Thursday, 26 January 2017 Macq-ro insights 3 Global slump scenarios and the EM economies that Peter Eadon-Clarke concern us the most When economies are running hard in one direction, we believe it is wise to research the other. With the global recovery maturing, we examine 3 scenarios that would lead to global growth beneath 2.5% pa, our definition of a slump. POSCO (Outperform) 4 Weak results, but solid outlook Anna Park POSCO reported seemingly disappointing 4Q16 results with OP of Won472bn. 4Q16 results miss is not as bad as it looks. POSCO's 4Q16 OP came in at Won472bn (+38.3% YoY), missing both our estimate of Won811bn and the street's recently revised down estimate of Won660bn by big margin. Hyundai Motor Company (Outperform) 5 Domestic market matters James Hong Hyundai Motor Company (HMC) reported a disappointing 4Q16 earnings. Its OP came in lower than what we expected even after considering a surge in warranty provisions (non-cash item in SG&A). Indonesia telecoms, towers 6 Follow the network investment Nathania Nurhalim We expect to see the beginning of 4G monetization drive further strong revenue momentum in 2017 for the Indonesian telco industry. As 4G utilization is on the rise, operators suggest that some pricing uplifts should be due in the near term. Korea consumer sector 7 Making money during tough times Kwang Cho We expect a challenging macro environment for the Korean consumer sector after the consumer sentiment index hit its lowest level since the Global Financial Crisis. Alibaba Group Holding (Outperform) 8 CNOOC (Outperform) 9 Crompton Consumer (Outperform) 10 Guangzhou Automobile (Outperform) 11 Lens Tech (A-Share) (Outperform) 12 LINE (Neutral) 13 Mahindra & Mahindra Fin. Services (Outperform) 14 Please refer to page 30 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. Maruti Suzuki (Outperform) 15 Maybank (Neutral) 16 Right-On (Downgrade to Underperform) 17 Sakata Seed (Outperform) 18 Samsung ElectroMechanics (Neutral) 19 Samsung Engineering (Outperform) 20 SUMCO (Outperform) 21 Tung Thih (Outperform) 22 TVS Motors (Neutral) 23 XL Axiata (Outperform) 24 Wipro (Neutral) 25 Wockhardt (Neutral) 26 Hong Kong Property 27 Hong Kong Property 28 Macquarie Commodities Comment 29 2 GLOBAL Macq-ro insights Global slump scenarios and the EM economies that concern us the most When economies are running hard in one direction, we believe it is wise to research the other. With the global recovery maturing, we examine 3 scenarios that would lead to global growth beneath 2.5% pa, our definition of a slump. Our 2016, 2017 and 2018 global real GDP growth forecasts are 2.6%, 3.0% & 2.9%, respectively. Our long-standing ‘long grinding cycle thesis’ is for global Why this issue matters to investors growth to remain in a 2.5-3.0% pa range. 1) A global slump and associated commodity With the economies of the US, the Eurozone and China each being around 20% price weakness would return EM of global GDP (using market exchange rate weights), then our three scenarios commodity-exporters to the difficult have each in turn growing 2% less than currently forecast. Each scenario takes adjustment years of 2011-15 0.4% off global growth directly, with spill over consequences doing the rest: 2) Vulnerabilities vary depending on a country’s export composition and the Global slump scenarios policy reaction 1) The US risk scenario was detailed in The US economy, Oil, and Overheating wherein 3) We recommend focussing on the fiscal surging oil prices towards US$80 spur energy capex into an increasingly tight labour deficit as the best indicator of a country’s market, leading in time to the Fed having to catch up aggressively with inflationary struggle with adjustment. pressures 2) For the Eurozone it is a repeat of the 2011-13 recession, a banking crisis, liquidity crunch 4) The countries with relatively high fiscal and inappropriately tight fiscal policy. Over the longer term, we agree with the Eurozone’s deficits are: Venezuela, Egypt, Saudi Achilles’ heel that “monetary union must be complemented by fiscal union and Arabia, Brazil, Zambia, Bolivia and mutualisation of debt; or the Euro is ultimately doomed” Argentina 3) Whilst 2% off our current forecasts for the US and the Eurozone lead to slightly positive Our forecasts: and slightly negative real GDP growth respectively, for China it implies that the ongoing gentle fade in growth, we forecast 6.5% growth in 2017 and 6.0% in 2018, becomes a Please see the 17 January 2017 The Global quicker slide to 4.0% to 4.5%.The Is China on the wrong side of history? note has a Macro Outlook. Online access to our global discussion of China’s growth model. macro forecasts is available on request Our risk assessments 1) This is a boom & bust cycle, which we believe is low risk (a probability of 10%) partially Analyst(s) because of the downside risks in 3). We do not believe protectionism enhances growth. Macquarie Capital Securities (Japan) Limited Peter Eadon-Clarke 2) We judge another banking-led crisis in the Eurozone to be also low risk (10% probability). +81 3 3512 7850 [email protected] The Eurozone, four years behind the US, has begun an employment-, consumption-, Nara Song consumer credit-led recovery. Growth above trend provides some room to tackle financial +81 3 3512 7878 [email protected] sector problems Macquarie Capital Markets Canada Ltd. 3) China’s ability to use its policy tools to gently fade growth could be impaired by an David Doyle, CFA increasing number of impediments from the US, e.g. a) tightening US monetary policy, b) +1 416 848 3663 [email protected] an activist US trade policy (Fortress America: Buy America! Trade policy is great again), Macquarie Securities (Australia) Limited c) increasingly tense US-China diplomatic relations. We judge this to be a low but rising James McIntyre, CFA +61 2 8232 8930 [email protected] risk (15% probability) Macquarie Capital Limited Source: Macquarie Research, January 2017 Larry Hu, PhD +852 3922 3778 [email protected] Jerry Peng The EM economies that concern us the most +852 3922 3548 [email protected] Macquarie Capital Securities India (Pvt) Ltd With a global growth shock, we believe attention would return to the underlying Tanvee Gupta Jain +91 22 6720 4355 [email protected] vulnerabilities of EM commodity-exporters. 2016 has provided cyclical relief in Macquarie Equities South Africa (Pty) Ltd global industrial production and related commodity prices. The adjustment that Elna Moolman +27 11 583 2570 [email protected] began in 2011, however, has further to run, in our opinion, pages 2-12. We Macquarie Capital (Europe) Limited recommend focussing on the fiscal deficit as the best indicator of a country’s Matthew Turner struggle with adjustment. The countries with relatively high fiscal deficits are: +44 20 3037 4340 [email protected] Venezuela, Egypt, Saudi Arabia, Brazil, Zambia, Bolivia and Argentina. 25 January 2017 Please refer to page 62 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. 3 KOREA POSCO 005490 KS Outperform Weak results, but solid outlook Price (at 12:31, 25 Jan 2017 GMT) Won267,500 Valuation Won 320,000 Event - Price to Book 12-month target Won 320,000 . POSCO reported seemingly disappointing 4Q16 results with OP of Upside/Downside % +19.6 Won472bn. 12-month TSR % +22.6 Volatility Index Medium Impact GICS sector Materials . 4Q16 results miss is not as bad as it looks. POSCO’s 4Q16 OP came in at Market cap Wonbn 23,323 Won472bn (+38.3% YoY), missing both our estimate of Won811bn and the Market cap US$m 20,266 street’s recently revised down estimate of Won660bn by big margin. However, Free float % 78 looking into the details, the OP miss of Won339bn compared to our estimate 30-day avg turnover US$m 63.1 mainly came from Won360bn of one-off expense from POSCO E&C without Number shares on issue m 87.19 which normalized OP would’ve been Won832bn (details are on pg 2). Investment fundamentals Furthermore, steel core OP, especially, was solid, coming in at Won636bn Year end 31 Dec 2015A 2016E 2017E 2018E which is in line with our estimate of Won686bn. If we add back one-off Revenue bn 58,192 53,340 62,370 60,529 EBIT bn 2,410 2,845 3,563 3,778 expenses the parent POSCO incurred (employee bonus of Won50bn and EBIT growth % -25.0 18.0 25.3 6.0 maintenance expense of Won70bn), normalized core steel OP would’ve been Reported profit bn -96 1,290 1,832 2,073 Adjusted profit bn 181 1,491 2,107 2,380 Won756bn – which is even better than our estimate of Won686bn. EPS rep Won -1103 14,799 21,011 23,778 EPS rep growth % nmf nmf 42.0 13.2 . Margin expansion is ahead of us. Looking at 1Q17, we estimate that EPS adj Won 2,072 17,097 24,162 27,298 EPS adj growth % -71.1 725.3 41.3 13.0 POSCO’s OP will recover to Won713bn. While the street seems still PER rep x nmf 18.1 12.7 11.2 concerned over the sharp rise in coal and iron ore input costs in 1Q17, we PER adj x 129.1 15.6 11.1 9.8 differ. We believe the current price gap between coal spot price (175$/t) and Total DPS Won 8,000 8,000 8,000 8,000 Total div yield % 3.0 3.0 3.0 3.0 contract price (285$/t) should bode well for POSCO’s 1Q and beyond ROA % 2.9 3.6 4.5 4.7 earnings.