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Hanjin Transportation (002320 KS) Parcel Delivery and Stevedoring to Lead the Way

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Hanjin Transportation (002320 KS) Parcel Delivery and Stevedoring to Lead the Way Hanjin Transportation (002320 KS) Parcel delivery and stevedoring to lead the way Logistics An asset-based logistics provider oriented toward parcel delivery Hanjin Transportation, the logistics arm of the Hanjin Group (established in 1958), Initiation Report mainly engages in ground transport, stevedoring, shipping, and parcel delivery October 28, 2015 operations. As of 2014, parcel delivery accounted for 27.3% of revenue, ground transport 27.2%, and stevedoring 15.8%. Among the company’s business divisions, we believe investors should pay particular attention to parcel delivery, which generates (Initiate) Buy more than 27% of revenue and 47% of operating profit. Investment points: Urban logistics complex and container terminals Target Price (12M, W) 60,000 1) Parcel delivery reinforced by the new Seoul Integrated Freight Terminal : Major Share Price (10/28/15, W) 45,100 retailers and manufacturers (cargo owners) are increasingly coming to realize the importance of delivery service competitiveness. The new Seoul Integrated Freight Expected Return 33% Terminal commenced operations in September, boosting Hanjin Transportation’s terminal capacity by 30%. Given rapid market growth, as well as the favorable location and state-of-the-art facilities of the new complex, we expect terminal utilization ratio to OP (15F, Wbn) 46 reach the mid-80% level in 4Q15 . Volume growth should lead to operating leverage Consensus OP (15F, Wbn) 47 effects, further lifting margins. EPS Growth (15F, %) 149.3 2) Opportunities from container terminals: We believe stevedoring will grow into a Market EPS Growth (15F, %) 20.6 major business that contributes 10-13% of the company’s operating profit (vs. 3.2% in P/E (15F, x) 5.0 2014), driven by the Pyeongtaek Container Terminal (which was acquired in 2Q15) and Market P/E (15F, x) 11.9 Incheon New Port Terminal A (which is set to open in early 2016). There are also talks of KOSPI 2,042.51 the company potentially acquiring Hanjin Newport (Pusan Newport International Market Cap (Wbn) 540 Terminal) from Hanjin Shipping. If the deal goes through, this could boost our 2016 Shares Outstanding (mn) 12 operating profit estimate by 38.3%. Free Float (%) 65.3 3) Non-operating assets: In July, Hanjin Transportation sold its stake (5.79mn shares) in Foreign Ownership (%) 9.5 Korean Air for W217bn. The company also has holdings in Seoul Express Bus Terminal Beta (12M) 1.69 52-Week Low 40,500 valued at roughly W160bn. We believe the company will use the proceeds from its 52-Week High 69,200 Korean Air stake sale to pay down its debt. As such, debt-to-equity ratio and interest expenses should decline, which should in turn drive up ROE. (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M Absolute -6.0 -25.0 -14.4 Initiate coverage with Buy and TP of W60,000 Relative -10.6 -21.1 -19.3 We initiate our coverage on Hanjin Transportation with a Buy recommendation and target price of W60,000. We derived our target price using a sum-of-the-parts 150 HanjinTrnspt KOSPI methodology. With the Korean Air stake sale now complete and earnings set to 130 meaningfully improve, we only reflected non-operating assets that are readily disposable 110 into our valuation. Our target price implies a 2016F P/B of 0.8x , which we believe is 90 highly achievable, given the expected pace of earnings growth led by parcel delivery. 70 Furthermore, if the Hanjin Newport acquisition comes to pass, this would boost 10.14 2.15 6.15 10.15 earnings, potentially leading to multiple expansion. Daewoo Securities CCo.,o., Ltd. FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 1,437 1,500 1,533 1,646 1,778 1,831 [Transportation/Energy] OP (Wbn) 38 40 53 46 64 69 Choong-hyun Kim OP margin (%) 2.6 2.7 3.5 2.8 3.6 3.8 +822-768-4126 NP (Wbn) -10 -7 44 108 49 54 [email protected] EPS (W) -842 -577 3,634 9,059 4,090 4,476 ROE (%) -1.3 -1.0 5.9 13.4 5.6 5.9 Jay JH Ryu P/E (x) - - 14.9 5.0 11.0 10.1 +822-768-4175 P/B (x) 0.3 0.3 0.8 0.6 0.6 0.6 jay.ryu @dwsec.com Notes: 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 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 28, 2015 Hanjin Transportation C O N T E N T S I. Investment points 3 1. Parcel delivery reinforced by the new Seoul Integrated Freight Terminal 2. Opportunities from container terminals 3. Non-operating assets II. Valuation 4 Initiate coverage with Buy and TP of W60,000 III. Industry analysis 5 Asset-based logistics provider to outperform non-asset-based rivals IV. Major businesses 11 1. Seoul Integrated Freight Terminal holds the key to Hanjin’s competitiveness 11 2. Stevedoring unit 12 V. Value of non-operating assets 14 Sale of non-operating assets to lower debt-to-equity ratio, leading to higher ROE VI. Earnings outlook 15 1. 3Q15 preview: Revenue of W405.8bn (+7.2% YoY) VII. Risks 17 1. FCF improvement needed 17 2. Competition for second and third place to intensify due to M&As 17 3. Relatively low contribution from overseas operations 18 KDB Daewoo Securities Research 2 October 28, 2015 Hanjin Transportation I. Investment points 1. Parcel delivery reinforced by the new Seoul Integrated Freight Terminal We expect the parcel delivery business to lead Hanjin Transportation’s growth. The new Seoul Integrated Freight Terminal commenced operations in September, boosting the company’s terminal capacity by 30%. Given rapid market growth (driven by an increase in single-person households and the development of the mobile shopping market), as well as the favorable location and state-of-the-art facilities of the new complex, we expect utilization to reach the mid- 80% level in 4Q15. Volume growth should lead to operating leverage effects, further lifting margins. The new terminal, located in Jangji-dong, Songpa-gu, is the only urban freight terminal within Seoul, and its biggest merit is its proximity to the Seoul capital area (SCA). The favorable location should allow the firm to stay ahead of its rivals. 2. Opportunities from container terminals We believe stevedoring will grow into a major business accounting for 10-13% of the company’s operating profit (vs. 3.2% in 2014), driven by the Pyeongtaek Container Terminal (which was acquired in 2Q15) and Incheon New Port Terminal A. The Incheon terminal, set to open in early 2016, is projected to generate W40-60bn in revenue per year (although it may take some time before the business settles down). There are also talks of the company potentially acquiring Hanjin Newport from Hanjin Shipping. If the deal goes through, this could boost our 2016 operating profit estimate by 38.3%, and add at least W130bn per year to revenue. 3. Non-operating assets In July, Hanjin sold its stake (5.79mn shares) in Korean Air for W217bn. The company also has holdings in Seoul Express Bus Terminal, which are valued at roughly W160bn. As of end-2Q15, it held around W820bn worth of interest-bearing liabilities. If the firm uses non-operating assets to pay down its debt, debt-to-equity ratio could fall from 154% to close to 120%. Interest expenses will also decline which should in turn drive up ROE. KDB Daewoo Securities Research 3 October 28, 2015 Hanjin Transportation II. Valuation Initiate coverage with Buy and TP of W60,000 We initiate our coverage on Hanjin Transportation with a Buy recommendation and target price of W60,000. We derived our target price using a sum-of-the-parts methodology. With the Korean Air stake sale now complete and earnings set to meaningfully improve, we only reflected non- operating assets that are readily disposable into our valuation (Incheon New Port Terminal A and the potential acquisition of Hanjin Newport were not taken into account in our valuation.). Hanjin’s stock price was up by as much as 27.7% from early in the year, aided by the strength of the parcel delivery business and the increased value of securities holdings. The stock’s rally came to a halt after the sale of Korean Air shares (W217bn) last July. Our target price implies 2016F P/B of 0.8x, which we believe is highly justifiable, given the expected pace of earnings growth led by parcel delivery. The stock is currently trading at 2016F P/B of 0.6x. We believe that: 1) the new Seoul Integrated Freight Terminal (opened in September) will reinforce Hanjin’s parcel delivery business; 2) the Incheon terminal, set to open in early 2016, will accelerate the firm’s earnings growth; 3) the proceeds from the Korean Air stake sale will be used to pay down debts, helping drive up ROE; and 4) Hanjin Newport, if acquired, will boost valuation. Table 111.1. SumSumSum-Sum ---ofofofof----thethethethe----partsparts valuation (Wbn) ValueValueValue Operating assetassetssss 1,049 EBITDA 107 2016F Target EV/EBITDA 10 2016F average of Asian players NonNonNon-Non ---operatingoperating assetassetssss 172 Seoul Express Bus Terminal 160 Hana Financial Group 5 POSCO 3 eNtoB 3 KL-Net 1 Net debt 512 2016F NAV 709 Shares outstanding (‘000) 11,803 Excluding treasury stocks Target price (W(W(W ))) 60,000 Source: KDB Daewoo Securities Research KDB Daewoo Securities Research 4 October 28, 2015 Hanjin Transportation III.
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