 3Q13 1Q14
Source: KITA, KDB Daewoo Securities Research Source: Hyundai Heavy Industries, KDB Daewoo Securities Research
KDB Daewoo Securities Research 22
October 6, 2014 Oil Refining/Chemicals
Hyosung (004800 KS/Buy/TP: W95,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F (Wbn) 12/13 12/14F 12/15F 12/16F Revenue 12,579 12,137 11,973 12,169 Current Assets 4,0934,0934,093 4,0444,0444,044 4,1474,1474,147 4,2774,2774,277 Cost of Sales 11,095 10,531 10,352 10,561 Cash and Cash Equivalents 445 278 424 543 Gross Profit 1,4841,4841,484 1,6061,6061,606 1,6211,6211,621 1,6081,6081,608 AR & Other Receivables 1,834 1,872 1,848 1,855 SG&A Expenses 998998998 1,0151,0151,015 1,0151,0151,015 1,0151,0151,015 Inventories 1,424 1,503 1,484 1,489 Operating Profit (Adj) 486486486 592592592 606606606 594594594 Other Current Assets 390 391 391 390 Operating Profit 486486486 592592592 606606606 594594594 NonNonNon-Non ---CurrentCurrent Assets 7,2637,2637,263 7,2387,2387,238 7,1897,1897,189 7,1517,1517,151 NonNonNon-Non ---OperatingOperating Profit ---229 -229229229 ---138-138138138 ---194-194194194 ---188-188188188 Investments in Associates 273 277 273 274 Net Financial Income -209 -203 -194 -187 Property, Plant and Equipment 5,451 5,407 5,364 5,325 Net Gain from Inv in Associates -14 -13 0 0 Intangible Assets 440 428 428 428 Pretax Profit 257 454 412 406 Total Assets 13,593 13,546 13,600 13,693 Income Tax 493 143 91 89 Current Liabilities 7,1337,1337,133 7,1827,1827,182 6,9576,9576,957 6,7646,7646,764 Profit from Continuing Operations -236 311 321 317 AP & Other Payables 1,229 1,253 1,237 1,241 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 5,202 5,217 5,017 4,817 Net Profit ---236 -236236236 311311311 321321321 317317317 Other Current Liabilities 702 712 703 706 Controlling Interests -229 300 321 317 NonNonNon-Non ---CurrentCurrent Liabilities 3,7873,7873,787 3,4603,4603,460 3,4503,4503,450 3,4533,4533,453 Non-Controlling Interests -7 11 0 0 Long-Term Financial Liabilities 3,020 2,681 2,681 2,681 Total Comprehensive Profit ---296 -296296296 269269269 321321321 317317317 Other Non-Current Liabilities 767 779 769 772 Controlling Interests -295 256 311 306 Total Liabilities 10,919 10,641 10,407 10,216 Non-Controlling Interests -1 13 11 11 Controlling Interests 2,5992,5992,599 2,8242,8242,824 3,1123,1123,112 3,3963,3963,396 EBITDA 1,039 1,113 1,130 1,113 Capital Stock 176 176 176 176 FCF (Free Cash Flow) -95 106 372 354 Capital Surplus 456 456 456 456 EBITDA Margin (%) 8.3 9.2 9.4 9.1 Retained Earnings 2,043 2,306 2,594 2,878 Operating Profit Margin (%) 3.9 4.9 5.1 4.9 NonNonNon-Non ---ControllingControlling Interests 757575 818181 818181 818181 Net Profit Margin (%) -1.8 2.5 2.7 2.6 Stockholders' Equity 2,6742,6742,674 2,9052,9052,905 3,1933,1933,193 3,4773,4773,477
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1312/1312/13 12/14F 12/15F 12/16F 12/1312/1312/13 12/14F 12/15F 12/16F Cash Flows from Op Activities 545 647 852 834 P/E (x) - 8.9 8.4 8.5 Net Profit -236 311 321 317 P/CF (x) 4.1 2.6 2.4 2.4 Non-Cash Income and Expense 833 704 808 796 P/B (x) 0.9 0.9 0.9 0.8 Depreciation 553 521 523 519 EV/EBITDA (x) 9.8 9.2 8.8 8.6 Amortization 0 0 0 0 EPS (W) -6,526 8,557 9,151 9,028 Others 280 183 285 277 CFPS (W) 16,998 28,907 32,164 31,694 Chg in Working Capital 64 -199 8 -2 BPS (W) 74,978 81,382 89,586 97,667 Chg in AR & Other Receivables 135 -123 22 -6 DPS (W) 1,000 1,000 1,000 1,000 Chg in Inventories 64 -64 19 -5 Payout ratio (%) -14.1 10.7 10.4 10.5 Chg in AP & Other Payables 37 30 -12 3 Dividend Yield (%) 1.4 1.3 1.3 1.3 Income Tax Paid ---513 -513513513 ---135-135135135 ---91-919191 ---89-898989 Revenue Growth (%) -0.3 -3.5 -1.4 1.6 Cash Flows from Inv Activities -559 -613 -477 -481 EBITDA Growth (%) 30.7 7.1 1.5 -1.5 Chg in PP&E -595 -531 -480 -480 Operating Profit Growth (%) 117.9 21.8 2.4 -2.0 Chg in Intangible Assets -40 0 0 0 EPS Growth (%) - - 6.9 -1.3 Chg in Financial Assets 166 -3 3 -1 Accounts Receivable Turnover (x) 6.8 7.0 6.9 7.0 Others ---90 -909090 ---79-797979 000 000 Inventory Turnover (x) 8.5 8.3 8.0 8.2 Cash Flows from Fin Activities 22 -207 -233 -233 Accounts Payable Turnover (x) 11.6 10.8 10.5 10.8 Chg in Financial Liabilities 188 -325 -200 -200 ROA (%) -1.7 2.3 2.4 2.3 Chg in Equity -5 0 0 0 ROE (%) -8.3 11.1 10.8 9.7 Dividends Paid -36 -44 -33 -33 ROIC (%) -5.8 5.2 6.1 6.0 Others ---125 -125125125 162162162 000 000 Liability to Equity Ratio (%) 408.3 366.3 325.9 293.8 Increase (Decrease) in Cash 8 -166 145 120 Current Ratio (%) 57.4 56.3 59.6 63.2 Beginning Balance 437 445 278 423 Net Debt to Equity Ratio (%) 286.2 258.0 223.9 196.5 Ending Balance 445445445 278278278 423423423 543543543 Interest Coverage Ratio (x) 2.2 2.8 3.0 3.0 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 23
October 6, 2014 Oil Refining/Chemicals
Toray Chemical Korea (008000 KS) Turnaround is ongoing
Chemicals 3Q preview: In-line operating profit of W10.2bn
For 3Q, we forecast Toray Chemical Korea to report an operating profit of W10.2bn, in (Maintain) Buy line with expectations. Declining raw material prices (TPA and MEG) have caused the firm’s textile ASP to fall. However, low-melt (LM) polyester fibers—a flagship product— Target Price (12M, W) 17,000 appear to have maintained solid margins thanks to the oligopolistic market structure, where four players control most of the market.
Share Price (10/02/14, W) 13,150 Water treatment filter margins are also widening, as raw material use has decreased and exports to China have been robust. Earnings at Toray’s Chinese subsidiary are expanding Expected Return 29% sharply, as water purifier demand has surged amid growing water pollution concerns and rising income levels. OP (14F, Wbn) 34 Consensus OP (14F, Wbn) 35 Meanwhile, 3Q pretax profit is projected to have declined due to loan refinancing fees and settlement payments related to meta-aramid fibers. However, W6bn in annual EPS Growth (14F, %) -35.4 interest expenses are likely to have been saved following the refinancing. The settlement Market EPS Growth (14F, %) 8.1 of the lawsuit is positive in that it lifts the uncertainty that had been cast over the meta- P/E (14F, x) 60.9 aramid fiber business, and legal fees will no longer be paid. Market P/E (14F, x) 12.0 KOSPI 1,976.16 Enterprise value on the rise
Market Cap (Wbn) 610 Since its acquisition by Japan-based Toray Industries, the company’s enterprise value has Shares Outstanding (mn) 46 been rising steadily. Free Float (%) 43.1 Foreign Ownership (%) 5.0 Its flagship fiber and water treatment filter businesses are cutting costs and Beta (12M) 0.26 strengthening marketing efforts. Bulk purchasing of raw materials such as TPA has 52-Week Low 9,500 helped save costs, and efforts are being made to diversify the customer base via Toray 52-Week High 15,450 International.
(%)(%)(%) 1M1M1M 6M6M6M 12M12M12M Moreover, losses are anticipated to decline starting in 4Q, as the company decided to Absolute 7.3 -8.4 29.6 shut down its unprofitable optical film business in 3Q. Various measures are also under Relative 11.4 -7.4 31.1 review to cut losses (including additional investments in MF and meta-aramid units).
160 Toray Chemical Korea KOSPI Maintain TP of W17,000; Turnaround is ongoing 140 We maintain our Buy rating on Toray Chemical with a target price of W17,000. In 120 deriving our target price, we used the discounted cash flow (DCF) methodology in light 100 of the company’s robust medium- to long-term growth potential and business stability.
80 9.13 1.14 5.14 9.14 The stock has rallied recently, but we believe its valuation premium remains intact given its strong medium- to long-term growth potential and the significant upside to water treatment filters and LM fibers. As earnings improve, the stock will likely show robust mid-cycle growth.
FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Revenue (Wbn) 1,166 1,110 1,033 964 998 1,146 OP (Wbn) 42 28 29 34 65 80 OP margin (%) 3.6 2.5 2.8 3.5 6.5 7.0 NP (Wbn) 8 8 15 10 39 56 EPS (W) 178 171 334 216 844 1,202 ROE (%) 2.7 2.6 5.0 3.1 11.1 14.0 P/E (x) 53.8 42.4 32.6 60.9 15.6 10.9 P/B (x) 1.4 1.1 1.6 1.8 1.6 1.4 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 24
October 6, 2014 Oil Refining/Chemicals
Table 151515.15 . QQQuarterlyQuarterly and annual earnings (Wbn, %) 1Q131Q131Q13 2Q132Q132Q13 3Q133Q133Q13 4Q134Q134Q13 1Q141Q141Q14 2Q142Q142Q14 3Q14F 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 131313 14F14F14F 15F15F15F 16F16F16F Consolidated Revenue 252 273 251 257 243 236 243 243 249 247 252 250 1,033 964 998 1,146 Operating profit 7 11 5 6 6 9 10 10 15 16 18 16 29 34 65 80
Non- Revenue 218 229 226 228 207 197 198 198 199 197 202 200 901 800 798 916 consolidated Fiber 162 165 161 167 146 136 140 140 139 137 143 140 655 563 560 611 Filter 22 29 25 27 27 26 27 27 29 29 29 29 102 107 116 126 RO 18 25 21 22 20 22 22 22 24 24 24 24 86 86 96 106 MF 3 4 4 5 7 5 5 5 5 5 5 5 16 22 20 20 Film 0 0 0 1 1 1 1 1 1 1 1 1 1 2 2 20 Aramid 21 21 24 20 19 20 20 20 20 20 20 20 86 79 80 120 Other 21 21 24 20 19 20 20 20 20 20 20 20 86 79 80 120 Operating profit 3 7 0 3 3 4 5 6 10 11 12 12 13 18 45 60 Fiber 3 7 0 7 5 6 6 6 8 8 9 8 17 23 32 35 Filter 1 4 2 2 2 4 4 3 5 5 5 5 10 12 19 22 RO 2 5 3 3 3 4 4 4 5 5 5 5 14 15 19 22 MF -1 -1 -1 -2 -1 -1 -1 -1 0 0 0 0 -5 -3 -1 0 Film -1 -1 -1 -2 -1 -1 -1 0 0 0 0 0 -5 -3 0 1 Aramid -2 -2 -3 -5 -3 -4 -3 -3 -2 -2 -1 -1 -12 -13 -6 2 Other 2 -1 2 0 0 0 -1 0 0 0 0 0 3 -1 0 0 Other Revenue 34 44 26 28 35 51 45 45 50 50 50 50 132 176 200 230 consolidated Operating profit 4 4 5 3 3 6 5 4 5 6 6 5 16 18 20 20 OP margin 11.9 8.8 19.3 10.5 8.9 11.2 11.1 8.9 9.0 11.0 11.0 9.0 12.0 10.1 10.0 8.7 Pretax profit 6 8 4 2 2 6 3 6 11 13 14 12 3 7 12 17 Net profit 4 7 3 1 -1 4 3 5 9 10 11 10 15 10 39 56 Source: KDB Daewoo Securities Research
TableTableTable 161616.16 . 3Q14F earningearningss preview (Wbn, %, %p) 3Q14F Growth 3Q133Q133Q13 2Q142Q142Q14 KDB Daewoo Consensus YoYYoYYoY QoQQoQQoQ Revenue 251 236 243 247 -3.5 2.7 Operating profit 5 9 10 10 100.1 18.3 OP margin 2.0 3.6 4.2 4.0 2.2 0.6 Pretax profit 4 6 3 4 -9.5 -41.3 Net profit 3 4 3 3 -11.5 -32.1 Source: WISEfn, KDB Daewoo Securities Research
TableTableTable 171717.17 . EEEarningsEarnings forecast revisions (Wbn, %, %p) Previous Revised % chg% chg.chg ... 14F14F14F 15F15F15F 14F14F14F 15F15F15F 14F14F14F 15F15F15F Revenue 996 1,085 964 998 -3.2 -8.1 Operating profit 35 68 34 65 -1.8 -4.6 Net profit 10 41 10 39 0.1 -4.6 OP margin 3.5 6.3 3.6 6.5 0.0 0.2 Net margin 1.0 3.8 1.0 3.9 0.0 0.1 Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 25
October 6, 2014 Oil Refining/Chemicals
Toray Chemical Korea (008000 KS/Buy/TP: W17,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F (Wbn) 12/13 12/14F 12/15F 12/16F Revenue 1,0331,0331,033 964964964 998998998 1,1461,1461,146 Current Assets 317317317 276276276 283283283 346346346 Cost of Sales 902902902 829829829 832832832 965965965 Cash and Cash Equivalents 72 32 32 61 Gross Profit 131131131 135135135 166166166 181181181 AR & Other Receivables 130 127 130 148 SG&A Expenses 103103103 101101101 101101101 101101101 Inventories 108 110 113 129 Operating Profit (Adj) 292929 343434 656565 808080 Other Current Assets 7 7 8 8 Operating Profit 292929 343434 656565 808080 NonNonNon-Non ---CurrentCurrent Assets 499499499 514514514 550550550 564564564 NonNonNon-Non ---OperatingOperating Profit ---9 -999 ---17-171717 ---14-141414 ---8-888 Investments in Associates 6 6 6 7 Net Financial Income -13 -15 -15 -8 Property, Plant and Equipment 429 451 490 506 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 35 30 27 24 Pretax Profit 20 17 51 72 Total Assets 816816816 789789789 833833833 909909909 Income Tax 3 7 12 17 Current Liabilities 295295295 236236236 239239239 257257257 Profit from Continuing Operations 16 10 39 56 AP & Other Payables 86 72 74 84 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 152 110 110 110 Net Profit 161616 101010 393939 565656 Other Current Liabilities 57 54 55 63 Controlling Interests 15 10 39 56 NonNonNon-Non ---CurrentCurrent Liabilities 197197197 222222222 222222222 226226226 Non-Controlling Interests 1 0 0 0 Long-Term Financial Liabilities 174 200 200 200 Total Comprehensive Profit 131313 888 393939 565656 Other Non-Current Liabilities 23 22 22 26 Controlling Interests 13 8 39 56 Total Liabilities 493493493 458458458 462462462 483483483 Non-Controlling Interests 0 0 0 0 Controlling Interests 320320320 332332332 371371371 427427427 EBITDA 66 76 109 127 Capital Stock 237 237 237 237 FCF (Free Cash Flow) 14 -8 15 37 Capital Surplus 0 0 0 0 EBITDA Margin (%) 6.4 7.9 10.9 11.1 Retained Earnings 87 100 139 195 Operating Profit Margin (%) 2.8 3.5 6.5 7.0 NonNonNon-Non ---ControllingControlling Interests 333 000 000 000 Net Profit Margin (%) 1.5 1.0 3.9 4.9 Stockholders' Equity 323323323 332332332 371371371 427427427
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1312/1312/13 12/14F 12/15F 12/16F 12/1312/1312/13 12/14F 12/15F 12/16F Cash Flows from Op Activities 66 52 95 97 P/E (x) 32.6 60.9 15.6 10.9 Net Profit 16 10 39 56 P/CF (x) 6.8 7.7 5.6 4.8 Non-Cash Income and Expense 59 70 71 72 P/B (x) 1.6 1.8 1.6 1.4 Depreciation 33 37 41 44 EV/EBITDA (x) 11.5 11.7 8.1 6.8 Amortization 4 4 4 3 EPS (W) 334 216 844 1,202 Others 22 29 26 25 CFPS (W) 1,614 1,719 2,368 2,754 Chg in Working Capital -4 -22 -3 -14 BPS (W) 6,936 7,167 8,011 9,213 Chg in AR & Other Receivables 4 9 -4 -18 DPS (W) 0 0 0 0 Chg in Inventories -1 -3 -3 -16 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables 6 -21 2 10 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid ---5 -555 ---6-666 ---12-121212 ---17-171717 Revenue Growth (%) -6.9 -6.7 3.5 14.8 Cash Flows from Inv Activities -50 -60 -79 -60 EBITDA Growth (%) 6.5 15.2 43.4 16.5 Chg in PP&E -51 -60 -80 -60 Operating Profit Growth (%) 3.6 17.2 91.2 23.1 Chg in Intangible Assets -1 0 0 0 EPS Growth (%) 95.3 -35.3 290.7 42.4 Chg in Financial Assets 1 0 0 0 Accounts Receivable Turnover (x) 7.9 7.5 7.8 8.2 Others 111 000 111 000 Inventory Turnover (x) 9.6 8.9 9.0 9.5 Cash Flows from Fin Activities 20 -31 -15 -9 Accounts Payable Turnover (x) 10.8 10.5 11.5 12.3 Chg in Financial Liabilities 30 -16 0 0 ROA (%) 2.0 1.2 4.8 6.4 Chg in Equity 0 0 0 0 ROE (%) 5.0 3.1 11.1 14.0 Dividends Paid 0 0 0 0 ROIC (%) 4.2 3.4 8.0 9.3 Others ---10 -101010 ---15-151515 ---15-151515 ---9-999 Liability to Equity Ratio (%) 152.3 137.9 124.5 113.2 Increase (Decrease) in Cash 37 -40 1 28 Current Ratio (%) 107.3 116.9 118.3 134.5 Beginning Balance 35 72 32 32 Net Debt to Equity Ratio (%) 78.5 83.7 74.7 58.3 Ending Balance 727272 323232 323232 616161 Interest Coverage Ratio (x) 2.1 2.2 4.3 9.0 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 26
October 6, 2014 Oil Refining/Chemicals
Huchems Fine Chemical (069260 KS) Buy on correction
Chemicals 3Q preview: Operating profit of W9.5bn; DNT utilization to improve in 4Q
We expect Huchems Fine Chemical to post a 3Q operating profit of W9.5bn, slightly (Maintain) Buy below the market consensus. Because of the slow growth of toluene diisocyanate (TDI) capacity utilization at Hanwha Fine Chemicals (a subsidiary of Hanwha Chemical; Target Price (12M, W) 30,000 formerly called KPX Fine Chemical), dinitrotoluene (DNT) capacity utilization edged up only slightly QoQ. Meanwhile, mononitrobenzene (MNB) utilization normalized as regular Share Price (10/02/14, W) 23,600 maintenance at one of the company’s customers came to an end. TDI capacity utilization has been at 60-70% since end-September. In 4Q, DNT utilization Expected Return 27% is anticipated to climb above 70%, and operating profit is likely to expand to W17.5bn as a result. OP (14F, Wbn) 55 Consensus OP (14F, Wbn) 59 Earnings to expand further in 2015
EPS Growth (14F, %) -14.5 Hanwha Chemical plans to bring two of the three factories of KPX Fine Chemical online Market EPS Growth (14F, %) 8.1 by year-end, and crank up the remaining one next year. Despite a sluggish market, higher P/E (14F, x) 20.9 utilizations will help boost the company’s chlorine sales. Market P/E (14F, x) 12.0 KOSPI 1,976.16 Huchems and Hanwha Chemical have yet to agree on pricing terms for DNT. However, given that Huchems is the only DNT supplier in Korea, and greater DNT utilization will Market Cap (Wbn) 965 lead to higher nitric acid utilization, Huchems should be able to comfortably achieve an Shares Outstanding (mn) 41 OP margin of over 10% (assuming that the factory operates at full capacity). For 2015, Free Float (%) 58.7 we expect the company’s operating profit to soar 63% YoY, to W88.9bn. Foreign Ownership (%) 13.5 Beta (12M) 0.63 Maintain Buy, but lower TP in light of weaker oil price outlook. 52-Week Low 21,250 52-Week High 26,000 Huchems’ stock suffered a temporary pullback amid concerns over unfavorable pricing terms for DNT and delays to its project in Malaysia. However, we believe that its (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M dividend payout ratio of 3% should provide strong downside support, and DNT prices are Absolute -1.3 9.0 7.0 unlikely to be fixed at extremely low levels. Relative 2.5 10.2 8.3 Despite the recent delays, we remain upbeat on the Malaysian project. Carbon emissions 120 Huchems KOSPI trading (to be introduced in Korea in 2015) is also positive for the company. Huchems 110 currently generates up to 1.6mn tonnes/year of carbon credits at its nitric acid 100 production facilities, but does not sell such credits due to low prices. If the credit is priced at W10,000, as the government expects it to be, Huchems should be able to 90 generate revenue of W16bn and operating profit of W10bn from emissions trading. 80 9.13 1.14 5.14 9.14 We trim our target price for Huchems to W30,000 (from W32,000) in light of our downward adjustments to oil price forecasts, but maintain Buy. The stock will likely remain range-bound for the time being, but any further correction should present a mid- cycle buying opportunity.
FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Revenue (Wbn) 567 713 796 718 858 870 OP (Wbn) 59 66 60 55 89 93 OP margin (%) 10.4 9.3 7.5 7.7 10.4 10.7 NP (Wbn) 51 53 54 46 75 76 EPS (W) 1,250 1,308 1,320 1,128 1,833 1,851 ROE (%) 12.2 12.0 11.8 9.9 15.0 13.9 P/E (x) 16.0 19.8 18.2 20.9 12.9 12.8 P/B (x) 1.9 2.3 2.0 1.9 1.7 1.6 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 27
October 6, 2014 Oil Refining/Chemicals
TableTableTable 181818.18 . Quarterly and annual earnings (Wbn, US$/W, US$/tonne, %) 201320132013 201420142014 201320132013 2014F2014F2014F 2015F2015F2015F 1Q1Q1Q 2Q2Q2Q 3Q3Q3Q 4Q4Q4Q 1Q1Q1Q 2Q2Q2Q 3QF3QF3QF 4QF4QF4QF Revenue Total 209 189 212 186 191 142 176 209 796 718 858 DNT 41 37 34 25 29 12 18 43 136 102 227 MNB 107 112 113 101 106 72 101 104 433 383 372 Nitric acid 37 34 30 29 32 26 29 33 131 120 145 Ammonium nitrate 11 12 12 12 15 13 13 13 46 53 46 CDM 1 0 0 1 0 0 0 0 2 0 6 Other 13 -7 23 18 10 19 16 16 47 60 62 Operating profit 13 17 18 12 19 9 9 17 60 55 89 Pretax profit 19 17 17 17 20 8 9 17 70 54 86 Net profit 16 11 13 14 16 7 8 15 54 46 75 Assumption US$/W 1,111 1,142 1,075 1,055 1,065 1,012 1,020 1,025 1,055 1,025 1,050 Ammonia 589 527 446 450 480 500 500 500 548 600 600
Benzene 1,366 1,382 1,288 1,248 1,282 1,302 1,291 1,318 1,210 1,274 1,136 Toluene 1,281 1,258 1,120 1,125 1,139 1,095 1,085 1,154 1,179 1,092 1,036 Utilization DNT 57 52 52 40 45 20 30 70 67 41 100 MNB 94 94 105 100 100 70 100 100 100 93 100 Nitric acid 80 80 85 85 85 70 80 90 94 81 100 Source: KDB Daewoo Securities Research
TableTableTable 191919.19 . EEEarningsEarnings forecast revisions (Wbn, %, %p) Previous Revised % chg% chg.chg ... 14F14F14F 15F15F15F 14F14F14F 15F15F15F 14F14F14F 15F15F15F Revenue 761 896 718 858 -5.6 -4.2 Operating profit 67 100 55 89 -18.5 -11.1 Net profit 56 83 46 75 -17.7 -9.7 OP margin 7.4 9.3 6.4 8.7 -0.9 -0.5 Net margin 7.4 9.3 6.4 8.7 -0.9 -0.5 Source: KDB Daewoo Securities Research
TableTableTable 202020.20 . Valuation (Wbn, x, W, no. of shares) 15F EBITDA Applied EV/EBITDA Fair value Value of existing business 125.9 7.0 881.5 Net borrowings 354.5 Value of new business -1.0 Enterprise value 1,237.0 Shares outstanding 40,878.6 Target price 30,259.5 Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 28
October 6, 2014 Oil Refining/Chemicals
Huchems Fine Chemical (069260 KS/Buy/TP: W30,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F (Wbn) 12/13 12/14F 12/15F 12/16F Revenue 796796796 718718718 858858858 870870870 Current Assets 402402402 401401401 558558558 537537537 Cost of Sales 698698698 624624624 730730730 738738738 Cash and Cash Equivalents 25 11 165 141 Gross Profit 989898 949494 128128128 132132132 AR & Other Receivables 108 119 122 124 SG&A Expenses 383838 404040 404040 404040 Inventories 32 34 35 36 Operating Profit (Adj) 606060 555555 898989 939393 Other Current Assets 237 237 236 236 Operating Profit 606060 555555 898989 939393 NonNonNon-Non ---CurrentCurrent Assets 374374374 356356356 343343343 496496496 NonNonNon-Non ---OperatingOperating Profit 101010 ---1-111 ---3-333 ---6-666 Investments in Associates 18 20 20 21 Net Financial Income -4 -3 -3 -6 Property, Plant and Equipment 321 304 291 446 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 18 16 15 13 Pretax Profit 70 54 86 87 Total Assets 776776776 757757757 901901901 1,0341,0341,034 Income Tax 20 12 19 19 Current Liabilities 163163163 152152152 154154154 156156156 Profit from Continuing Operations 50 42 67 67 AP & Other Payables 64 73 74 76 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 80 60 60 60 Net Profit 505050 424242 676767 676767 Other Current Liabilities 19 19 20 20 Controlling Interests 54 46 75 76 NonNonNon-Non ---CurrentCurrent Liabilities 150150150 129129129 229229229 329329329 Non-Controlling Interests -4 -4 -8 -8 Long-Term Financial Liabilities 148 127 227 327 Total Comprehensive Profit 515151 414141 676767 676767 Other Non-Current Liabilities 2 2 2 2 Controlling Interests 55 47 79 80 Total Liabilities 313313313 281281281 383383383 485485485 Non-Controlling Interests -4 -6 -12 -13 Controlling Interests 460460460 476476476 526526526 566566566 EBITDA 99 91 123 139 Capital Stock 41 41 41 41 FCF (Free Cash Flow) 63 57 79 -87 Capital Surplus 182 182 182 182 EBITDA Margin (%) 12.4 12.7 14.3 16.0 Retained Earnings 266 283 333 373 Operating Profit Margin (%) 7.5 7.7 10.4 10.7 NonNonNon-Non ---ControllingControlling Interests 444 000 ---8-888 ---17-171717 Net Profit Margin (%) 6.8 6.4 8.7 8.7 Stockholders' Equity 464464464 476476476 518518518 549549549
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1312/1312/13 12/14F 12/15F 12/16F 12/1312/1312/13 12/14F 12/15F 12/16F Cash Flows from Op Activities 87 74 99 113 P/E (x) 18.2 20.9 12.9 12.8 Net Profit 50 42 67 67 P/CF (x) 9.4 10.2 7.8 6.9 Non-Cash Income and Expense 54 53 56 72 P/B (x) 2.0 1.9 1.7 1.6 Depreciation 38 34 32 45 EV/EBITDA (x) 9.7 10.1 6.9 6.9 Amortization 2 2 2 1 EPS (W) 1,320 1,128 1,833 1,851 Others 14 17 22 26 CFPS (W) 2,556 2,322 3,008 3,410 Chg in Working Capital -4 -2 -2 -1 BPS (W) 11,967 12,377 13,613 14,581 Chg in AR & Other Receivables 12 -14 -3 -2 DPS (W) 750 620 916 925 Chg in Inventories 1 -2 -1 -1 Payout ratio (%) 58.7 58.6 54.2 54.2 Chg in AP & Other Payables -13 7 2 1 Dividend Yield (%) 3.1 2.6 3.9 3.9 Income Tax Paid ---15 -151515 ---18-181818 ---19-191919 ---19-191919 Revenue Growth (%) 11.6 -9.8 19.5 1.4 Cash Flows from Inv Activities -62 -19 -20 -200 EBITDA Growth (%) 5.3 -8.1 35.2 13.0 Chg in PP&E -24 -17 -20 -200 Operating Profit Growth (%) -9.1 -8.3 61.8 4.5 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) 0.9 -14.5 62.5 1.0 Chg in Financial Assets -46 -1 0 0 Accounts Receivable Turnover (x) 7.1 6.5 7.3 7.3 Others 888 ---1-111 000 000 Inventory Turnover (x) 24.3 21.5 24.7 24.5 Cash Flows from Fin Activities -32 -66 76 64 Accounts Payable Turnover (x) 11.7 10.7 11.6 11.5 Chg in Financial Liabilities 19 -41 100 100 ROA (%) 6.5 5.4 8.0 7.0 Chg in Equity 0 0 0 0 ROE (%) 11.8 9.9 15.0 13.9 Dividends Paid -28 -30 -24 -36 ROIC (%) 10.1 10.5 17.8 15.6 Others ---23 -232323 555 000 000 Liability to Equity Ratio (%) 67.5 59.2 74.0 88.2 Increase (Decrease) in Cash -6 -14 154 -24 Current Ratio (%) 246.6 263.0 362.0 345.5 Beginning Balance 31 25 11 165 Net Debt to Equity Ratio (%) -5.2 -10.7 -20.2 3.5 Ending Balance 252525 111111 165165165 141141141 Interest Coverage Ratio (x) 6.0 6.0 8.0 6.0 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 29
October 6, 2014 Oil Refining/Chemicals
Lotte Chemical (011170 KS) 3Q earnings to meet consensus
Chemicals 3Q preview: Earnings to meet recently lowered consensus
For 3Q, we project Lotte Chemical to post operating profit of W136.8bn, in line with the (Maintain) Buy recently lowered consensus. Although monoethylene glycol (MEG) and butadiene prices did not rebound markedly despite the onset of high-demand season, ethylene spreads Target Price (12M, W) 190,000 widened, contributing to earnings improvement. Losses on aromatics, including terephthalic acid (TPA), are estimated to have continued due to sluggish demand and Share Price (10/02/14, W) 140,000 oversupply. Rebound in spreads to be limited until year-end Expected Return 36% Spreads of Lotte Chemical’s major products, including MEG and butadiene, have been OP (14F, Wbn) 418 weakening since August and will likely remain sluggish until year-end. With regard to Consensus OP (14F, Wbn) 417 MEG, high-demand season is coming to an end, and regular maintenance is in the final stage. For butadiene, supply will likely increase in the Asian market due to 1) the EPS Growth (14F, %) 0.9 completion of regular maintenance at naphtha cracking centers (NCCs) and 2) falling Market EPS Growth (14F, %) 8.1 LPG input. At the same time, US and European prices should fall, weighing on Asian P/E (14F, x) 16.5 butadiene prices. Market P/E (14F, x) 12.0 KOSPI 1,976.16 For ethylene, spreads remain robust thanks to tight supply. However, given that Market Cap (Wbn) 4,799 downstream product prices have been moving sideways, spreads are unlikely to widen Shares Outstanding (mn) 34 further. We expect 4Q operating profit to fall QoQ to W128.3bn. Free Float (%) 44.7 Lower TP; Shares to be range-bound Foreign Ownership (%) 26.6 Beta (12M) 1.90 As we lowered our 2015 Dubai oil price estimate from US$105/bbl to US$95/bbl, we cut 52-Week Low 137,000 our 2015 earnings estimates for Lotte Chemical and thus trimmed our target price to 52-Week High 235,500 W190,000 (from W220,000). Our target price was derived by applying a target P/B of (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M 0.9x (based on ROE of 9.2%) to our 2015 BPS estimate. Absolute -15.2 -26.3 -28.0 Prices of major products are likely to remain weak through the end of the year, with the Relative -11.9 -25.5 -27.2 next market momentum not forecast to arrive until the 2015 Chinese lunar New Year
140 Lotte Chemical KOSPI holidays. On the supply side, 2015 will likely be more favorable for Lotte Chemical than
120 2014. Given that butadiene capacity expansion is forecast to slow after peaking in 2014, butadiene prices should rebound only if demand picks up. New capacity for MEG will 100 likely be minimal in 2015. And ethylene margins are projected to be robust in light of 80 limited capacity increase in 2015.
60 Still, predictability for the industry is weak due to potential policy changes in China and 9.13 1.14 5.14 9.14 Europe. And 2015 market consensus estimates have already reflected expectations for
the company’s earnings improvement. Thus, we expect that Lotte Chemical shares will remain range-bound for the time being, and show full-swing improvement only when market momentum picks up.
FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Revenue (Wbn) 15,699 15,903 16,439 15,156 14,625 15,110 OP (Wbn) 1,470 372 487 418 809 977 OP margin (%) 9.4 2.3 3.0 2.8 5.5 6.5 NP (Wbn) 978 315 288 290 620 767 EPS (W) 30,701 9,862 8,400 8,474 18,079 22,378 ROE (%) 19.6 5.5 4.7 4.6 9.2 10.4 P/E (x) 9.7 24.9 27.6 16.5 7.7 6.3 P/B (x) 1.7 1.4 1.3 0.7 0.7 0.6 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 30
October 6, 2014 Oil Refining/Chemicals
TableTableTable 212121.21 . Quarterly and annual earnings (Wbn, %, US$/tonne, US$/bbl) 1Q131Q131Q13 2Q132Q132Q13 3Q133Q133Q13 4Q134Q134Q13 1Q141Q141Q14 2Q142Q142Q14 3Q14F 4Q14F 201320132013 2014F2014F2014F 2015F2015F2015F Revenue Total 4,177 4,159 4,039 4,068 3,873 3,782 3,828 3,673 16,439 15,156 14,625 Olefin 2,522 2,436 2,365 2,460 2,360 2,343 2,381 2,275 9,783 9,359 8,869 Aromatics 965 1,001 947 837 838 762 732 701 3,750 3,032 2,889 Titan 690 722 690 746 700 683 715 697 2,848 2,794 2,867 Operating Total 117 70 172 129 68 84 137 128 487 418 809 profit Olefin 129 98 167 161 96 91 141 139 554 467 744 Aromatics 4 -22 -14 -61 -33 -18 -13 -13 -93 -76 0 Titan -16 -6 14 22 1 9 9 2 14 20 65 Pretax profit 117 48 190 20 70 66 124 118 375 378 775 Net profit 114 25 152 -4 49 53 97 92 288 290 620 Dubai oil 108 101 106 106 104 106 102 95 105 102 95 HDPE-naphtha 464 528 517 536 530 557 607 650 511 586 650 EG-naphtha 152 123 152 91 27 -10 58 70 129 36 105 Butadiene-naphtha 866 529 197 621 470 377 578 500 553 481 875 Source: KDB Daewoo Securities Research
TableTableTable 222222.22 . EEEarningsEarnings forecast revisions (Wbn, %, %p) Previous Revised % chg. 14F14F14F 15F15F15F 14F14F14F 15F15F15F 14F14F14F 15F15F15F Revenue 15,379 15,369 15,156 14,625 -1.5 -4.8 Operating profit 404 820 418 809 3.4 -1.3 Net profit 276 621 290 620 5.2 -0.2 OP margin 2.6 5.3 2.8 5.5 0.1 0.2 Net margin 1.8 4.0 1.9 4.2 0.1 0.2 Source: KDB Daewoo Securities Research
TableTableTable 232323.23 . 3Q14F preview (Wbn, %, %p) 3Q14F Growth 3Q133Q133Q13 2Q142Q142Q14 KDB Daewoo Consensus YoYYoYYoY QoQQoQQoQ Revenue 4,039 3,782 3,828 3,938 -5.2 1.2 Operating profit 172 84 137 135 -20.3 62.3 OP margin 4.3 2.2 3.6 3.4 -0.7 1.4 Pretax profit 190 66 124 133 -34.6 87.6 Net profit 152 53 97 98 -36.3 84.0 Source: WISEfn, KDB Daewoo Securities Research
KDB Daewoo Securities Research 31
October 6, 2014 Oil Refining/Chemicals
Lotte Chemical (011170 KS/Buy/TP: W190,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F (Wbn) 12/13 12/14F 12/15F 12/16F Revenue 16,439 15,156 14,625 15,110 Current Assets 4,6144,6144,614 5,0015,0015,001 5,4555,4555,455 6,0516,0516,051 Cost of Sales 15,527 14,308 13,386 13,704 Cash and Cash Equivalents 979 1,607 2,074 2,627 Gross Profit 912912912 848848848 1,2391,2391,239 1,4061,4061,406 AR & Other Receivables 1,595 1,446 1,440 1,459 SG&A Expenses 424424424 429429429 429429429 429429429 Inventories 1,629 1,576 1,570 1,591 Operating Profit (Adj) 487487487 418418418 809809809 977977977 Other Current Assets 411 372 371 374 Operating Profit 487487487 418418418 809809809 977977977 NonNonNon-Non ---CurrentCurrent Assets 6,0736,0736,073 5,7165,7165,716 5,6415,6415,641 5,6005,6005,600 NonNonNon-Non ---OperatingOperating Profit ---112 -112112112 ---40-404040 ---34-343434 ---18-181818 Investments in Associates 1,452 1,311 1,306 1,323 Net Financial Income -63 -53 -35 -18 Property, Plant and Equipment 4,187 3,977 3,909 3,851 Net Gain from Inv in Associates -27 -7 0 0 Intangible Assets 24 22 21 19 Pretax Profit 375 378 775 959 Total Assets 10,688 10,717 11,096 11,652 Income Tax 89 89 155 192 Current Liabilities 2,9292,9292,929 2,7962,7962,796 2,7902,7902,790 2,8092,8092,809 Profit from Continuing Operations 286 289 620 767 AP & Other Payables 1,439 1,314 1,309 1,326 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1,318 1,327 1,326 1,327 Net Profit 286286286 289289289 620620620 767767767 Other Current Liabilities 172 155 155 156 Controlling Interests 288 290 620 767 NonNonNon-Non ---CurrentCurrent Liabilities 1,4641,4641,464 1,4651,4651,465 1,2641,2641,264 1,0671,0671,067 Non-Controlling Interests -2 -2 0 0 Long-Term Financial Liabilities 1,195 1,222 1,022 822 Total Comprehensive Profit 236236236 201201201 620620620 767767767 Other Non-Current Liabilities 269 243 242 245 Controlling Interests 241 193 590 730 Total Liabilities 4,3934,3934,393 4,2614,2614,261 4,0554,0554,055 3,8773,8773,877 Non-Controlling Interests -5 8 30 37 Controlling Interests 6,2566,2566,256 6,4256,4256,425 7,0117,0117,011 7,7447,7447,744 EBITDA 994 901 1,279 1,436 Capital Stock 171 171 171 171 FCF (Free Cash Flow) 70 557 729 827 Capital Surplus 477 477 477 477 EBITDA Margin (%) 6.0 5.9 8.7 9.5 Retained Earnings 5,682 5,941 6,527 7,260 Operating Profit Margin (%) 3.0 2.8 5.5 6.5 NonNonNon-Non ---ControllingControlling Interests 383838 313131 313131 313131 Net Profit Margin (%) 1.8 1.9 4.2 5.1 Stockholders' Equity 6,2946,2946,294 6,4566,4566,456 7,0427,0427,042 7,7757,7757,775
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1312/1312/13 12/14F 12/15F 12/16F 12/1312/1312/13 12/14F 12/15F 12/16F Cash Flows from Op Activities 359 893 1,129 1,227 P/E (x) 27.6 16.5 7.7 6.3 Net Profit 286 289 620 767 P/CF (x) 8.0 5.2 3.8 3.3 Non-Cash Income and Expense 714 627 659 669 P/B (x) 1.3 0.7 0.7 0.6 Depreciation 505 482 468 458 EV/EBITDA (x) 9.3 6.1 3.8 2.8 Amortization 2 2 1 1 EPS (W) 8,400 8,474 18,079 22,378 Others 207 143 190 210 CFPS (W) 29,165 26,704 37,302 41,909 Chg in Working Capital -537 85 5 -18 BPS (W) 182,525 187,431 204,527 225,922 Chg in AR & Other Receivables 0 90 5 -18 DPS (W) 1,000 1,000 1,000 1,000 Chg in Inventories -136 33 6 -20 Payout ratio (%) 11.8 11.7 5.4 4.4 Chg in AP & Other Payables -337 -87 -5 16 Dividend Yield (%) 0.4 0.7 0.7 0.7 Income Tax Paid ---104 -104104104 ---107-107107107 ---155-155155155 ---192-192192192 Revenue Growth (%) 3.4 -7.8 -3.5 3.3 Cash Flows from Inv Activities -550 -226 -354 -350 EBITDA Growth (%) 19.5 -9.4 42.0 12.3 Chg in PP&E -274 -304 -400 -400 Operating Profit Growth (%) 30.9 -14.2 93.5 20.8 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) -14.8 0.9 113.3 23.8 Chg in Financial Assets -106 46 2 -6 Accounts Receivable Turnover (x) 10.9 10.6 10.6 10.9 Others ---170 -170170170 323232 444444 565656 Inventory Turnover (x) 10.5 9.5 9.3 9.6 Cash Flows from Fin Activities 432 -157 -313 -307 Accounts Payable Turnover (x) 10.1 10.9 10.7 10.9 Chg in Financial Liabilities 537 36 -200 -200 ROA (%) 2.7 2.7 5.7 6.7 Chg in Equity 5 -1 0 0 ROE (%) 4.7 4.6 9.2 10.4 Dividends Paid -34 -34 -34 -34 ROIC (%) 6.4 5.5 11.5 14.0 Others ---76 -767676 ---158-158158158 ---79-797979 ---73-737373 Liability to Equity Ratio (%) 69.8 66.0 57.6 49.9 Increase (Decrease) in Cash 234 628 467 553 Current Ratio (%) 157.5 178.9 195.5 215.4 Beginning Balance 745 979 1,607 2,074 Net Debt to Equity Ratio (%) 19.4 10.2 -0.1 -9.8 Ending Balance 979979979 1,6071,6071,607 2,0742,0742,074 2,6272,6272,627 Interest Coverage Ratio (x) 5.5 4.9 10.2 13.4 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 32
October 6, 2014 Oil Refining/Chemicals
Kumho Petrochemical (011780 KS) Nearing a bottom
Chemicals 3Q earnings to miss consensus due to sluggish synthetic rubber market
For 3Q, we project Kumho Petrochemical to post an operating profit of W58bn, slightly (Maintain) Trading Buy missing the consensus. Synthetic rubber earnings are unlikely to have improved markedly, as utilization was lowered due to weak prices amid sluggish tire demand. Target Price (12M, W) 90,000 Phenol derivatives earnings are estimated to have swung to positive territory thanks to lower utilization at competitors. Despite higher spreads, synthetic resin earnings are Share Price (10/02/14, W) 71,200 projected to have inched down QoQ due to lower prices. Earnings at the energy unit are expected to have remained flat.
Expected Return 26% Pickup in the petrochemical market to be limited until year-end
OP (14F, Wbn) 176 For 4Q, we project operating profit to fall QoQ to W48.2bn. For butadiene, supply will Consensus OP (14F, Wbn) 170 likely increase in 4Q due to 1) the completion of regular maintenance at naphtha cracking centers (NCCs) and 2) falling LPG input, weighing on prices. Synthetic rubber EPS Growth (14F, %) - utilization is expected to remain low amid oversupply. Market EPS Growth (14F, %) 8.1 P/E (14F, x) 22.7 Phenol derivatives earnings are anticipated to improve in 4Q, as spreads have been Market P/E (14F, x) 12.0 expanding since September. However, earnings are unlikely to improve dramatically, KOSPI 1,976.16 given that 1) the increase in spreads is ascribed to lower utilization, and 2) massive Market Cap (Wbn) 2,169 capacity ramps-up are scheduled for 2014-15. Synthetic resin spreads are likely to fall Shares Outstanding (mn) 33 amid low-demand season, while earnings at the energy unit should decline due to regular Free Float (%) 43.3 maintenance. Foreign Ownership (%) 9.3 Beta (12M) 0.99 Nearing a bottom 52-Week Low 69,700 Although the petrochemical market is unlikely to rebound markedly until year-end, the 52-Week High 112,000 market should hit a bottom in 4Q. Global tire demand has grown in 2014, but Chinese (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M synthetic rubber capacity has expanded more sharply. However, Chinese synthetic Absolute -11.8 -18.3 -28.2 rubber capacity growth is likely to peak in 2014, and earnings are expected to improve Relative -8.4 -17.5 -27.3 starting in 2015. The phenol derivatives and ABS markets also appear to be bottoming. The energy unit is expected to deliver earnings improvement starting next year. In 120 Kumho Petrochemical KOSPI particular, the unit is likely to record an operating profit of more than W200bn in 2016, 110 100 given that its capacity should double by early 2016. 90 We expect the petrochemical market to bottom in 4Q. We think that shares of Kumho 80 Petrochemical will gain momentum in line with the price of butadiene, which is expected 70 to bottom in 4Q and rebound in 1Q15. We slightly lower our target price to W90,000 60 9.13 1.14 5.14 9.14 (from W100,000), as we revised down our 2015 earnings forecasts. We derived our target price based on 2015F earnings and the value of new capacity to begin operating in 2016.
FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Revenue (Wbn) 6,457 5,884 5,132 4,920 5,341 5,257 OP (Wbn) 839 224 134 176 362 595 OP margin (%) 13.0 3.8 2.6 3.6 6.8 11.3 NP (Wbn) 506 130 -12 105 253 450 EPS (W) 17,569 3,869 -368 3,143 7,565 13,436 ROE (%) 44.5 8.7 -0.8 7.0 15.3 22.9 P/E (x) 9.5 33.7 - 22.7 9.4 5.3 P/B (x) 3.8 2.8 2.1 1.5 1.3 1.1 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 33
October 6, 2014 Oil Refining/Chemicals
TableTableTable 242424.24 . Quarterly and annual earnings (Wbn, %) 201320132013 2014F2014F2014F 201320132013 2014F2014F2014F 2015F2015F2015F 1Q1Q1Q 2Q2Q2Q 3Q3Q3Q 4Q4Q4Q 1Q1Q1Q 2Q2Q2Q 3QF3QF3QF 4QF4QF4QF Revenue Total 1,415 1,384 1,192 1,140 1,242 1,218 1,260 1,201 5,132 4,920 5,341 Synthetic rubber 680 654 511 450 510 478 494 480 2,295 1,962 2,267
Synthetic resin 331 360 340 316 334 346 390 362 1,348 1,432 1,515
Phenol derivatives 277 254 205 223 260 250 248 239 959 998 1,044
Energy & other 127 116 136 150 137 144 128 119 530 529 515
Operating Total 78 77 -2 -18 29 42 58 48 136 176 362 profit Synthetic rubber 34 46 0 -20 -10 -11 2 3 60 -16 106 Synthetic resin 10 7 3 0 13 17 13 8 21 52 87
Phenol derivatives 6 5 -25 -20 -9 -14 9 10 -34 -4 42
Energy & other 32 30 34 34 36 34 34 27 90 145 127
Net profit 34 26 6 -78 15 24 38 29 -12 105 253 OP margin 5.5 5.6 -0.1 -1.6 2.3 3.4 4.6 4.0 2.6 3.6 6.8 Net margin 2.4 1.9 0.5 -6.9 1.2 1.9 3.0 2.4 -0.2 2.1 4.7 Source: KDB Daewoo Securities Research
TableTableTable 252525.25 . EEEarningsEarnings forecast revisions (Wbn, %, %p) Previous Revised % chg% chg.chg ... 14F14F14F 15F15F15F 14F14F14F 15F15F15F 14F14F14F 15F15F15F Revenue 5,111 5,838 4,920 5,341 -3.7 -8.5 Operating profit 177 371 176 362 -0.4 -2.5 Net profit 102 242 105 253 3.2 4.7 OP margin 3.5 6.4 3.6 6.8 0.1 0.4 Net margin 2.0 4.1 2.1 4.7 0.1 0.6 Source: KDB Daewoo Securities Research
TableTableTable 262626.26 . 3Q14F preview (Wbn, %, %p) 3Q14F Growth 3Q133Q133Q13 2Q142Q142Q14 KDB Daewoo Consensus YoYYoYYoY QoQQoQQoQ Revenue 1,192 1,218 1,260 1,276 5.7 3.4 Operating profit -2 42 58 58 TTB 39.7 OP margin -0.1 3.4 4.6 4.5 4.7 1.2 Pretax profit -4 26 46 46 TTB 73.6 Net profit 6 24 38 37 581.3 58.3 Source: WISEfn, KDB Daewoo Securities Research
TableTableTable 272727.27 . Valuation (Wbn, x, ‘000 shares, W) 2015F2015F2015F
Revenue 5,341 Operating profit 362 Non-operating profit -55 Net profit 230 Fair P/E 10 Business value 2,299 Value from energy unit’s expansion 750 Fair value 3,049 Shares outstanding 33,491 Target price 91,052 Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 34
October 6, 2014 Oil Refining/Chemicals
Kumho Petrochemical (011780 KS/Trading Buy/TP: W90,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F (Wbn) 12/13 12/14F 12/15F 12/16F Revenue 5,1325,1325,132 4,9204,9204,920 5,3415,3415,341 5,2575,2575,257 Current Assets 1,2591,2591,259 1,4201,4201,420 1,7201,7201,720 2,1122,1122,112 Cost of Sales 4,8184,8184,818 4,5764,5764,576 4,8114,8114,811 4,4944,4944,494 Cash and Cash Equivalents 83 138 310 679 Gross Profit 314314314 344344344 530530530 763763763 AR & Other Receivables 601 671 745 767 SG&A Expenses 180180180 168168168 168168168 168168168 Inventories 539 577 632 632 Operating Profit (Adj) 134134134 176176176 362362362 595595595 Other Current Assets 36 34 33 34 Operating Profit 134134134 176176176 362362362 595595595 NonNonNon-Non ---CurrentCurrent Assets 2,9532,9532,953 3,0433,0433,043 3,2163,2163,216 3,2183,2183,218 NonNonNon-Non ---OperatingOperating Profit ---205 -205205205 ---55-555555 ---55-555555 ---49-494949 Investments in Associates 338 356 389 389 Net Financial Income -65 -69 -74 -69 Property, Plant and Equipment 2,222 2,284 2,393 2,397 Net Gain from Inv in Associates 33 15 20 20 Intangible Assets 20 16 14 12 Pretax Profit -71 121 307 546 Total Assets 4,2124,2124,212 4,4624,4624,462 4,9364,9364,936 5,3305,3305,330 Income Tax -28 21 54 96 Current Liabilities 1,4041,4041,404 1,4611,4611,461 1,5161,5161,516 1,5161,5161,516 Profit from Continuing Operations -43 101 253 450 AP & Other Payables 480 516 564 564 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 859 876 876 876 Net Profit ---43 -434343 101101101 253253253 450450450 Other Current Liabilities 65 69 76 76 Controlling Interests -12 105 253 450 NonNonNon-Non ---CurrentCurrent Liabilities 1,2471,2471,247 1,3671,3671,367 1,5741,5741,574 1,5741,5741,574 Non-Controlling Interests -30 -5 0 0 Long-Term Financial Liabilities 1,177 1,293 1,493 1,493 Total Comprehensive Profit ---45 -454545 117117117 253253253 450450450 Other Non-Current Liabilities 70 74 81 81 Controlling Interests -17 124 269 478 Total Liabilities 2,6522,6522,652 2,8282,8282,828 3,0903,0903,090 3,0903,0903,090 Non-Controlling Interests -28 -7 -16 -28 Controlling Interests 1,4751,4751,475 1,5531,5531,553 1,7641,7641,764 2,1582,1582,158 EBITDA 309 356 554 793 Capital Stock 167 167 167 167 FCF (Free Cash Flow) -63 -31 63 408 Capital Surplus 265 265 265 265 EBITDA Margin (%) 6.0 7.2 10.4 15.1 Retained Earnings 1,051 1,118 1,329 1,723 Operating Profit Margin (%) 2.6 3.6 6.8 11.3 NonNonNon-Non ---ControllingControlling Interests 858585 828282 828282 828282 Net Profit Margin (%) -0.2 2.1 4.7 8.6 Stockholders' Equity 1,5601,5601,560 1,6351,6351,635 1,8461,8461,846 2,2402,2402,240
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1312/1312/13 12/14F 12/15F 12/16F 12/1312/1312/13 12/14F 12/15F 12/16F Cash Flows from Op Activities 288 233 363 608 P/E (x) - 22.7 9.4 5.3 Net Profit -43 101 253 450 P/CF (x) 9.9 6.7 4.3 3.0 Non-Cash Income and Expense 366 258 301 343 P/B (x) 2.1 1.5 1.3 1.1 Depreciation 170 177 191 196 EV/EBITDA (x) 16.3 12.3 7.9 5.1 Amortization 5 3 2 2 EPS (W) -368 3,143 7,565 13,436 Others 191 78 108 145 CFPS (W) 9,647 10,695 16,554 23,680 Chg in Working Capital 50 -38 -64 -20 BPS (W) 45,227 47,551 53,862 65,627 Chg in AR & Other Receivables 22 -60 -56 0 DPS (W) 1,500 1,500 2,000 2,000 Chg in Inventories 29 -39 -55 0 Payout ratio (%) -87.4 37.1 19.6 11.1 Chg in AP & Other Payables 8 3 29 0 Dividend Yield (%) 1.6 2.1 2.8 2.8 Income Tax Paid ---36 -363636 ---26-262626 ---54-545454 ---96-969696 Revenue Growth (%) -12.8 -4.1 8.6 -1.6 Cash Flows from Inv Activities -339 -263 -335 -203 EBITDA Growth (%) -19.5 15.2 55.6 43.1 Chg in PP&E -347 -264 -300 -200 Operating Profit Growth (%) -40.2 31.3 105.7 64.4 Chg in Intangible Assets -1 0 0 0 EPS Growth (%) - - 140.7 77.6 Chg in Financial Assets 91 -20 -35 -3 Accounts Receivable Turnover (x) 9.1 8.7 8.6 8.1 Others ---82 -828282 212121 000 000 Inventory Turnover (x) 9.3 8.8 8.8 8.3 Cash Flows from Fin Activities -111 101 158 -56 Accounts Payable Turnover (x) 16.8 15.3 14.8 13.2 Chg in Financial Liabilities -57 133 200 0 ROA (%) -1.0 2.3 5.4 8.8 Chg in Equity 0 0 0 0 ROE (%) -0.8 7.0 15.3 22.9 Dividends Paid -56 -42 -42 -56 ROIC (%) 2.8 5.0 9.7 15.4 Others 222 101010 000 000 Liability to Equity Ratio (%) 170.0 173.0 167.4 137.9 Increase (Decrease) in Cash -163 55 172 369 Current Ratio (%) 89.6 97.2 113.5 139.4 Beginning Balance 246 83 138 310 Net Debt to Equity Ratio (%) 123.7 122.6 110.0 74.0 Ending Balance 838383 138138138 310310310 679679679 Interest Coverage Ratio (x) 1.9 2.4 4.5 7.1 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 35
October 6, 2014 Oil Refining/Chemicals
SK Innovation (096770 KS) Downward earnings revision coming to an end
Oil Refining 3Q preview: Weak OP likely due to lower refining margins and oil prices
For 3Q, we forecast SK Innovation to post an operating loss of W11.3bn. The oil refining (Maintain) Buy unit is expected to record a massive operating loss, as: 1) it should incur inventory valuation losses due to a US$10/bbl decline in oil prices from July to September; and 2) Target Price (12M, W) 120,000 refining margins fell below the break-even point. Operating profit at the chemicals unit is expected to have increased QoQ to W158.4bn thanks to higher PX spreads and strong Share Price (10/02/14, W) 75,000 ethylene prices. Meanwhile, operating profit at the E&P oil unit is forecast to have risen to W136.8bn on the back of increased production at a US block purchased in 1H, and the lube oil unit is expected to post an operating profit of W75.5bn (flat QoQ). Expected Return 60% 4Q OP to rise QoQ to W306.8bn thanks to lower oil refining losses OP (14F, Wbn) 471 Consensus OP (14F, Wbn) 467 In 4Q, we expect SK Innovation to swing to an operating profit of W306.8bn. Oil refining losses will likely shrink, as: 1) refining margins have been recovering since bottoming in EPS Growth (14F, %) -68.9 September; and 2) oil prices have stopped falling. PX spreads are hovering around Market EPS Growth (14F, %) 8.1 US$350-400 despite the operation of new facilities. Under the current spread levels, the P/E (14F, x) 30.9 oil refining unit is expected to swing to an operating profit once the Ulsan and Incheon Market P/E (14F, x) 12.0 KOSPI 1,976.16 facilities begin operating. Lube oil margins, which have recently been falling modestly due to the operation of new facilities, are unlikely to plunge in light of the oligopolistic Market Cap (Wbn) 6,935 market status. The E&P unit is expected to deliver stable earnings. Shares Outstanding (mn) 94 Free Float (%) 66.0 Lower TP to W120,000; Recent share price pullback seems excessive Foreign Ownership (%) 34.4 Beta (12M) 1.36 Shares of SK Innovation have steadily declined despite a low P/B, as earnings forecasts 52-Week Low 75,000 were revised down due to 1) won appreciation in 2Q and 2) falls in refining margins and 52-Week High 158,000 oil prices arising from lower-than-expected demand from emerging markets (particularly China) in 3Q. However, we believe that additional downward earnings revisions will be (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M limited, as expectations for a recovery in refining margins in 4Q have fallen. Absolute -20.2 -37.8 -48.1 Relative -17.2 -37.1 -47.5 Although both refining margins and oil prices are unlikely to rise markedly, the likelihood of these variables falling further also seems limited. Refining margins picked up in 120 SK Innovation KOSPI September, aided by lowered utilization in July-August. Oil prices have also dropped to a 100 level where OPEC members find it necessary to cut production.
80 If SK Innovation does not incur oil refining losses, the company is capable of generating a 60 quarterly operating profit of more than W300bn and delivering an ROE of 6% (vs. current P/B of 0.5x). Since the company’s earnings are expected to turn around in 4Q, 40 9.13 1.14 5.14 9.14 the shares will likely rebound accordingly. We maintain our Buy recommendation on SK Innovation but lower our target price to W120,000 (from W140,000), as we revised down our 2015 oil price estimates.
FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Revenue (Wbn) 68,371 73,330 66,670 67,113 65,811 65,805 OP (Wbn) 2,959 1,699 1,383 471 1,488 2,157 OP margin (%) 4.3 2.3 2.1 0.7 2.3 3.3 NP (Wbn) 3,169 1,185 730 227 1,115 1,634 EPS (W) 33,816 12,649 7,789 2,424 11,898 17,434 ROE (%) 24.4 7.9 4.7 1.4 6.9 9.5 P/E (x) 4.2 13.8 18.2 30.9 6.3 4.3 P/B (x) 0.9 1.1 0.8 0.4 0.4 0.4 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 36
October 6, 2014 Oil Refining/Chemicals
TableTableTable 282828.28 . Quarterly and annual earnings (Wbn, %, US$/W, US$/tonne, US$/bbl) 1Q131Q131Q13 2Q132Q132Q13 3Q133Q133Q13 4Q134Q134Q13 1Q141Q141Q14 2Q142Q142Q14 3Q14F 4Q14F 201320132013 2014F2014F2014F 2015F2015F2015F Revenue Total 18,108 16,853 15,858 15,856 16,878 16,494 16,835 16,907 66,670 67,113 65,811 Oil refining 13,884 12,720 11,481 11,811 12,740 12,204 12,233 11,958 49,897 49,135 44,940 Chemicals 3,285 3,137 3,323 2,997 3,114 3,261 3,484 3,672 12,742 13,530 14,958 Other 939 995 1,054 1,048 1,024 1,029 1,119 1,277 4,036 4,448 5,912 Operating Total 696 396 316 -25 226 -50 -11 307 1,382 471 1,488 profit Oil refining 384 39 -52 -310 35 -215 -342 -39 60 -561 -120 Chemicals 246 224 219 160 85 51 158 173 848 467 784 Other 66 133 150 125 107 114 172 174 474 566 824 Pretax profit 402 333 420 -37 187 8 -37 283 1,117 441 1,430 Net profit 258 253 292 -73 82 -46 -29 221 730 227 1,115 US$/W 1,111 1,142 1,075 1,055 1,065 1,012 1,020 1,025 1,055 1,025 1,050 Dubai oil 108 101 106 106 104 106 102 95 105 102 95 Diesel-Dubai oil 18 15 17 17 16 15 13 15 17 15 15 Benzene-naphtha 421 430 328 335 367 339 396 350 379 363 300 PX-naphtha 640 559 541 460 326 288 414 350 379 363 300 Source: KDB Daewoo Securities Research
TableTableTable 292929.29 . EEEarningsEarnings forecast revisions (Wbn, %, %p) Previous Revised % chg% chg.chg ... 14F14F14F 15F15F15F 14F14F14F 15F15F15F 14F14F14F 15F15F15F Revenue 67,623 69,599 67,113 65,811 -0.8 -5.4 Operating profit 690 1,656 471 1,488 -31.7 -10.1 Net profit 398 1,213 227 1,115 -42.9 -8.1 OP margin 1.0 2.4 0.7 2.3 -0.3 -0.1 Net margin 0.6 1.7 0.3 1.7 -0.3 0.0 Source: KDB Daewoo Securities Research
TableTableTable 303030.30 . 3Q14F preview (Wbn, %, %p) 3Q14F Growth 3Q133Q133Q13 2Q142Q142Q14 KDB Daewoo Consensus YoYYoYYoY QoQQoQQoQ Revenue 15,858 16,494 16,835 16,694 6.2 2.1 Operating profit 316 -50 -11 115 TTR TTR OP margin 2.0 -0.3 -0.1 0.7 -2.1 0.2 Pretax profit 420 8 -37 133 TTR TTR Net profit 292 -46 -29 95 TTR RR Source: WISEfn, KDB Daewoo Securities Research
TableTableTable 313131.31 . Valuation (2015F) (Wbn, x) EBITDA (201(201(2015(201 555F)F)F)F) Multiple Fair value
Operating value Refining/chemicals/lube oil 1,875.8 7.0 13,130.9 - Assumed US$10/bbl for P1 E&P (bn bbl, US$/bbl) 5.1 10.0 5,654.0 reserve Total (A) 18,784.9 Asset value (B) 692.0 - Book value Enterprise value (C=A+B) 19,476.9 Net borrowings (D) 7,677.0 - As of end-2Q14 Preferred stock market cap (E) 61.9 Fair value (F=C-D-E) 11,738.0 Shares outstanding (G, ‘000 93,713.6 shares) Target price (F/G, W) 125,254.0 Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 37
October 6, 2014 Oil Refining/Chemicals
SK Innovation (096770 KS/Buy/TP: W120,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F (Wbn) 12/13 12/14F 12/15F 12/16F Revenue 66,670 67,113 65,811 65,805 Current Assets 16,997 18,076 17,455 17,542 Cost of Sales 63,408 64,784 62,464 61,790 Cash and Cash Equivalents 2,849 3,098 2,880 2,968 Gross Profit 3,2623,2623,262 2,3292,3292,329 3,3473,3473,347 4,0154,0154,015 AR & Other Receivables 6,118 6,261 6,093 6,093 SG&A Expenses 1,8791,8791,879 1,8581,8581,858 1,8581,8581,858 1,8581,8581,858 Inventories 7,080 7,702 7,495 7,495 Operating Profit (Adj) 1,3831,3831,383 471471471 1,4881,4881,488 2,1572,1572,157 Other Current Assets 950 1,015 987 986 Operating Profit 1,3831,3831,383 471471471 1,4881,4881,488 2,1572,1572,157 NonNonNon-Non ---CurrentCurrent Assets 18,291 19,115 20,337 21,585 NonNonNon-Non ---OperatingOperating Profit ---266 -266266266 ---30-303030 ---58-585858 ---62-626262 Investments in Associates 1,873 1,998 1,944 1,944 Net Financial Income -190 -152 -151 -154 Property, Plant and Equipment 14,335 14,497 15,851 17,159 Net Gain from Inv in Associates 68 130 80 80 Intangible Assets 1,382 1,786 1,724 1,664 Pretax Profit 1,117 441 1,430 2,095 Total Assets 35,289 37,192 37,791 39,127 Income Tax 339 186 314 461 Current Liabilities 11,665 13,444 13,187 13,187 Profit from Continuing Operations 779 255 1,115 1,634 AP & Other Payables 6,352 7,122 6,930 6,930 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 3,112 3,975 3,973 3,973 Net Profit 779779779 255255255 1,1151,1151,115 1,6341,6341,634 Other Current Liabilities 2,201 2,347 2,284 2,284 Controlling Interests 730 227 1,115 1,634 NonNonNon-Non ---CurrentCurrent Liabilities 6,7086,7086,708 7,0327,0327,032 7,0077,0077,007 7,0077,0077,007 Non-Controlling Interests 49 28 0 0 Long-Term Financial Liabilities 5,861 6,127 6,127 6,127 Total Comprehensive Profit 834834834 100100100 1,1151,1151,115 1,6341,6341,634 Other Non-Current Liabilities 847 905 880 880 Controlling Interests 766 80 1,112 1,629 Total Liabilities 18,374 20,476 20,194 20,194 Non-Controlling Interests 68 20 3 5 Controlling Interests 15,839 15,622 16,503 17,839 EBITDA 2,052 1,165 2,197 2,908 Capital Stock 469 469 469 469 FCF (Free Cash Flow) -1,344 -33 -139 306 Capital Surplus 5,893 5,893 5,893 5,893 EBITDA Margin (%) 3.1 1.7 3.3 4.4 Retained Earnings 9,535 9,450 10,331 11,667 Operating Profit Margin (%) 2.1 0.7 2.3 3.3 NonNonNon-Non ---ControllingControlling Interests 1,0761,0761,076 1,0941,0941,094 1,0941,0941,094 1,0941,0941,094 Net Profit Margin (%) 1.1 0.3 1.7 2.5 Stockholders' Equity 16,915 16,716 17,597 18,933
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1312/1312/13 12/14F 12/15F 12/16F 12/1312/1312/13 12/14F 12/15F 12/16F Cash Flows from Op Activities 1,379 859 1,861 2,306 P/E (x) 18.2 30.9 6.3 4.3 Net Profit 779 255 1,115 1,634 P/CF (x) 6.6 5.8 3.2 2.4 Non-Cash Income and Expense 1,240 959 1,094 1,287 P/B (x) 0.8 0.4 0.4 0.4 Depreciation 611 630 647 692 EV/EBITDA (x) 9.8 12.7 6.9 5.2 Amortization 58 64 62 60 EPS (W) 7,789 2,424 11,898 17,434 Others 571 265 385 535 CFPS (W) 21,541 12,953 23,573 31,163 Chg in Working Capital -124 92 117 0 BPS (W) 170,471 168,153 177,555 191,806 Chg in AR & Other Receivables 237 171 141 0 DPS (W) 3,200 2,500 3,200 3,200 Chg in Inventories -304 -675 208 0 Payout ratio (%) 37.8 90.2 26.4 18.0 Chg in AP & Other Payables -68 645 -180 0 Dividend Yield (%) 2.3 3.3 4.3 4.3 Income Tax Paid ---387 -387387387 ---311-311311311 ---314-314314314 ---461-461461461 Revenue Growth (%) -9.1 0.7 -1.9 0.0 Cash Flows from Inv Activities -1,979 -1,766 -1,977 -2,000 EBITDA Growth (%) -11.7 -43.2 88.6 32.4 Chg in PP&E -2,634 -825 -2,000 -2,000 Operating Profit Growth (%) -18.6 -65.9 215.9 45.0 Chg in Intangible Assets -188 0 0 0 EPS Growth (%) -38.4 -68.9 390.8 46.5 Chg in Financial Assets 821 -53 23 0 Accounts Receivable Turnover (x) 12.5 13.0 12.8 13.0 Others 222222 ---888-888888888 000 000 Inventory Turnover (x) 9.6 9.1 8.7 8.8 Cash Flows from Fin Activities 635 913 -236 -298 Accounts Payable Turnover (x) 10.3 10.2 9.5 9.5 Chg in Financial Liabilities 1,017 1,129 -2 0 ROA (%) 2.3 0.7 3.0 4.2 Chg in Equity 0 0 0 0 ROE (%) 4.7 1.4 6.9 9.5 Dividends Paid -299 -298 -234 -298 ROIC (%) 4.8 1.3 5.2 7.2 Others ---83 -838383 828282 000 000 Liability to Equity Ratio (%) 108.6 122.5 114.8 106.7 Increase (Decrease) in Cash 20 250 -218 87 Current Ratio (%) 145.7 134.5 132.4 133.0 Beginning Balance 2,829 2,849 3,098 2,880 Net Debt to Equity Ratio (%) 34.8 40.4 39.7 36.4 Ending Balance 2,8492,8492,849 3,0983,0983,098 2,8802,8802,880 2,9682,9682,968 Interest Coverage Ratio (x) 5.0 2.2 6.9 10.0 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 38
October 6, 2014 Oil Refining/Chemicals
GS Holdings (078930 KS) Downward earnings forecast revisions coming to an end
Oil Refining 3Q preview: OP to fall QoQ on tepid refining margins and lower utilization at energy subsidiaries
(Maintain) Buy We forecast GS Holdings’ 3Q operating profit to fall QoQ to W57bn. Its key subsidiary GS Caltex is expected to post massive operating losses due to tepid refining margins and Target Price (12M, W) 50,000 lower oil prices. Energy subsidiaries, including GS EPS, should deliver poor earnings QoQ, as their utilization ratios declined due to lower prices arising from higher power supply Share Price (10/02/14, W) 39,300 following a rise in nuclear power plant utilization.
4Q earnings to pick up QoQ Expected Return 27% Falling refining margins and oil prices seem attributable to weak demand from emerging OP (14F, Wbn) 326 markets, including China. For the first eight months of 2014, Chinese petroleum demand Consensus OP (14F, Wbn) 368 appears to have dropped YoY. In particular, diesel demand declined sharply YoY due to EPS Growth (14F, %) -59.3 reduced investments in fixed assets, including real estate. Chinese petroleum demand is Market EPS Growth (14F, %) 8.1 unlikely to improve markedly. P/E (14F, x) 25.5 However, refining margins and oil prices, which fell sharply in 3Q, are unlikely to plunge Market P/E (14F, x) 12.0 again in 4Q. A massive sell-off occurred in 3Q due to far-lower-than-expected demand in KOSPI 1,976.16 the quarter. However, refining margins started to pick up modestly in September Market Cap (Wbn) 3,652 following a plunge in July-August. Indeed, the level seen in July-August is unlikely to Shares Outstanding (mn) 95 occur again for any prolonged period, as refineries would not make profits at that level. Free Float (%) 53.8 With regard to oil prices, Dubai crude, which has fallen to the low US$90/bbl level, is Foreign Ownership (%) 18.0 unlikely to see any further sharp drops. Beta (12M) 1.16 52-Week Low 39,300 We expect 4Q operating profit to rise QoQ to W135bn. GS Caltex’s earnings are 52-Week High 60,500 expected to rise QoQ, as: 1) refining margins have been recovering since September; and 2) the decline in oil prices is easing. (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M Absolute -7.5 -19.1 -29.9 Lower TP but maintain Buy Relative -4.0 -18.2 -29.1 We maintain our Buy recommendation on GS Holdings but lower our target price to 110 GS Holdings KOSPI W50,000 (from W55,000). We derived our target price by adding the values of the 100 energy business (which will likely complete capacity expansion in 2017) and oil refining 90 assets. We lowered our target P/B for GS Caltex to 0.6x from 0.7x to reflect oil 80 refineries’ falling P/Bs.
70 Although the company’s flagship oil refining and energy units are currently experiencing 60 9.13 1.14 5.14 9.14 difficulties, the mid-term market outlook has recently been improving in light of 1) a delay in refining facility investments and 2) disruptions in coal power generation projects. We believe that the current market slump has already been priced in significantly.
FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Revenue (Wbn) 8,519 9,716 9,583 10,592 11,126 11,496 OP (Wbn) 932 684 552 326 612 779 OP margin (%) 10.9 7.0 5.8 3.1 5.5 6.8 NP (Wbn) 774 494 358 146 353 463 EPS (W) 8,170 5,217 3,778 1,539 3,726 4,891 ROE (%) 13.6 8.0 5.5 2.2 5.3 6.6 P/E (x) 6.2 13.8 15.2 25.5 10.5 8.0 P/B (x) 0.8 1.1 0.8 0.6 0.5 0.5 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 39
October 6, 2014 Oil Refining/Chemicals
TableTableTable 323232.32 . GS Holdings’ quarterly and annual earnings (Wbn) 1Q131Q131Q13 2Q132Q132Q13 3Q133Q133Q13 4Q134Q134Q13 1Q14 2Q142Q142Q14 3Q14F 4Q14F 201320132013 2014F2014F2014F 2015F2015F2015F Revenue Total 2,294 2,165 2,546 2,388 2,647 2,609 2,680 2,656 9,583 10,592 11,126 GS Retail 1,118 1,172 1,270 1,175 1,131 1,250 1,333 1,233 4,734 4,948 5,195 GS Global 637 546 630 588 650 610 630 588 2,401 2,477 2,477 GS EPS 281 272 306 373 392 286 296 272 1,231 1,246 1,260 GS Energy 404 153 294 207 323 168 107 207 1,059 805 1,059 Equity-method gains from GS Home Shopping 9 10 9 11 9 9 9 11 39 37 34 GS E&R - - - - 94 255 255 295 - 899 1,100 Other -154 12 38 35 142 287 50 50 -69 528 200 Operating Total 180 79 264 29 69 66 57 135 552 326 612 profit GS Retail 14 47 60 34 13 42 55 35 155 145 185 GS Global 7 4 3 0 6 7 5 5 14 23 20 GS EPS 22 27 27 34 17 14 16 14 109 60 88 GS Energy 107 -29 144 -63 -5 -24 -53 37 159 -45 169 Equity-method gains from GS Caltex 47 -19 167 -52 -3 -19 -49 36 144 -35 170 Equity-method gains from GS Power 20 7 5 8 19 6 6 11 40 43 38 Equity-method gains from GS Home Shopping 9 10 9 11 10 9 9 11 39 38 34 GS E&R - - - - 6 9 5 13 - 34 36 Other 21 20 21 14 29 18 20 20 76 87 80 Source: KDB Daewoo Securities Research
TableTableTable 333333.33 . GS Caltex’s quarterly and annual earnings (Wbn) 1Q131Q131Q13 2Q132Q132Q13 3Q133Q133Q13 4Q134Q134Q13 1Q141Q141Q14 2Q142Q142Q14 3Q14F 4Q14F 201320132013 2014F2014F2014F 2015F2015F2015F Revenue Total 10,901 11,567 11,784 11,408 10,836 10,197 10,476 10,082 44,248 33,446 39,371 Oil refining/Lube oil 9,104 9,260 9,791 9,242 9,037 8,593 8,761 8,436 37,396 28,292 33,250 Chemicals 1,698 1,700 1,738 1,716 1,799 1,583 1,715 1,646 6,852 5,153 6,121 Operating Total 392 94 349 65 75 -71 -81 146 897 69 655 profit Oil refining/Lube oil 174 -81 143 -95 -9 -110 -182 54 141 -248 300 Chemicals 219 175 204 158 84 38 101 93 756 316 355 Dubai oil 108 101 106 106 104 106 102 95 105 102 95 US$/W 1,111 1,142 1,075 1,055 1,065 1,012 1,020 1,025 1,055 1,025 1,050 PX-naphtha 640 559 541 460 326 288 400 350 550 345 350 Gasoline-Dubai oil 18 15 13 10 15 16 13 13 14 14 15 Naphtha-Dubai oil -2 -7 -6 -2 -1 -1 -2 -3 -4 -2 -2 Diesel-Dubai oil 18 15 17 17 16 15 13 15 17 15 15 Fuel oil-Dubai oil -10 -6 -13 -12 -11 -12 -11 -8 -10 -10 -10 Source: KDB Daewoo Securities Research
TableTableTable 343434.34 . GS. GS’GS ’’’ss vs valuationv aluation (Wbn, %) Book value StakeStakeStake Share value NotesNotesNotes
- Applied P/B of 0.6x and reflected GS Holdings’ stake GS Caltex 9,009.0 50.0 2,702.7 in GS Caltex - Applied P/E of 8x to estimated 17F EPS and reflected GS EPS 115.5 70.0 646.6 GS Holdings’ stake in GS EPS - Applied P/E of 8x to estimated 17F EPS and reflected GS Caltex 72.4 50.0 289.7 GS Holdings’ stake in GS Power - Applied P/E of 8x to estimated 17F EPS and reflected GS E&R CHP plant 90.0 64.0 460.8 GS Holdings’ stake in CHP plant Bukpyeong coal-fired power - Applied P/E of 12x to estimated 17F EPS and 52.6 32.0 201.9 plant reflected GS Holdings’ stake in GS Bukpyeong plant
Mkt. cap. StakeStakeStake Share value
GS Retail 1,967.0 65.8 905.3 - Discounted at 30% GS Home Shopping 1,647.0 30.0 345.9 - Discounted at 30% GS Global 216.0 54.6 82.5 - Discounted at 30% Brand royalty 658.0 - Multiplied brand royalty profit in 2013 by 10x Invested real estate 1,140.0 - Book value Fair value (Wbn) 7,433.4 Net borrowing 2,901.7 Enterprise value 4,531.7 Shares outstanding (mn shares) 94.7 Target price (W) 47,853 Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 40
October 6, 2014 Oil Refining/Chemicals
GS Holdings (078930 KS/Buy/TP: W50,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F (Wbn) 12/13 12/14F 12/15F 12/16F Revenue 9,5839,5839,583 10,592 11,126 11,496 Current Assets 2,3232,3232,323 1,3101,3101,310 1,3321,3321,332 1,5831,5831,583 Cost of Sales 7,8987,8987,898 9,0969,0969,096 9,3449,3449,344 9,5489,5489,548 Cash and Cash Equivalents 607 92 58 273 Gross Profit 1,6851,6851,685 1,4961,4961,496 1,7821,7821,782 1,9481,9481,948 AR & Other Receivables 641 60 63 65 SG&SG&SG&ASG& A Expenses 1,1331,1331,133 1,1701,1701,170 1,1701,1701,170 1,1701,1701,170 Inventories 280 285 299 309 Operating Profit (Adj) 552552552 326326326 612612612 779779779 Other Current Assets 795 873 912 936 Operating Profit 552552552 326326326 612612612 779779779 NonNonNon-Non ---CurrentCurrent Assets 10,313 12,975 13,680 14,270 NonNonNon-Non ---OperatingOperating Profit ---39 -393939 ---81-818181 ---80-808080 ---80-808080 Investments in Associates 5,295 5,889 6,185 6,372 Net Financial Income -87 -106 -80 -80 Property, Plant and Equipment 2,283 3,720 4,120 4,520 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 591 1,242 1,242 1,242 Pretax Profit 513 245 532 699 Total Assets 12,636 14,285 15,012 15,853 Income Tax 78 54 117 154 Current Liabilities 1,7821,7821,782 1,6171,6171,617 1,6261,6261,626 1,6311,6311,631 Profit from Continuing Operations 435 191 415 545 AP & Other Payables 932 0 0 0 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 696 1,445 1,446 1,446 Net Profit 435435435 191191191 415415415 545545545 Other Current Liabilities 154 172 180 185 Controlling Interests 358 146 353 463 NonNonNon-Non ---CurrentCurrent Liabilities 3,4303,4303,430 4,7514,7514,751 5,1815,1815,181 5,6005,6005,600 Non-Controlling Interests 77 45 62 82 Long-Term Financial Liabilities 2,887 4,147 4,547 4,947 Total Comprehensive Profit 435435435 182182182 415415415 545545545 Other Non-Current Liabilities 543 604 634 653 Controlling Interests 358 -29 -235 -308 Total Liabilities 5,2125,2125,212 6,3686,3686,368 6,8076,8076,807 7,2327,2327,232 Non-Controlling Interests 77 211 650 853 Controlling Interests 6,5756,5756,575 6,5806,5806,580 6,8066,8066,806 7,1417,1417,141 EBITDA 552 326 612 779 Capital Stock 474 474 474 474 FCF (Free Cash Flow) 134 406 37 159 Capital Surplus 1,312 1,295 1,295 1,295 EBITDA Margin (%) 5.8 3.1 5.5 6.8 Retained Earnings 4,915 4,945 5,170 5,505 Operating Profit Margin (%) 5.8 3.1 5.5 6.8 NonNonNon-Non ---ControllingControlling Interests 850850850 1,3371,3371,337 1,3991,3991,399 1,4811,4811,481 Net Profit Margin (%) 3.7 1.4 3.2 4.0 Stockholders' Equity 7,4257,4257,425 7,9177,9177,917 8,2058,2058,205 8,6228,6228,622
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1312/1312/13 12/14F 12/15F 12/16F 12/1312/1312/13 12/14F 12/15F 12/16F Cash Flows from Op Activities 794 992 437 559 P/E (x) 15.2 25.5 10.5 8.0 Net Profit 435 191 415 545 P/CF (x) 7.7 7.1 6.1 4.8 Non-Cash Income and Expense 269 334 197 234 P/B (x) 0.8 0.6 0.5 0.5 Depreciation 0 0 0 0 EV/EBITDA (x) 15.4 29.9 16.7 13.4 Amortization 0 0 0 0 EPS (W) 3,778 1,539 3,726 4,891 Others 269 334 197 234 CFPS (W) 7,432 5,538 6,464 8,222 Chg in Working Capital 3 561 22 14 BPS (W) 69,429 69,497 71,873 75,413 Chg in AR & Other Receivables -19 110 0 0 DPS (W) 1,350 1,350 1,350 1,350 Chg in Inventories -33 21 -14 -9 Payout ratio (%) 28.8 65.8 30.2 23.0 Chg in AP & Other Payables 88 -125 0 0 Dividend Yield (%) 2.4 3.4 3.4 3.4 Income Tax Paid ---91 -919191 ---87-878787 ---117-117117117 ---154-154154154 Revenue Growth (%) -1.4 10.5 5.0 3.3 Cash Flows from Inv Activities -836 -1,845 -447 -429 EBITDA Growth (%) -19.3 -40.9 87.7 27.3 Chg in PP&E -496 -585 -400 -400 Operating Profit Growth (%) -19.3 -40.9 87.7 27.3 Chg in Intangible Assets -69 0 0 0 EPS Growth (%) -27.6 -59.3 142.1 31.3 Chg in Financial Assets -130 -94 -47 -29 Accounts Receivable Turnover (x) 15.9 36.0 0.0 0.0 Others ---141 -141141141 ---1,166-1,1661,1661,166 000 000 Inventory Turnover (x) 33.6 37.5 38.1 37.8 Cash Flows from Fin Activities -30 1,024 272 272 Accounts Payable Turnover (x) 10.1 23.0 0.0 0.0 Chg in Financial Liabilities -286 2,010 400 400 ROA (%) 3.4 1.4 2.8 3.5 Chg in Equity 0 -17 0 0 ROE (%) 5.5 2.2 5.3 6.6 Dividends Paid -153 -161 -128 -128 ROIC (%) 12.5 5.2 7.5 9.0 Others 409409409 ---808-808808808 000 000 Liability to Equity Ratio (%) 70.2 80.4 83.0 83.9 Increase (Decrease) in Cash -69 -515 -34 215 Current Ratio (%) 130.4 81.0 81.9 97.0 Beginning Balance 676 607 92 58 Net Debt to Equity Ratio (%) 30.6 59.6 62.3 61.2 Ending Balance 607607607 929292 585858 273273273 Interest Coverage Ratio (x) 3.9 2.4 7.7 9.7 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 41
October 6, 2014 Oil Refining/Chemicals
S-Oil (010950 KS) Bottomed out; Recovery to progress steadily
Oil Refining 3Q preview: Likely to miss consensus due to a fall in oil prices and weak refining margins
(Maintain) Buy We expect weak 3Q numbers for S-Oil in light of tepid oil prices and sluggish refining margins. Earnings at the oil refining unit are believed to have deteriorated due to weak refining Target Price (12M, W) 50,000 margins during July-August, as well as a plunge in oil prices in September. Given that the average oil price in September dropped by US$10/bbl compared to June, we expect Share Price (10/02/14, W) 40,000 inventory valuation losses of approximately W100bn (the company’s average inventory is 10mn barrels). The chemicals unit is forecast to have improved on the back of the recovery of Expected Return 25% PX margins. Earnings at the lubricant oil unit are projected to have remained flat QoQ. 4Q earnings to improve on the back of lower OSP premium and the recovery OP (14F, Wbn) 14 Consensus OP (14F, Wbn) 115 of refining margins
EPS Growth (14F, %) -61.9 In 4Q, we forecast the company’s operating profit to improve to W96.4bn on the back Market EPS Growth (14F, %) 8.1 of a significant decrease in losses at the oil refining unit. Refining margins recovered in P/E (14F, x) 42.3 September after plummeting in July-August, aided by capacity utilization cuts by Market P/E (14F, x) 12.0 refineries. Amid sluggish refining margins in Asia, OSP premium to oil sold in Asia has KOSPI 1,976.16 also fallen, which should help boost the company’s earnings.
Market Cap (Wbn) 4,503 During July-August, refining margins plummeted due to high inventory levels and an Shares Outstanding (mn) 117 unexpected plunge in demand. However, refining margins are unlikely to plunge again given Free Float (%) 36.3 that expectations for demand are already low. Nevertheless, we do not expect any drastic Foreign Ownership (%) 46.1 improvement in margins, considering: 1) still-tepid emerging economies such as China, and 2) Beta (12M) 0.97 scheduled massive capacity ramp-ups in the Middle East between year-end and early next 52-Week Low 40,000 year. 52-Week High 81,200 PX margins have deteriorated recently, but are likely to remain above US$350/bbl. New (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M PX facilities have already begun production, and if margins fall below US$300/bbl, Absolute -12.3 -35.1 -48.2 refineries are likely to adjust their capacity utilization ratios. Lubricant oil margins are Relative -8.9 -34.4 -47.6 forecast to decline once the new facilities of Chevron, Hyundai Oil Bank, and Repsol
120 S-Oil KOSPI begin production in end-3Q.
100 Lower TP; Shares to be range-bound 80 We trim our target price for S-Oil to W50,000 (from W65,000) to reflect our downward 60 revisions to Dubai oil price and refining margin estimates. S-Oil shares pulled back due to 40 the earnings slowdown and decreased expectations for dividend payout. However, 9.13 1.14 5.14 9.14 additional downside should be limited, as earnings are forecast to recover in 4Q and
dividend yields should pick up if 2015 earnings normalize. It should be noted that, because S-Oil shares are highly valued compared to peers, any rebound would likely be relatively weak. In the near term, we expect the stock to remain range-bound.
FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Revenue (Wbn) 31,914 34,723 31,159 29,235 27,939 28,550 OP (Wbn) 1,698 782 366 14 507 842 OP margin (%) 5.3 2.3 1.2 0.0 1.8 2.9 NP (Wbn) 1,191 585 290 110 395 657 EPS (W) 10,214 5,018 2,484 946 3,392 5,635 ROE (%) 24.5 11.0 5.4 2.1 7.2 11.1 P/E (x) 9.8 20.7 29.8 42.3 11.8 7.1 P/B (x) 2.2 2.3 1.6 0.9 0.8 0.8 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 42
October 6, 2014 Oil Refining/Chemicals
TableTableTable 353535.35 . Quarterly and annual earnings (Wbn, %, US$/W, US$/bbl, US$/tonne) 1Q131Q131Q13 2Q132Q132Q13 3Q133Q133Q13 4Q134Q134Q13 1Q141Q141Q14 2Q142Q142Q14 3Q14F 4Q14F 201320132013 2014F2014F2014F 2015F2015F2015F Revenue 8,014 6,975 8,126 8,045 7,602 7,419 7,374 6,840 31,159 29,235 27,939 Oil refining 6,532 5,704 6,693 6,579 6,179 6,000 6,007 5,558 25,509 23,743 22,923 Petrochemicals 1,049 870 986 994 895 907 887 824 3,898 3,512 3,213 Lube oil 433 401 447 471 529 512 480 458 1,752 1,979 1,803 Operating profit 327 100 25 -53 47 -54 -75 96 366 14 507 Oil refining 131 -59 -169 -225 -52 -153 -225 -23 -322 -454 -45 Petrochemicals 182 110 154 121 47 26 88 69 566 230 309 Lube oil 14 50 40 52 53 73 62 50 156 238 243 Pretax profit 193 -30 260 -37 28 90 -75 96 387 140 507 Net profit 147 -22 192 -28 25 68 -58 75 290 110 395 OP margin 4.1 1.4 0.3 -0.7 0.6 -0.7 -1.0 1.4 1.3 0.0 1.8 Net margin 1.8 -0.3 2.4 -0.3 0.3 0.9 -0.8 1.1 0.9 0.4 1.4 US$/W rate 1,111 1,142 1,075 1,055 1,065 1,012 1,020 1,025 1,055 1,025 1,050 Dubai oil 108 101 106 106 104 106 102 95 105 102 95 Diesel-Dubai oil 18 15 17 17 16 15 13 15 17 15 15 PX-naphtha 640 559 541 460 326 288 414 350 571 345 350 Source: KDB Daewoo Securities Research
TableTableTable 363636.36 . Earnings forecast revisions (Wbn, %, %p) Previous Revised % chg. 14F14F14F 15F15F15F 14F14F14F 15F15F15F 14F14F14F 15F15F15F Revenue 29,933 30,611 29,235 27,939 -2.3 -8.7 Operating profit 211 765 14 507 -93.4 -33.7 Net profit 266 597 110 395 -58.5 -33.8 OP margin 0.7 2.5 0.0 1.8 -0.7 -0.7 Net margin 0.9 2.0 0.4 1.4 -0.5 -0.5 Source: KDB Daewoo Securities Research
TableTableTable 373737.37 . 3Q14F preview (Wbn, %, %p) 3Q14F Growth 3Q133Q133Q13 2Q142Q142Q14 KDB Daewoo Consensus YoYYoYYoY QoQQoQQoQ Revenue 8,126 7,419 7,374 7,466 -9.3 -0.6 Operating profit 25 -54 -75 29 TTR RR OP margin 0.3 -0.7 -1.0 0.4 -1.3 -0.3 Pretax profit 260 90 -75 21 TTR TTR Net profit 192 68 -58 29 TTR TTR Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 43
October 6, 2014 Oil Refining/Chemicals
S-Oil (010950 KS/Buy/TP: W50,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F (Wbn) 12/13 12/14F 12/15F 12/16F Revenue 31,159 29,235 27,939 28,550 Current Assets 7,9137,9137,913 7,3317,3317,331 7,5267,5267,526 7,4087,4087,408 Cost of Sales 30,229 28,633 26,844 27,120 Cash and Cash Equivalents 585 1,163 1,257 1,068 Gross Profit 930930930 602602602 1,0951,0951,095 1,4301,4301,430 AR & Other Receivables 2,707 1,976 2,011 2,035 SG&A Expenses 563563563 588588588 588588588 588588588 Inventories 4,238 3,819 3,886 3,933 Operating Profit (Adj) 366366366 141414 507507507 842842842 Other Current Assets 383 373 372 372 Operating ProfitProfitProfit 366366366 141414 507507507 842842842 NonNonNon-Non ---CurrentCurrent Assets 4,0084,0084,008 4,3044,3044,304 4,4804,4804,480 5,1065,1065,106 NonNonNon-Non ---OperatingOperating Profit 212121 126126126 000 000 Investments in Associates 30 26 26 26 Net Financial Income -17 0 0 0 Property, Plant and Equipment 3,760 4,030 4,209 4,839 Net Gain from Inv in Associates 7 2 0 0 Intangible Assets 47 42 36 31 Pretax Profit 387 140 507 842 Total Assets 11,921 11,634 12,006 12,513 Income Tax 98 30 112 185 Current Liabilities 5,8855,8855,885 5,0005,0005,000 5,0365,0365,036 5,0605,0605,060 Profit from Continuing Operations 290 110 395 657 AP & Other Payables 3,037 2,005 2,040 2,065 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 2,691 2,995 2,995 2,995 Net Profit 290290290 110110110 395395395 657657657 Other Current Liabilities 157 0 1 0 Controlling Interests 290 110 395 657 NonNonNon-Non ---CurrentCurrent Liabilities 682682682 1,3141,3141,314 1,3171,3171,317 1,3181,3181,318 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 520 1,177 1,177 1,177 Total Comprehensive Profit 287287287 868686 395395395 657657657 Other Non-Current Liabilities 162 137 140 141 Controlling Interests 287 86 395 657 Total Liabilities 6,5676,5676,567 6,3156,3156,315 6,3526,3526,352 6,3786,3786,378 Non-Controlling Interests 0 0 0 0 Controlling Interests 5,3545,3545,354 5,3205,3205,320 5,6535,6535,653 6,1356,1356,135 EBITDA 734 357 834 1,218 Capital Stock 292 292 292 292 FCF (Free Cash Flow) 347 -324 158 -12 Capital Surplus 1,332 1,332 1,332 1,332 EBITDA Margin (%) 2.4 1.2 3.0 4.3 Retained Earnings 3,683 3,673 4,007 4,488 Operating Profit Margin (%) 1.2 0.0 1.8 2.9 NonNonNon-Non ---ControllingControlling Interests 000 000 000 000 Net Profit Margin (%) 0.9 0.4 1.4 2.3 Stockholders' Equity 5,3545,3545,354 5,3205,3205,320 5,6535,6535,653 6,1356,1356,135
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1312/1312/13 12/14F 12/15F 12/16F 12/1312/1312/13 12/14F 12/15F 12/16F Cash Flows from Op Activities 793 283 658 988 P/E (x) 29.8 42.3 11.8 7.1 Net Profit 290 110 395 657 P/CF (x) 12.2 13.1 5.6 3.8 Non-Cash Income and Expense 419 245 438 561 P/B (x) 1.6 0.9 0.8 0.8 Depreciation 361 336 321 371 EV/EBITDA (x) 14.7 20.4 8.6 6.1 Amortization 7 7 6 5 EPS (W) 2,484 946 3,392 5,635 Others 51 -98 111 185 CFPS (W) 6,075 3,044 7,150 10,447 Chg in Working Capital 316 -41 -64 -44 BPS (W) 45,932 45,637 48,500 52,630 Chg in AR & Other Receivables 127 173 -35 -24 DPS (W) 1,330 528 1,507 2,466 Chg in Inventories 164 422 -67 -46 Payout ratio (%) 51.7 53.9 42.9 42.3 Chg in AP & Other Payables -118 -314 35 24 Dividend Yield (%) 1.8 1.3 3.8 6.2 Income Tax Paid ---224 -224224224 ---30-303030 ---112-112112112 ---185-185185185 Revenue Growth (%) -10.3 -6.2 -4.4 2.2 Cash Flows from Inv Activities -96 -637 -502 -1,001 EBITDA Growth (%) -37.4 -51.4 133.6 46.0 Chg in PP&E -445 -606 -500 -1,000 Operating Profit Growth (%) -53.2 -96.2 3,521.4 66.1 Chg in Intangible Assets -6 0 0 0 EPS Growth (%) -50.5 -61.9 258.6 66.1 Chg in Financial Assets 373 22 -2 -1 Accounts Receivable Turnover (x) 14.0 14.1 14.0 14.1 Others ---18 -181818 ---53-535353 000 000 Inventory Turnover (x) 7.2 7.3 7.3 7.3 Cash Flows from Fin Activities -547 931 -62 -176 Accounts Payable Turnover (x) 12.7 13.2 13.3 13.2 Chg in Financial Liabilities -297 961 0 0 ROA (%) 2.4 0.9 3.3 5.4 Chg in Equity 0 0 0 0 ROE (%) 5.4 2.1 7.2 11.1 Dividends Paid -309 -120 -62 -176 ROIC (%) 3.6 0.1 4.9 7.7 Others 595959 909090 000 000 Liability to Equity Ratio (%) 122.7 118.7 112.4 104.0 Increase (Decrease) in Cash 150 579 94 -189 Current Ratio (%) 134.5 146.6 149.5 146.4 Beginning Balance 434 585 1,163 1,257 Net Debt to Equity Ratio (%) 42.1 49.6 45.0 44.5 Ending Balance 585585585 1,1631,1631,163 1,2571,2571,257 1,0681,0681,068 Interest Coverage Ratio (x) 6.8 0.0 0.0 0.0 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 44
October 6, 2014 Oil Refining/Chemicals
OCI (010060 KS) Polysilicon price rebound likely to present trading opportunity
Chemicals 3Q preview: Sluggish due to regular maintenance; 4Q OP to recover on a rebound in polysilicon prices
(Maintain) Hold We forecast OCI’s 3Q operating profit to come in at W15bn, in line with the recently lowered consensus. We estimate that losses at the polysilicon unit expanded QoQ due to Target Price (12M, W) - a rise in costs (affected by regular maintenance). On the non-operating side, the company might recognize impairment losses on some accounts receivables Share Price (10/02/14, W) 121,000 (approximately W90bn), affected by the court receivership of its customer Nexolon.
In 4Q, we project operating profit to improve to W31bn on the back of the dissipation of Expected Return - the effects of maintenance, as well as a small rise in polysilicon prices.
OP (14F, Wbn) 108 Keep tabs on polysilicon prices Consensus OP (14F, Wbn) 129 With the recent steady pickup in Chinese solar PV demand, polysilicon prices have EPS Growth (14F, %) - stopped declining. Although the demand recovery and rebound in prices are not Market EPS Growth (14F, %) 8.1 progressing quickly, we still expect prices to rise once inventory drawdowns are P/E (14F, x) - completed given the absence of capacity expansion plans until end-2014. Market P/E (14F, x) 12.0 KOSPI 1,976.16 Considering the high correlation between OCI shares and polysilicon prices, we believe that a price rebound should provide investors with a trading opportunity. We advise Market Cap (Wbn) 2,886 investors to keep close tabs on polysilicon prices in the near term. Shares Outstanding (mn) 24 Free Float (%) 69.7 Medium outlook: Chinese competitors become more competitive Foreign Ownership (%) 22.7 Beta (12M) 1.03 We recommend a trading approach for OCI, due to 1) low demand visibility for 2015 and 52-Week Low 121,000 beyond and 2) the company’s weakened competitiveness. 52-Week High 214,000 The solar PV demand visibility for 2015 and beyond seems weak, as demand largely (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M depends on policies, and supply is forecast to increase in 2015. Polysilicon makers are Absolute -17.1 -33.5 -32.8 increasing supply, as: 1) demand is forecast to grow over the medium to long term, 2) Relative -14.0 -32.8 -32.0 capacity ramp-ups will likely help cut costs, and 3) Chinese makers are managing to
140 OCI KOSPI reduce costs quickly on the back of low electricity rates and upgraded facilities.
120 Share prices are reflecting changes in the competitiveness of producers. Global solar PV
100 shares are recovering. China-based Daqo surged, and GCL-Poly and Wacker Chemie also rose. Although OCI shares pulled back due to non-operating issues, they could rise if 80 momentum picks up (e.g., a rise in polysilicon prices). However, OCI shares are still likely 60 to lag behind Chinese competitors. 9.13 1.14 5.14 9.14
FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Revenue (Wbn) 4,276 3,218 2,956 3,133 3,531 3,583 OP (Wbn) 1,118 155 -106 108 397 462 OP margin (%) 26.1 4.8 -3.6 3.4 11.2 12.9 NP (Wbn) 768 -68 -328 -40 181 220 EPS (W) 32,617 -2,866 -13,741 -1,673 7,601 9,214 ROE (%) 28.8 -2.1 -10.9 -1.4 6.3 7.2 P/E (x) 6.7 - - - 15.9 13.1 P/B (x) 1.6 1.2 1.6 1.0 1.0 0.9 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 45
October 6, 2014 Oil Refining/Chemicals
TableTableTable 383838.38 . Quarterly and annual earnings (Wbn, %, ‘000 tonnes, US$/kg, US$/tonne) 201320132013 2014F2014F2014F 201320132013 2014F2014F2014F 2015F2015F2015F 1Q131Q131Q13 2Q132Q132Q13 3Q133Q133Q13 4Q134Q134Q13 1Q141Q141Q14 2Q142Q142Q14 3Q14F 4Q14F Total 780 716 728 731 798 757 781 798 2,955 3,134 3,531 Basic chemical 491 428 444 466 521 484 485 531 1,829 2,021 2,403 Polysilicon 221 154 177 198 242 210 202 246 751 900 1,249 Revenue OCI materials 53 51 47 41 44 48 53 55 191 199 234 Other 217 222 221 227 235 227 230 230 887 922 920 Carbon chemical 321 321 329 300 310 321 329 300 1,271 1,260 1,260 Other -32 -33 -45 -35 -33 -33 -33 -33 -145 -132 -132 Total -24 18 -57 -43 28 34 15 31 -106 108 397 Basic chemical -40 -3 -73 -34 14 31 5 32 -150 82 344 Polysilicon -67 -29 -110 -51 -19 -5 -31 3 -257 -53 186 Operating OCI materials 5 2 0 0 1 5 7 9 7 21 47 Profit Other 22 25 37 17 32 30 30 20 100 112 110 Carbon chemical 25 30 26 7 27 17 20 10 88 74 75 Other -9 -9 -10 -16 -13 -14 -11 -11 -44 -48 -22 Pretax profit -27 -29 -77 -50 36 15 -57 -21 -183 -27 302 Net profit -42 -195 -68 -23 18 -9 -35 -13 -328 -40 181 Polysilicon sales 9,875 7,650 8,925 9,975 10,944 10,500 8,800 10,500 36,425 40,744 50,038 Polysilicon ASP 18 18 18 18 21 22 20 23 18 21 25 Polysilicon cost 25 23 27 23 22 22 24 23 23 23 21 Source: KDB Daewoo Securities Research
TableTableTable 393939.39 . 3Q14F preview (Wbn, %, %p) 3Q14F Growth 3Q133Q133Q13 2Q142Q142Q14 KDB Daewoo Consensus YoYYoYYoY QoQQoQQoQ Revenue 728 757 781 786 7.3 3.2 Operating profit -57 34 15 26 TTB -56.8 OP margin -7.8 4.5 1.9 3.4 9.7 -2.6 Pretax profit -77 15 -57 14 RR TTR Net profit -68 -9 -35 15 RR RR Source: WISEfn, KDB Daewoo Securities Research
TableTableTable 404040.40 . Earnings forecast revisions (Wbn, %, %p) Previous Revised % chg% chg.chg ... 14F14F14F 15F15F15F 14F14F14F 15F15F15F 14F14F14F 15F15F15F Revenue 3,164 3,525 3,134 3,531 -0.9 0.2 Operating profit 141 433 108 397 -23.2 -8.4 Net profit 34 213 -40 181 TTR -14.9 OP margin 4.5 12.3 3.5 11.2 -1.0 -1.0 Net margin 1.1 6.0 -1.3 5.1 -2.3 -0.9 Source: KDB Daewoo Securities Research
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October 6, 2014 Oil Refining/Chemicals
OCI (010060 KS/Hold)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F (Wbn) 12/13 12/14F 12/15F 12/16F Revenue 2,9562,9562,956 3,1333,1333,133 3,5313,5313,531 3,5833,5833,583 Current Assets 1,8451,8451,845 2,0082,0082,008 2,2092,2092,209 2,8022,8022,802 Cost of Sales 2,7052,7052,705 2,6482,6482,648 2,7572,7572,757 2,7442,7442,744 Cash and Cash Equivalents 352 483 549 1,222 Gross Profit 251251251 485485485 774774774 839839839 AR & Other Receivables 771 819 929 902 SG&A Expenses 357357357 378378378 377377377 377377377 Inventories 436 486 551 535 Operating Profit (Adj) ---106 -106106106 108108108 397397397 462462462 Other Current Assets 286 220 180 143 Operating Profit ---106 -106106106 108108108 397397397 462462462 NonNonNon-Non ---CurrentCurrent Assets 5,4575,4575,457 5,6395,6395,639 5,8865,8865,886 5,7175,7175,717 NonNonNon-Non ---OperatingOperating Profit ---77 -777777 ---135-135135135 ---95-959595 ---95-959595 Investments in Associates 89 97 110 106 Net Financial Income -72 -84 -95 -95 Property, Plant and Equipment 4,779 4,964 5,199 5,038 Net Gain from Inv in Associates 9 5 0 0 Intangible Assets 146 140 137 133 Pretax Profit -183 -27 302 367 Total Assets 7,3027,3027,302 7,6477,6477,647 8,0948,0948,094 8,5198,5198,519 Income Tax 105 -6 75 93 Current Liabilities 1,5801,5801,580 1,7811,7811,781 1,8021,8021,802 1,7731,7731,773 Profit from Continuing Operations -288 -21 227 275 AP & Other Payables 691 709 730 709 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 647 830 830 830 Net Profit ---288 -288288288 ---21-212121 227227227 275275275 Other Current Liabilities 242 242 242 234 Controlling Interests -328 -40 181 220 NonNonNon-Non ---CurrentCurrent Liabilities 2,4492,4492,449 2,6722,6722,672 2,8722,8722,872 3,0503,0503,050 Non-Controlling Interests 40 19 45 55 Long-Term Financial Liabilities 1,733 1,955 2,155 2,355 Total Comprehensive Profit ---291 -291291291 ---46-464646 227227227 275275275 Other Non-Current Liabilities 716 717 717 695 Controlling Interests -330 -72 250 303 Total Liabilities 4,0294,0294,029 4,4534,4534,453 4,6744,6744,674 4,8244,8244,824 Non-Controlling Interests 39 26 -23 -28 Controlling Interests 2,8322,8322,832 2,7692,7692,769 2,9512,9512,951 3,1703,1703,170 EBITDA 422 638 965 1,027 Capital Stock 127 127 127 127 FCF (Free Cash Flow) -391 -333 -168 436 Capital Surplus 800 790 790 790 EBITDA Margin (%) 14.3 20.4 27.3 28.7 Retained Earnings 1,935 1,895 2,076 2,296 Operating Profit Margin (%) -3.6 3.4 11.2 12.9 NonNonNon-Non ---ControllingControlling Interests 441441441 425425425 470470470 525525525 Net Profit Margin (%) -11.1 -1.3 5.1 6.1 Stockholders' Equity 3,2733,2733,273 3,1943,1943,194 3,4213,4213,421 3,6953,6953,695
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/1312/1312/13 12/14F 12/15F 12/16F 12/1312/1312/13 12/14F 12/15F 12/16F Cash Flows from Op Activities 28 349 632 836 P/E (x) - - 15.9 13.1 Net Profit -288 -21 227 275 P/CF (x) 9.2 5.1 3.0 2.8 Non-Cash Income and Expense 784 591 739 753 P/B (x) 1.6 1.0 1.0 0.9 Depreciation 521 526 565 562 EV/EBITDA (x) 16.1 8.6 5.9 5.2 Amortization 8 4 4 3 EPS (W) -13,741 -1,673 7,601 9,214 Others 255 61 170 188 CFPS (W) 20,802 23,905 40,487 43,072 Chg in Working Capital -169 -25 -163 -4 BPS (W) 118,766 116,118 123,718 132,932 Chg in AR & Other Receivables -112 -85 -101 25 DPS (W) 0 0 0 200 Chg in Inventories 125 -47 -65 16 Payout ratio (%) 0.0 0.0 0.0 1.7 Chg in AP & Other Payables -17 20 21 -5 Dividend Yield (%) 0.0 0.0 0.0 0.2 Income Tax Paid ---234 -234234234 ---115-115115115 ---75-757575 ---93-939393 Revenue Growth (%) -8.1 6.0 12.7 1.5 Cash Flows from Inv Activities -252 -599 -753 -366 EBITDA Growth (%) -39.6 51.2 51.3 6.4 Chg in PP&E -411 -681 -800 -400 Operating Profit Growth (%) - - 267.6 16.4 Chg in Intangible Assets -2 0 0 0 EPS Growth (%) - - - 21.2 Chg in Financial Assets 151 70 47 34 Accounts Receivable Turnover (x) 4.7 4.3 4.4 4.3 Others 101010 121212 000 000 Inventory Turnover (x) 6.1 6.8 6.8 6.6 Cash Flows from Fin Activities 131 403 200 200 Accounts Payable Turnover (x) 18.3 18.0 16.6 15.7 Chg in Financial Liabilities 181 405 200 200 ROA (%) -3.9 -0.3 2.9 3.3 Chg in Equity -1 -9 0 0 ROE (%) -10.9 -1.4 6.3 7.2 Dividends Paid -106 -31 0 0 ROIC (%) -3.0 1.6 5.2 5.9 Others 575757 383838 000 000 Liability to Equity Ratio (%) 123.1 139.4 136.6 130.5 Increase (Decrease) in Cash -94 131 65 673 Current Ratio (%) 116.8 112.7 122.6 158.0 Beginning Balance 446 352 483 549 Net Debt to Equity Ratio (%) 55.1 67.3 68.2 51.2 Ending Balance 352352352 483483483 549549549 1,2221,2221,222 Interest Coverage Ratio (x) -1.2 1.1 3.7 4.1 Source: Company data, KDB Daewoo Securities Research estimates
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October 6, 2014 Oil Refining/Chemicals
Hanwha Chemical (009830 KS) Recovery of Chinese demand holds the key to a rebound
Chemicals 3Q preview: OP to miss consensus due to market slowdown
We expect Hanwha Chemical’s 3Q operating profit to come in at W33.7bn, below the (Maintain) Hold consensus. The recovery of the chemicals market was slow amid the sluggish Chinese economy. In particular, the rise in ethylene (feedstock) prices outpaced the rise in chemical Target Price (12M, W) - prices, which we believe caused the chemical spreads of Hanwha Chemical (which purchases ethylene from its subsidiary Yeochun NCC) to shrink. The PVC unit seems to have remained tepid due to the weak Chinese construction market, as well as a supply glut. In addition, we Share Price (10/02/14, W) 13,400 forecast that Ningbo PVC, the company’s Chinese subsidiary, remained in the red. Meanwhile, the polysilicon unit is estimated to have curtailed losses, as costs have dropped to the low- to Expected Return - mid-US$20/kg range due to the facility now operating at full capacity.
OP (14F, Wbn) 193 We do not expect any significant improvement in solar PV selling prices and shipments, Consensus OP (14F, Wbn) 216 considering the slow recovery of the solar PV market. Materials sales to automakers seem to have been solid. However, IT materials sales might have been hurt by weak EPS Growth (14F, %) 433.1 handset demand. Earnings at Yeochun NCC are forecast to have grown QoQ in light of Market EPS Growth (14F, %) 8.1 strong spreads of ethylene. P/E (14F, x) 43.1 Market P/E (14F, x) 12.0 The recovery of Chinese demand holds the key to 4Q earnings KOSPI 1,976.16 We believe the recovery of Chinese solar PV demand will hold the key to the company’s Market Cap (Wbn) 2,170 4Q earnings. In September, China announced measures to support distributed solar Shares Outstanding (mn) 163 power generation systems, and Chinese demand has been improving steadily since then. Free Float (%) 63.1 Indeed, with 20MW-or-smaller facilities set to receive government subsidies as Foreign Ownership (%) 17.2 distributed systems, uncertainties surrounding distributed solar power systems have Beta (12M) 1.31 largely dissipated. However, the pace of the demand pickup is not rapid. Thus, we advise 52-Week Low 13,400 investors to pay attention to whether additional demand stimulus policies will emerge in 52-Week High 24,200 4Q (e.g., subsidies from local governments).
(%)(%)(%) 1M1M1M 6M6M6M 12M12M12M If Chinese demand picks up full swing, this will lead to a short-term rebound in Absolute -15.7 -32.5 -37.1 polysilicon prices. That would likely cause polysilicon losses to decrease and the Relative -12.5 -31.8 -36.3 company’s solar PV shipments to grow, boosting the company’s earnings. Given that the Chinese government reaffirmed its commitment to achieving its 2014 target, we think it 130 Hanwha Chemical KOSPI is likely that polysilicon prices and shipments will somehow pick up in 4Q. We project the 110 company’s 4Q operating profit to improve to W54.8bn.
90 Remain Hold; Pace of earnings recovery not expected to be rapid 70 If solar PV demand recovers in 4Q, Hanwha Chemical’s 4Q earnings will likely improve. 50 9.13 1.14 5.14 9.14 However, we do not expect a dramatic improvement. Furthermore, uncertainties over whether the company will acquire the petrochemical business of Dow Chemical are expected to linger. A significant uptrend for the stock will require a meaningful recovery of the chemicals market, an improved solar PV market, and the dissipation of uncertainties. We maintain our Hold rating.
FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Revenue (Wbn) 7,943 6,962 7,864 7,961 7,824 8,044 OP (Wbn) 326 5 98 193 336 423 OP margin (%) 4.1 0.1 1.2 2.4 4.3 5.3 NP (Wbn) 254 30 8 49 172 244 EPS (W) 1,793 209 58 311 1,054 1,497 ROE (%) 7.1 0.7 0.2 1.2 3.9 5.3 P/E (x) 13.7 87.7 369.3 43.1 12.7 9.0 P/B (x) 0.8 0.6 0.8 0.5 0.5 0.5 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
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October 6, 2014 Oil Refining/Chemicals
TableTableTable 414141.41 . Quarterly and annual earnings (Wbn, %) 201320132013 201420142014 201320132013 2012012014F201 4F4F4F 2012012015201 555FFFF 1Q1Q1Q 2Q2Q2Q 3Q3Q3Q 4Q4Q4Q 1Q1Q1Q 2Q2Q2Q 3QF3QF3QF 4QF4QF4QF Revenue Total 1,780 1,981 2,085 2,018 1,957 2,104 2,005 1,894 7,864 7,961 7,824 Chemicals 822 900 927 936 867 941 1,076 897 3,585 3,781 3,923 China PVC 70 105 104 85 69 89 98 93 364 350 385 Solar PV 376 399 452 510 499 502 488 544 1,736 2,033 2,074 Manufacturing 363 411 427 448 406 447 208 187 1,649 1,249 842 Retail 118 121 112 144 117 139 135 173 495 563 600 Other 31 45 64 -105 -1 -14 0 0 35 -15 0 Operating Total -9 32 41 34 83 22 34 55 98 193 336 profit Chemicals 12 29 26 22 21 -6 2 4 90 22 102 China PVC -6 -6 2 -8 -5 -10 -6 -3 -18 -24 8 Solar PV -28 -34 -25 -17 24 1 10 15 -104 51 52 Manufacturing 16 23 21 12 25 15 17 12 72 70 112 Retail 12 14 4 30 12 11 5 26 59 54 62 Other -15 7 14 -5 6 10 5 0 -1 22 0 Equity-method gains 42 -10 13 7 4 21 31 17 49 73 108 Pretax profit 9 -46 -10 5 25 -1 13 21 -43 57 245 Net profit 25 -34 -2 19 20 5 9 14 8 49 172 OP margin -0.5 1.6 2.0 1.7 4.2 1.0 1.7 2.9 1.2 2.4 4.3 Net margin 1.4 -1.7 -0.1 0.9 1.0 0.3 0.4 0.8 0.1 0.6 2.2 Source: KDB Daewoo Securities Research
TableTableTable 424242.42 . Earnings forecast revisions (Wbn, %, %p) Previous Revised % chg% chg.chg ... 14F14F14F 15F15F15F 14F14F14F 15F15F15F 14F14F14F 15F15F15F Revenue 8,112 8,088 7,961 7,824 -1.9 -3.3 Operating profit 217 367 193 336 -10.9 -8.5 Net profit 71 194 49 172 -31.6 -11.4 OP margin 2.7 4.5 2.4 4.3 -0.2 -0.2 Net margin 0.9 2.4 0.6 2.2 -0.3 -0.2 Source: KDB Daewoo Securities Research
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October 6, 2014 Oil Refining/Chemicals
Hanwha Chemical (009830 KS/Hold)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F (Wbn) 12/13 12/14F 12/15F 12/16F Revenue 7,8647,8647,864 7,9617,9617,961 7,8247,8247,824 8,0448,0448,044 Current Assets 4,4704,4704,470 4,7044,7044,704 4,8724,8724,872 5,0795,0795,079 Cost of Sales 6,5996,5996,599 6,6136,6136,613 6,3346,3346,334 6,4676,4676,467 Cash and Cash Equivalents 920 1,447 1,422 1,516 Gross Profit 1,2651,2651,265 1,3481,3481,348 1,4901,4901,490 1,5771,5771,577 AR & Other Receivables 1,493 1,271 1,346 1,390 SG&A Expenses 1,1671,1671,167 1,1551,1551,155 1,1551,1551,155 1,1551,1551,155 Inventories 1,738 1,687 1,788 1,845 Operating Profit (Adj) 989898 193193193 336336336 423423423 Other Current Assets 319 299 316 328 Operating Profit 989898 193193193 336336336 423423423 NonNonNon-Non ---CurrentCurrent Assets 8,3378,3378,337 7,8857,8857,885 7,8357,8357,835 7,7637,7637,763 NonNonNon-Non ---OperatingOperating Profit ---141 -141141141 ---136-136136136 ---91-919191 ---75-757575 Investments in Associates 1,278 1,199 1,270 1,311 Net Financial Income -209 -209 -199 -189 Property, Plant and Equipment 5,994 5,673 5,557 5,452 Net Gain from Inv in Associates 53 73 108 114 Intangible Assets 471 439 422 407 Pretax Profit -43 57 245 348 Total Assets 12,807 12,589 12,707 12,842 Income Tax 36 24 54 76 Current Liabilities 4,3974,3974,397 4,4594,4594,459 4,5764,5764,576 4,6434,6434,643 Profit from Continuing Operations -80 34 191 271 AP & Other Payables 1,685 1,501 1,590 1,641 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 2,230 2,506 2,507 2,507 Net Profit ---80 -808080 343434 191191191 271271271 Other Current Liabilities 482 452 479 495 Controlling Interests 8 49 172 244 NonNonNon-Non ---CurrentCurrent Liabilities 3,9533,9533,953 3,3993,3993,399 3,2353,2353,235 3,0553,0553,055 Non-Controlling Interests -88 -15 19 27 Long-Term Financial Liabilities 3,318 2,803 2,603 2,403 Total Comprehensive Profit ---81 -818181 ---61-616161 191191191 271271271 Other Non-Current Liabilities 635 596 632 652 Controlling Interests 1 -26 172 244 Total Liabilities 8,3508,3508,350 7,8587,8587,858 7,8107,8107,810 7,6987,6987,698 Non-Controlling Interests -82 -34 19 27 Controlling Interests 4,0584,0584,058 4,3494,3494,349 4,4954,4954,495 4,7154,7154,715 EBITDA 488 614 749 823 Capital Stock 707 815 815 815 FCF (Free Cash Flow) -268 292 380 446 Capital Surplus 486 717 717 717 EBITDA Margin (%) 6.2 7.7 9.6 10.2 Retained Earnings 2,729 2,755 2,903 3,122 Operating Profit Margin (%) 1.2 2.4 4.3 5.3 NonNonNon-Non ---ControllingControlling Interests 399399399 382382382 402402402 429429429 Net Profit Margin (%) 0.1 0.6 2.2 3.0 Stockholders' Equity 4,4574,4574,457 4,7314,7314,731 4,8974,8974,897 5,1445,1445,144
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (((Wbn)(Wbn)Wbn)Wbn) 12/1312/1312/13 12/14F 12/15F 12/16F 12/1312/1312/13 12/14F 12/15F 12/16F Cash Flows from Op Activities 404 694 660 726 P/E (x) 369.3 43.1 12.7 9.0 Net Profit -80 34 191 271 P/CF (x) 6.5 3.4 2.9 2.7 Non-Cash Income and Expense 550 580 558 552 P/B (x) 0.8 0.5 0.5 0.5 Depreciation 369 402 396 384 EV/EBITDA (x) 16.3 10.3 8.2 7.1 Amortization 20 19 17 16 EPS (W) 58 311 1,054 1,497 Others 161 159 145 152 CFPS (W) 3,330 3,932 4,596 5,046 Chg in Working Capital -44 114 -35 -20 BPS (W) 28,692 26,666 27,569 28,916 Chg in AR & Other Receivables -181 44 -67 -39 DPS (W) 150 150 150 150 Chg in Inventories -3 61 -100 -58 Payout ratio (%) -26.5 72.3 12.7 9.0 Chg in AP & Other Payables 166 -75 67 39 Dividend Yield (%) 0.7 1.1 1.1 1.1 Income Tax Paid ---59 -595959 ---49-494949 ---54-545454 ---76-767676 Revenue Growth (%) 13.0 1.2 -1.7 2.8 Cash Flows from Inv Activities -260 -351 -279 -270 EBITDA Growth (%) 35.9 25.8 22.0 9.9 Chg in PP&E -607 -400 -280 -280 Operating Profit Growth (%) 1,860.0 96.9 74.1 25.9 Chg in Intangible Assets 10 0 0 0 EPS Growth (%) -72.2 436.2 238.9 42.0 Chg in Financial Assets 122 22 -19 -11 Accounts Receivable Turnover (x) 6.4 6.4 6.7 6.6 Others 215215215 272727 202020 212121 Inventory Turnover (x) 5.0 4.6 4.5 4.4 Cash Flows from Fin Activities 190 65 -442 -434 Accounts Payable Turnover (x) 5.7 5.5 5.5 5.3 Chg in Financial Liabilities 386 -239 -199 -199 ROA (%) -0.6 0.3 1.5 2.1 Chg in Equity -3 339 0 0 ROE (%) 0.2 1.2 3.9 5.3 Dividends Paid -38 -23 -25 -25 ROIC (%) 2.3 1.5 3.6 4.5 Others ---155 -155155155 ---12-121212 ---218-218218218 ---210-210210210 Liability to Equity Ratio (%) 187.4 166.1 159.5 149.7 Increase (Decrease) in Cash 326 526 -25 94 Current Ratio (%) 101.7 105.5 106.5 109.4 Beginning Balance 594 920 1,447 1,422 Net Debt to Equity Ratio (%) 101.0 79.2 72.8 63.5 Ending Balance 920920920 1,4471,4471,447 1,4221,4221,422 1,5161,5161,516 Interest Coverage Ratio (x) 0.4 0.9 1.5 2.0 Source: Company data, KDB Daewoo Securities Research estimates
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October 6, 2014 Oil Refining/Chemicals
APPENDIX 1
Important Disclosures & Disclaimers 222-2---YearYear Rating and Target Price History
Company (((Code)(Code)Code)Code) DateDateDate RatingRatingRating Target Price Company (((Code)(Code)Code)Code) DateDateDate RatingRatingRating Target Price LG Chem(051910) 10/05/2014 Buy 330,000 SK Innovation(096770) 10/05/2014 Buy 120,000 07/20/2014 Buy 350,000 06/24/2014 Buy 140,000 03/24/2014 Buy 330,000 04/08/2014 Buy 160,000 01/27/2014 Buy 350,000 02/04/2014 Buy 180,000 09/04/2013 Buy 380,000 01/07/2014 Buy 200,000 04/21/2013 Buy 320,000 07/28/2013 Buy 220,000 10/21/2012 Buy 380,000 04/21/2013 Buy 200,000 07/19/2012 Buy 340,000 01/22/2013 Buy 220,000 Hyosung(004800) 02/23/2014 Buy 95,000 09/27/2012 Buy 200,000 No Coverage GS Holdings(078930) 10/05/2014 Buy 50,000 Toray Chemical Korea(008000) 08/18/2014 Buy 17,000 06/24/2014 Buy 55,000 Huchems(069260) 10/05/2014 Buy 30,000 04/08/2014 Buy 65,000 08/13/2014 Buy 32,000 02/06/2014 Buy 60,000 06/18/2013 Buy 28,000 01/22/2014 Buy 65,000 01/04/2013 Buy 35,000 10/07/2013 Buy 70,000 No Coverage 04/21/2013 Buy 65,000 Lotte Chemical(011170) 10/05/2014 Buy 190,000 08/16/2012 Buy 80,000 04/28/2014 Buy 220,000 S-Oil(010950) 10/05/2014 Buy 50,000 03/24/2014 Buy 240,000 06/24/2014 Buy 65,000 02/05/2014 Buy 260,000 04/08/2014 Buy 70,000 10/14/2013 Buy 280,000 01/22/2014 Buy 85,000 01/22/2013 Hold - 04/21/2013 Buy 100,000 No Coverage 08/16/2012 Buy 130,000 Kumho Petrochemical(011780) 10/05/2014 Trading Buy 90,000 OCI(010060) 10/17/2012 Hold - 01/22/2014 Trading Buy 100,000 07/25/2012 Trading Buy 210,000 10/14/2013 Trading Buy 120,000 Hanwha Chemical(009830) 06/25/2012 Hold - 07/19/2012 Hold -
(W) LG Chem (W) Hyosung (W) Toray Chemical Korea (W) Huchems 400,000 100,000 20,000 40,000
80,000 300,000 15,000 30,000
60,000 200,000 10,000 20,000 40,000
100,000 5,000 10,000 20,000
0 0 0 0 Oct 12 Oct 13 Oct 14 Oct 12 Oct 13 Oct 14 Oct 12 Oct 13 Oct 14 Oct 12 Oct 13 Oct 14
(W) Lotte Chemical (W) Kumho Petrochemical (W) SK Innovation (W) GS Holdings 300,000 150,000 250,000 100,000
250,000 200,000 80,000 200,000 100,000 150,000 60,000 150,000 100,000 40,000 100,000 50,000
50,000 50,000 20,000
0 0 0 0 Oct 12 Oct 13 Oct 14 Oct 12 Oct 13 Oct 14 Oct 12 Oct 13 Oct 14 Oct 12 Oct 13 Oct 14
(W) S-Oil (W) OCI (W) Hanwha Chemical 150,000 250,000 30,000
200,000 25,000 100,000 20,000 150,000 15,000 100,000 50,000 10,000
50,000 5,000
0 0 0 Oct 12 Oct 13 Oct 14 Oct 12 Oct 13 Oct 14 Oct 12 Oct 13 Oct 14
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October 6, 2014 Oil Refining/Chemicals
Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price ( ─), Target price ( ▬), Not covered ( ■), Buy ( ▲), Trading Buy ( ■), Hold ( ●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.
Disclosures As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of Hanwha Chemical, OCI, S-Oil, Lotte Chemical, Kumho Petro Chemical, LG Chem, SK Innovation, GS Holdings as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with Hanwha Chemical, OCI, S-Oil, Lotte Chemical, Kumho Petro Chemical, LG Chem, SK Innovation, GS Holdings as an underlying asset, and other than this, Daewoo Securities has no other spe cial interests in the covered companies. As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for single stock futures backed by shares of Lotte Chemical, SK Innovation, GS Holdings as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies.
Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.
Disclaimers This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.
Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.
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October 6, 2014 Oil Refining/Chemicals
KDB Daewoo Securities International Network
Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 320 Park Avenue 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 31st Floor
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