April 4, 2011 Company Report
OCI (010060 KS) Chemicals
Polysilicon price to exceed expectations Yeonju Park +822-768-3061 [email protected] Initiate coverage with Buy call and TP of W670,000 Hannah Yoon We initiate our coverage on OCI with a Buy call and a target price of W670,000 +822-768-4161 (based on a 2011F P/E of 15x; the value of the polysilicon business was derived by [email protected] applying a target EV/EBITDA of 8x to the average of its 2011F~2013F EBITDAs).
Considering OCI is forecast to show a CAGR of a whopping 53% until 2012, we believe that our optimistic 2011 earnings forecasts are reasonable.
Greater-than-expected solar power demand to drive up polysilicon prices
In 2011, solar power demand is anticipated to exceed the market consensus forecast. In the aftermath of the earthquake in Japan, major European nations and the U.S. are likely to maintain generous subsidies for the solar power industry. With Buy (Initiate) a drop in installation costs, generous subsidies would result in a higher internal rate Target Price (12M, W) 670,000 of return, which would drive demand, as in 2010. Share Price (04/01/11, W) 498,000 Expected Return (%): 34.5 34.5 Strong solar power demand should further tighten the already-tight supply of EPS Growth (11F, %) 65.8 polysilicon. In the polysilicon market, only a few firms with cost and quality Market EPS Growth (11F, %) 20.9 competitiveness are capable of achieving aggressive capacity expansion. In light of P/E (X) 11.2 OCIÊs high quality products and strong cost competitiveness (two key elements of Market P/E (04/01/11F, x) 10.8 its polysilicon businessÊ competitiveness), we believe that the company will be able KOSPI(04/01/11F) 2,121.01 to maintain its competitive position in both the near term and the long term. The Market Cap (Wbn) 11,514 company has proved its stellar competitiveness by developing core equipment for Shares Outstanding (mn) 23 Avg Trading Volume (60D, '000) 216 polysilicon production (jointly with GT Solar) and significantly expanding production Avg Trading Value (60D, Wbn) 87 volume through debottlenecking. Dividend Yield (11F, %) 0.7 Free Float (%) 65.9 2011 OP to reach W1.2tr (up 68% YoY), beating expectations 52-Week Low 183,000 With polysilicon prices staying high on the back of greater-than-expected solar 52-Week High 498,000 power demand, the companyÊs 2011 earnings are likely to beat the market Beta (12M, Daily Rate of Return) 1.0 consensus estimate. We forecast OCIÊs operating profit to come in at W290.5bn in Price Return Volatility (12M Daily,%,SD) 2.7 1Q11 and W340.9bn in 2Q11. Production costs are likely to plunge from 4Q11 Foreign Ownership (%) 28.5 once the debottlenecking facility at the third factory begins full operations. As such, Major Shareholder(s) Lee Su Young et al. (32.58%) we forecast full-year OP to reach W1.2tr (up 68% YoY). Miraeasset Asset Management (9.22%)
Price Performance (%) 1M 6M 12M Absolute 33.9 44.3 159.4 § Earnings & Valuation Metrics Relative 24.5 31.3 136.0
OP EV/ Share price Sales OP NP EPS EBITDA FCF ROE P/E P/B FY Margin EBITDA 290 KOSPI (Wbn) (Wbn) (Wbn) (W) (Wbn) (Wbn) (%) (x) (x) (%) (x) 240
12/09 2,102 538 25.6 385 18,161 695 -279 28.4 12.0 3.4 7.8 190 12/10 2,606 717 27.5 617 26,912 936 209 34.9 12.3 3.7 8.4 140 12/11F 3,396 1,206 35.5 1,032 44,624 1,570 243 40.1 11.2 3.7 7.3 90 12/12F 3,980 1,681 42.2 1,395 60,321 2,154 735 37.2 8.3 2.6 5.0 40 12/13F 4,292 1,479 34.5 1,265 54,699 2,095 707 25.3 9.1 2.1 4.9 3/10 7/10 11/10 3/11 Source: Company data, Daewoo Securities Research estimates
Please read carefully important disclosures at the end of this report.
I. Valuation ...... 3
II. Corporate overview...... 6
1. Emerged as the second largest polysilicon maker ...... 6 1) Polysilicon: Core raw material for solar cells...... 8 2) Petro & coal chemicals: Stable growth expected ...... 10 3) LED sapphire ingot: Ready to advance into the market on cost savings...... 11
III. Industry outlook ...... 12
1. Solar cell market outlook...... 12 1) Demand growth to exceed expectations; Market to grow to 100GW in 2020...... 12 2) Europe: Largest solar power consumer...... 13
2. Polysilicon supply to remain tight until 2012...... 19
IV. Investment points ...... 21
1. Polysilicon prices to stay robust on strong solar power demand ...... 21
2. Stiff competition after 2013 unlikely to hamper growth...... 23
V. Earnings forecasts ...... 25
VI. Financial status and risks...... 26
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April 4, 2011 OCI
I. Valuation
1. Valuation of polysilicon business using a target EV/EBITDA of 8x
Target EV/EBITDA: 10% We derived our target price for OCI (W670,000) by applying respective target EV/EBITDA premium to multiple of multiples for all of the companyÊs business divisions to the respective averages of their chemicals sector; 10% 2011F~2013F EBITDAs. We used 2011F~2013F EBITDA numbers to reflect the significant discount to multiple of growth momentum from the companyÊs large-scale polysilicon capacity expansion. Our electronic materials target price, which is equivalent to a 2011F P/E of 15x and a P/B of 5.0x, appears reasonable, sector considering the companyÊs 2011F ROE of 40.1% and its mid- to long-term growth prospects.
The value of OCIÊs polysilicon business was derived using a target EV/EBITDA multiple of 8x. Our target EV/EBITDA multiple is equivalent to a 10% premium to the EV/EBITDA of the chemicals sector and a 10% discount to the EV/EBITDA of the electronic materials sector. The 10% premium to the multiple for the chemicals sector reflects the fact that the polysilicon business has high growth potential and high barriers to entry compared to other chemical segments; and the 10% discount to the multiple for the electronic materials sector reflects the expected intense market competition after 2013.
Our higher-than-peer- Our target EV/EBITDA of 8x for OCI is 20% higher than that of global polysilicon makers (6x). average EV/EBITDA However, we believe that this premium is justifiable, considering: 1) OCIÊs peers are appears reasonable engaging in low value-added businesses (e.g., cells and modules), and 2) OCI is expected to remain the market leader even amid intense competition after 2013.
Table 1. Target price calculation (Wbn, X, Â000 shares, W, %) EBITDA EV/EBITDA multiple Fair value Remarks 10% discount to the average EBITDA of IT material companies Earnings value Polysilicon 1,726.6 8.0 13,812.8 in 2011F~2013F 20% discount to the average EBITDA of chemical companies Non-polysilicon 212.3 5.0 1,061.4 in 2011F~2013F Total 14,874.3 Investment securities value 637.0 20% discount to market value, but no discount to book value Net debt -4.7 Treasury stocks 95.0 Fair shareholdersÊ value 15,421.0 Number of shares issued 23,121.3 Target price 666,963.2 Current price 494,000.0 Target return 35.0 2011F Implied P/E 14.9 2011F Implied P/B 5.0 2011F Implied ROE 40.1 Source: Daewoo Securities Research
Table 2. OCIÊs investment securities value (%, Wbn) Company Business Ownership Book value Market cap. Fair value Application OCI materials Special gas and industrial materials 49.1 146.0 697.1 556.0 Market value eTech Construction Construction 5.1 5.7 10.5 8.4 Market value Samkwang Glass Nonmetallic mineral 7.1 22.8 21.5 17.6 Market value Ordeg Auto components 20.0 19.2 19.2 Book value OCI Ferro Chemicals for water waste treatment 50.0 5.7 5.7 Book value Eyang Chemical 50.0 26.9 26.9 Book value DCRE Chemical products and leasing service 100.0 - - Book value Elpion Materials and equipments for solar PV business 63.0 25.9 25.9 Book value OCI Enterprises Inc. Natural soda ash 89.7 97.6 97.6 Book value OCI I&C Data processing and other computer operations 100.0 1.0 1.0 Book value Others 53.3 53.3 Book value Total 404.1 637.0 Source: Daewoo Securities Research Daewoo Securities Research 3
April 4, 2011 OCI
Table 2. Valuation comparison of global solar PV companies (x, %) Company P/E P/B ROE EV/EBITDA 10 11F 12F 10 11F 12F 10 11F 12F 10 11F 12F OCI 17.5 13.3 11.4 5.3 3.9 2.9 34.9 34.1 29.8 8.3 8.5 7.2 Tokuyama 22.8 17.1 14.3 0.6 0.6 0.6 3.5 3.5 3.7 4.2 4.1 4.4 MEMC 40.4 11.3 9.5 1.4 1.2 1.1 1.6 9.6 9.8 15.0 6.8 5.7 REC 17.9 16.8 15.7 0.8 0.8 0.8 5.1 5.0 4.8 7.2 5.5 5.6 Wacker Chemie 15.9 13.6 11.6 3.2 2.8 2.4 22.6 21.7 21.9 5.2 6.2 5.4 Polysilicon average 22.9 14.9 12.8 2.0 1.6 1.4 11.9 12.9 12.3 7.3 5.9 5.4 SHARP 22.9 28.1 33.1 0.8 0.8 0.8 0.4 2.9 2.6 4.1 4.3 4.7 Suntech Power 5.8 7.1 7.3 1.1 0.7 0.7 15.0 11.0 9.8 - 6.1 5.8 SunPower 13.9 9.1 7.6 1.0 0.9 0.8 11.8 10.9 13.4 5.2 4.8 4.2 First Solar 19.1 16.0 13.3 3.7 3.0 2.5 21.7 19.4 17.4 11.6 10.7 8.5 Q-cells 1.8 12.0 16.3 0.5 0.5 0.5 -105.2 4.0 4.2 - 6.4 6.1 MOTECH 10.7 12.6 11.5 2.2 1.8 - 1.0 13.6 18.2 - 12.2 - Sanyo Electric - - 60.0 6.5 8.1 7.6 - -24.6 7.1 9.2 8.6 8.4 Solar cell average 12.4 14.2 21.3 2.3 2.3 2.1 -9.2 5.3 10.4 7.5 7.6 6.3 Source: Bloomberg
Figure 1. P/B band Figure 2. P/E band
(Wtr) (Wtr) 24x 18x 14x 6.2x 4.8x 12 10x 12 3.1x
10 10
8 8 1.8x 6x
6 6
4 4 0.8x
2 2
0 0 07 08 09 10 11 12 07 08 09 10 11 12
Source: Quantiwise Source: Quantiwise
Figure 3. GCL PolyÊs sales contribution (2011) Figure 4. RECÊs sales contribution (2011) Others Coal 3% Steam 2% Polysilicon 8% Solar 30% 32%
Electricity 14%
Wafer 50%
Polysilicon Wafer 23% 38%
Source: GCL Poly Source: REC
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April 4, 2011 OCI
Figure 5. P/B-ROE comparison of polysilicon manufacturers (2011) Figure 6. P/B-ROE comparison of polysilicon manufacturers (2012)
(P/B, x) (P/B, x) OCI 4 3.0 OCI First Solar First Solar 2.5 Wacker 3 Wacker
2.0
2 MOTECH 1.5
SHARP MEMC MEMC 1 Q-cells Sunpower Suntech 1.0 SHARP Tokuyama Q-cells Sunpower REC (ROE, %) Tokuyama Suntech (ROE, %) REC 0 0.5 0 5 10 15 20 25 30 35 0 5 10 15 20 25 30
Source: Bloomberg Source: Bloomberg
Figure 7. Price trends of polysilicon, wafer and cells Figure 8. Share performances of polysilicon manufacturers
(US$/Kg) (US$) (1/1/10=100) 90 Polysilicon (L) 7 250 OCI Wacker MEMC Wafer (R) REC Tokuyama Solar cell (R) 80 200 6
70 150 5 60 100
4 50 50
40 3 0 1/10 3/10 5/10 7/10 9/10 11/10 1/11 3/11 1/10 3/10 5/10 7/10 9/10 11/10 1/11 3/11
Source: PV Insights Source: Thomson Reuters
Figure 9. Share performances of solar cell/module manufacturers Figure 10. Share performances of equipment manufacturers
(1/1/10=100) (1/1/10=100) OC OERLIKON ROTH & RAU MANZ AUTOMATION CENTROTHERM 150 Q-Cells Sharp Suntech 200 GT SOLAR INTERNATIONAL Motech Sunpower First Solar
120 150
90 100
60
50 30
0 0 1/10 4/10 7/10 10/10 1/11 1/10 4/10 7/10 10/10 1/11
Source: Thomson Reuters Source: Thomson Reuters
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April 4, 2011 OCI
II. Corporate overview
1. Emerged as the second largest polysilicon maker
OP contribution from the OCI, which was established in 1959, produces petro/coal chemicals and polysilicon. In 2011, polysilicon division is 59% of the companyÊs sales are expected to come from the polysilicon division, while 33% estimated to reach 86% should be attributable to the petro & coal chemical division. Meanwhile, the polysilicon in 2011 division is projected to account for 86% of the companyÊs total operating profit. The company has recently announced a plan to penetrate into the LED sapphire ingot market. Petro & coal chemicals: The petro & coal chemical division produces carbon black and TDI (toluene di-isocyanate) Ranks 1st in carbon from by-products of the steel making process, including coal tar and crude light oil. Carbon black and 2nd in TDI black is used to reinforce tires, and its major producers include OCI, Evonik Carbon Black, and Colombian Chemicals. OCI, the largest carbon black producer in Korea, plans to expand its capacity from 210,000 tonnes in 2010 to 350,000 tonnes in 2014, thereby increasing exports. TDI is a raw material for polyurethane, and OCI is the second largest TDI manufacturer in Korea. Polysilicon: OCI advanced into the polysilicon market in 2006 and started its commercial production in Commercial production 2008. In 2010, the company emerged as the second largest polysilicon maker through rapid started in 2008; capacity expansion in the global market which had been dominated by a handful of emerged as the worldÊs manufacturers, including MEMC and Wacker. second largest Figure 11. OCIÊs business portfolio polysilicon maker in
2010
Source: OCI
Figure 12. Sales breakdown (2011F) Figure 13. Operating profit breakdown (2011F)
Inorganic Inorganic chemicals chemicals 8% 2% Petro/coal/fine chemicals 27%
Polysilicon Petro/coal/fine 51% chemicals 38% Others 0%
Polysilicon 71% Others 3%
Source: Daewoo Securities Research Source: Daewoo Securities Research
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April 4, 2011 OCI
Figure 14. Corporate governance
4.1% Union OCI
11.5% 49.1% OCI Materials
Bullsone 50% Eyang Chemical
25.1% 7.1% Samkwang 25% 47.7% 6% Gunjang Energy OCI Corp. Unid Glass 63% 31.3% 33.7% Elpion Quantstech
50% 30% OCI Ferro Ordeg 20% 100% OCI I&C
100% DCRE 5.1% eTEC E&C 25.2% 30.7% 100%
eTEC Infra
Source: OCI
Figure 15. Status of subsidiaries
OCI
Samkwang Eyang OCI Materials Elpion OCI Ferro OCI I&C DCRE Glass eTEC E&C Ordeg Chemical Compound and Solar related Data processing Special gas Monometallic Auto Ceramic and other Chemical product chemical materials and and mineral Construction component manufacturing computer manufacturing and product equipment materials manufacturing manufacturing operation leasing services Manufacturing manufacturing related business
Source: OCI
Figure 16. Shareholding status Figure 17. OCI MaterialsÊ sales and OP margin forecasts
(Wbn) (%) Lee, Soo Young 500 Sales (L) 45 and affiliates 26% OP margin (R) 40 400
35 300 Union 30 Floating shares 4% 200 58% 25 Miraea Asset Management 100 10% 20 Treasury shares 2% 0 15 07 08 09 10 11F 12F
Source: OCI Source: Fn Guide
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April 4, 2011 OCI
1) Polysilicon: Core raw material for solar cells Polysilicon is a key component of solar panel construction. Polysilicon is used to make silicon wafers, which are then turned into solar cells after a variety of processes.
Cost and quality are key Polysilicon accounts for 28% of solar cell manufacturing costs. Since the purity of polysilicon determines the solar cell conversion efficiency, solar cell manufacturers must secure high- quality polysilicon at low costs.
Polysilicon: Combined Polysilicon is a value-added product with the highest entry barrier in the solar cell supply market share of top six chain. There are many players in the wafer, cell, and module markets, with Chinese makers companies stood at gaining the upper hand thanks to their cost competitiveness. Meanwhile, the polysilicon 78% in 2010 market is dominated by only six companies, including Hamlock and Wacker Chemie, whose combined market share stood at 78% in 2010.
High technological The oligopolistic market structure is attributable to 1) high technological barriers and 2) the barrier; massive amount massive amount of time and money required for building production facilities (two to three of time and money years; more than W1tr needed to build capacity of 10,000 tonnes).
Figure 18. Solar cell manufacturing process
Solar cell manufacturing process
Solar cell module manufacturing process
Source: Industry data
Figure 19. Mechanism of solar power generation Figure 20. Cost structure of solar cell modules (2010)
Module Polysilicon 27% 28%
Light Light Light
Electrode
Antireflection coating
N share d silicon
P shared silicon
Electrode Electric current Cell 20% Wafer 25%
Source: Industry data Source: Industry data
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April 4, 2011 OCI
Polysilicon is manufactured by turning 99% silicon into gaseous trichlorosilane or monosilane and inducing the deposition of 6N (99.9999%)~11N (99.999999999%) polysilicon.
Siemens Process is the Polysilicon manufacturing techniques include: 1) metallurgical refining, 2) FBR, and 2) most widely used Siemens Process. Metallurgical refining has become less popular due to lower polysilicon technique for producing prices. FBR, which is heralded for its cost efficiency in comparison to the Siemens Process, polysilicon is only used by a few manufacturers, such as MEMC and REC, due to difficulties related to raising yield. As such, the Siemens Process is currently the most widely used technique.
Figure 21. Integrated polysilicon production process
Source: Industry data
Figure 22. Polysilicon production using Tri-chloro Silane
Source: Industry data
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April 4, 2011 OCI
2) Petro & coal chemicals: Stable growth expected Supply contract changes OCI produces carbon black from by-products, including coal tar and crude light oil, supplied will not slowdown by POSCO. We expect OCIÊs carbon black business to post stable growth on the back of 1) earnings significantly rising demand from the tire and automobile industries and 2) its domestic market dominance. Although recent changes in its raw material supply contract with POSCO will likely lead to higher raw material costs, OCI will be able to display stable earnings in light of high margins at its competitors, in our view.
OCI plans to enhance its market position through investments in the carbon black business, while pursuing new value-added businesses, including VIP (vacuum insulation panel) and needle coke.
Table 2. OCIÊs petro & coal product business Product Domestic market share Raw material Main uses End uses Carbon Black # 1 Coal tar, naphtha Tire armature Tire, rubber TDI # 2 DNT (toluene) Raw material for polyurethane Auto, shoes, etc. BTX Not significant Coal tar, naphtha Raw material for paint solvent and ink ABS, paint PA Not significant Oxo Xylene PVC Source: OCI
Figure 23. OCIÊs petro & coal chemicals Figure 24. Capacity expansion of OCIÊs chemical division
Source: OCI Source: OCI
Figure 25. Estimates of carbon black production capacity Figure 26. VIP market outlook
('000 tonnes/year) ('000 tonnes/year) ('000 tonnes/year) 2,000 180 350 OCI Global market (L) Ebonic Carbon Black Domestic market (R) 300 150 Columbian Chemicals 1,500 250 120 200 1,000 90 150 60 100 500 30 50
0 0 0 2010 2011F 2012F 2010 2011F 2012F 2013F
Source: OCI Source: OCI
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April 4, 2011 OCI
3) LED sapphire ingot: Ready to advance into the market on cost savings A market with huge OCI announced its plan to invest US$89.3mn in the LED sapphire ingot market, with a 2013 growth potential and sales target of W55.9bn. high barriers to entry LED sapphire ingot is a raw material for wafers used in LED chips. Currently, the top three makers hold a combined market share of 85% due to high technological entry barriers. OCI expects the LED sapphire ingot market to grow sharply from US$589mn in 2011 to US$1,248 in 2014, in line with the widening application of LEDs (from LED TVs to lighting).
OCI to develop new OCI believes that it can cut production costs markedly by developing a new sapphire ingot sapphire ingot production method (i.e., heat exchange) in partnership with the equipment maker GT Solar. production method in It remains to be seen whether the new method will gain approval and lead to mass partnership with GT production. However, the new method seems highly likely to succeed, given 1) GT SolarÊs Solar superior competitiveness in solar cell-use silicone ingot, and 2) OCI and GT SolarÊs strong track records for developing polysilicone production facilities.
Figure 27. LED sapphire ingot market outlook Figure 28. LED sapphire ingot market share (2011)
(US$ mn) 1,400 6" 4" 3" 2" ACME Mamiki 1,200 Sapphire Tech 1,000 Kyocera 800
600
400 Monocrystal 200
0 Rubicon 10F 11F 12F 13F 14F
Source: OCI Source: Industry data
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April 4, 2011 OCI
III. Industry outlook
1. Solar cell market outlook
1) Demand growth to exceed expectations; Market to grow to 100GW in 2020 Demand to exceed The global solar cell market is forecast to grow 34% YoY to 21GW (in terms of new expectations in 2011 installations) in 2011. Last year, the market grew 167% YoY to 16GW, far exceeding market expectations. The rapid expansion seems attributable to declining solar cell module prices, and strong installation demand ahead of government cuts to FiTs (Feed-in Tariffs) in 2011.
EuropeÊs subsidy cuts to The solar cell market will likely continue to expand faster than expected in 2011. European be small in the wake of nations are unlikely to cut FiT markedly in the wake of the nuclear crisis in Japan. In the U.S., nuclear issues in Japan demand should continue to rise toward the end of the year, ahead of the expiration of the investment tax credit for solar cell power generators.
Solar cells to account for In the mid- to long-term, we expect solar cell demand to reach 100GW in 2020 (508GW on a 9% of global power cumulative basis), representing roughly 9% of global electric power generation. generation in 2020
Table 3. Solar PV demand forecasts (MW, %) 07 08 09 10 11F 12F 13F 14F 15F 20F Solar PV demand (newly installed capacity) Japan 230 226 450 700 700 1,500 1,500 1,500 1,500 1,500 Germany 1,328 1,531 3,300 7,000 7,000 6,000 6,000 5,000 5,000 2,000 Italy 87 340 450 2,000 3,500 4,000 4,000 3,500 3,000 3,000 Spain 428 2,281 150 400 750 1,200 1,200 1,500 1,800 1,800 France 16 95 250 500 800 1,100 1,100 1,100 1,100 1,100 U.S. 220 350 500 900 2,300 3,100 4,100 5,330 6,929 25,727 China 32 69 200 569 1,200 1,560 2,028 2,636 3,691 24,416 Korea 42 280 170 123 196 250 300 350 400 405 India 17 32 50 105 500 1,000 1,500 1,950 2,730 19,349 Others 285 316 480 3,700 4,440 5,328 6,394 7,672 9,207 22,909 World 2,685 5,520 6,000 15,997 21,386 25,038 28,122 30,539 35,357 102,206 Growth rate 49 106 9 167 34 17 12 9 16 30 Accumulative installation Japan 1,288 1,514 1,964 2,664 3,364 4,864 6,364 7,864 9,364 16,864 Germany 3,841 5,372 8,672 15,672 22,672 28,672 34,672 39,672 44,672 60,672 Italy 153 493 943 2,943 6,443 10,443 14,443 17,943 20,943 35,943 Spain 613 2,894 3,044 3,444 4,194 5,394 6,594 8,094 9,894 18,894 France 43 138 388 888 1,688 2,788 3,888 4,988 6,088 11,588 U.S. 615 965 1,465 2,365 4,665 7,765 11,865 17,195 24,124 105,582 China 72 141 341 910 2,110 3,670 5,698 8,334 12,025 75,971 Korea 72 352 522 645 841 1,091 1,391 1,741 2,141 4,156 India 69 101 151 256 756 1,756 3,256 5,206 7,936 58,339 Others 871 1,187 1,667 5,367 9,807 15,135 21,529 29,201 38,408 120,624 World 7,637 13,157 19,157 35,154 56,540 81,578 109,700 140,238 175,595 508,632 Solar PV out of total electricity production Japan 0.5 0.6 0.7 1.1 1.3 1.9 2.4 2.9 3.6 6.5 OECD Europe 0.6 1.1 1.6 2.7 4.1 5.4 6.7 7.9 8.8 13.0 U.S. 0.1 0.1 0.1 0.2 0.4 0.7 1.1 1.6 2.4 10.0 China 0.0 0.0 0.1 0.1 0.3 0.4 0.7 1.0 1.3 6.8 India 0.0 0.1 0.1 0.1 0.4 1.0 1.7 2.7 3.7 23.6 World 0.2 0.3 0.4 0.8 1.2 1.7 2.3 2.8 3.5 9.3 Source: Daewoo Securities Research
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April 4, 2011 OCI
2) Europe: Largest solar power consumer Europe takes up 60% of Europe consumes over 60% of total solar power generated globally, driven by 1) high global solar cell demand interest in protecting the environment, 2) promotion of renewable energy as a means of job creation, 3) low energy self-sufficiency rates, and 4) expensive electricity.
Solar power generation Demand is forecast to rise in Europe and remain strong until 2015, spreading from Germany costs to equal electricity to Italy, Greece and France. Electricity is very expensive in European nations; in Italy, solar rates in 2013 power generation costs already equal general retail electricity rates. If solar power system installation costs fall to US$2.5/watt, the power generation costs should fall to a similar level in all European nations by 2013~2014 (estimates by Suntech).
Investments in new and Furthermore, investments in renewable energy will likely expand due to recent concerns renewable energy to over nuclear energy. As of 2007, nuclear power plants accounted for 16% (131GW) of total increase due to radiation electric power generation in Europe (OECD). If government budgets for nuclear power fears generation are diverted to renewable energy, the industry should grow much faster than expected. Indeed, many European nations have already started to reconsider their nuclear power plans, and are intending to expand their renewable energy budgets.
Figure 29. Power generation facility outlook in Europe
(GW) 180 Nuclear Wind power Solar power
150
120
90
60
30
0 2007 2015F 2020F
Source: IEA
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Figure 30. Background of solar development in Europe Figure 31. Energy consumption in EU
Source: Suntech Source: IEA
Figure 32. Solar demand in Europe; Solar power proportion in EU Figure 33. Breakeven point of solar power generation (MW) (%) 20,000 France 16 Spain Italy 15,000 Germany 12 % of Solar energy (R)
10,000 8
5,000 4
0 0 07 09 11F 13F 15F 17F 19F
Source: Daewoo Securities Research Source: Suntech
Figure 34. SuntechÊs system installation cost reduction plan Figure 35. FiT change estimate in Europe (Suntech)
Source: Suntech Source: Suntech
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April 4, 2011 OCI
In 2011, we expect Germany to remain the largest solar cell market with a capacity of 7GW (flat YoY) and Italy to lead market growth with demand growing to 3.5GW.
Germany is anticipated to cut FiT by an additional 16% in 2H11, but profitability should remain intact thanks to a decline in solar cell module prices. Meanwhile, the installation of solar power generation facilities should increase ahead of a reduction to FiT in 2012.
Italian subsidy cuts In Italy, solar power generators should maintain high profitability despite a scheduled cut FiT probably smaller than in 2H. According to various media reports, the government may not cut FiT at the request of expected several local solar power generation companies.
There are some risks as well. European governments may reduce subsidies for solar power generation due to financial burdens (e.g., bigger-than-expected cuts to FiTs and installation caps). In 2008, Spain experienced a significant contraction in market size following the introduction of an installation cap.
Governments unlikely to At this point, we believe that the European nations will remain generous, as 1) public reduce financial support interest in renewable energy has increased in the wake of the nuclear crisis in Japan, 2) the job market needs to stabilize, and 3) financial support for solar power generation comes from electricity bills, not the government budget.
Table 4. Jobs related to renewable energy in Germany (unit) 2004 2009 Wind power 63,900 87,100 Bio mass 56,800 109,000 Solar PV 25,100 79,600 Water power 9,500 9,000 Total 160,500 300,500 Source: German Solar Industry Association
Table 5. IRR (Internal Rate of Return) assumption from FiT; System ASP contraction in Italy 10 years After June 2011 Decline FiT (EUR/kWh) 0.38 0.24 -38% Module ASP (EUR/Wp) 1.39 0.99 -29% System ASP (EUR/Wp) 3.09 2.64 -15% IRR (%) 12.1 8.5 Source: Industry data, Daewoo Securities Research
Figure 36. Solar cell power generation capacity estimate in Germany
(MW) (MW) 50,000 Accumulative installed capacity (L) New installation (R) 8,000
40,000 6,000
30,000 4,000
20,000
2,000 10,000
0 0 07 08 09 10 11F 12F 13F 14F 15F
Source: Daewoo Securities Research
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Figure 37. Proportion of renewable energy in Germany Figure 38. FiT cut plan of Germany (30~100kW, roof top basis)
(MW) (%) (EUR cent/kWh) 45 200,000 Solar PV (L) 40 Wind power (L) 40 -9% Water power (L) 35 -13% 150,000 Renewable energy portion (R) 30 -3% 30 -13% -16% 25 100,000 20 -9% 20
15 50,000 10 10
5
0 0 0 07 09 11F 13F 15F 17F 19F 09 1H10 3Q10 4Q10 1H11 2H11 12
Source: Daewoo Securities Research Source: Industry data
Figure 39. Renewable energy out of total electricity fees in Germany Figure 40. SunpowerÊs cost reduction plan
(US cent/kWh) (%) 25 8 Total (L) % of EEG (R) 20 6
15 4 10
2 5
0 0 2004 2005 2006 2007 2008 2009
Source: Industry data Source: Sunpower
Figure 41. Solar cell capacity estimates in Italy Figure 42. FiT cut plan of Italy
(MW) (MW) (EUR/kWh) 25,000 Accumulative installed capacity (L) 5,000 40 New installation (R) -7% 20,000 4,000 -5% 35 -5%
15,000 3,000 -6% 30 -6% 10,000 2,000
25 5,000 1,000
0 0 20 07 08 09 10 11F 12F 13F 14F 15F 2010 11.1~4 11.5~8 11.9~12 2012 2013
Source: Daewoo Securities Research Source: Industry data
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3) U.S.: Solar cell demand to grow to 2.3GW in 2011 and to 25GW by 2020
Demand is growing in The U.S. is the largest electricity consumer in the world with power capacity of 1,000GW as some states, namely of 2010. However, demand for new solar power facilities stagnated at 900MW. Although the California U.S. established mid- to long-term renewable energy targets, the government has only provided indirect support, such as tax benefits. Thus, the solar cell market has expanded at a slower pace than in Europe. However, demand is growing steadily driven by states with ample sunlight and a keen interest in the environment, namely California.
Demand is projected to In 2011, solar cell demand is projected to reach 2.3GW, exceeding 2GW for the first time in exceed 2GW in 2011 history. Solar cell companies are pushing ahead with large-scale solar power plant construction. In addition, demand for solar power facilities is expected to increase sharply before the Solar Investment Tax Credit (ITC) expires at end-2011.
Solar energy to account Solar cell demand growth is forecast to accelerate in line with the downtrend in power for 10% of all power generation costs. First Solar, a U.S.-based thin-film solar panel maker, plans to reduce power generation in 2020 generation unit costs to half of the 2009-level in 2014, which should help solar energy compete with fossil fuel energy and trigger full-scale growth of the solar cell industry. We expect growth in solar cell demand to take off after 2015, with newly installed capacity and accumulated capacity reaching 25GW and 100GW (10% of the entire power capacity), respectively, in 2020.
Table 6. Production cost by energy source in U.S. (US cent/kWh) 2005 2008 2010~2020 Natural gas 3~4 3.5~5 4~6 Coal 3.5~4.5 4.5~6 5~8 Wind power on land 5~8 3~5 2~4 Wind power at sea 9~12 6.5~9 3~8 Solar energy 25~30 17~22 10~18 Source: Industry data
Figure 43. Solar power generation capacity growth in the U.S. Figure 44. Solar power plant construction plan in the U.S.
(MW) (%) 120,000 Accumulative installed capacity (L) 12 Solar PV installation portion (R) 100,000 9 80,000
60,000 6
40,000 3 20,000
0 0 2007 2009 2011F 2013F 2015F 2017F 2019F
Source: Daewoo Securities Research Source: Dsire
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4) China/India: Require large-scale power generation capacities
Solar cell demand Solar cell demand in China and India is projected to expand from 674MW in 2010 to 1.7GW projected to expand in 2011. Solar power capacity accounts for just a small portion of the two nationsÊ power from 674MW in 2010 to production. They have been slow to adopt solar energy due to high generation costs. 1.7GW in 2011 However, solar cell demand in these countries should grow sharply in line with a decline in High growth potential generation costs. First, they are likely to use renewable energy to meet new electricity thanks to falling demand needed for economic growth. (In 2020, power capacity requirements are expected generation costs to exceed the 2010-level by W385GW.) Second, China and India are anticipated to expand support for solar cell manufacturers. China is the largest solar cell and module producer in the world.
If China and India both increase the percentage of solar power out of total electricity production to 4%, their newly installed solar power capacity is projected to grow to 43GW with an accumulated capacity reaching 134GW.
Figure 45. Power capacity installation outlook for India and China Figure 46. Nuclear, wind and solar power capacity in China
(GW) (GW) 1,400 India 90 nuclear China wind-powered 1,300 solar +385GW 247 63 1,200 60 1,100 44 +159GW 213 39 1,000 30 25 1,116 900 177
924 9 800 6 6 4 801 0 700 0 2010F 2015F 2020F 07 15F 20F
Source: IEA Source: IEA
Figure 47. ChinaÊs solar power installation trend and forecast Figure 48. Solar power facilities in China
(MW) (%) 4,000 New installation (L) 1.5 Nuclear Water Wind Wind and % of Solar PV power power power others Nuclear 1.2 16% 1% Water 2% 1% 2% 3,000 power Petroleu 23% 0.9 m and 2,000 gas 1% Electricity Installed 0.6 production capacity
1,000 0.3 Coal Coal 74% 80% 0 0.0 07 09 11F 13F 15F
Source: Daewoo Securities Research Source: IEA
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2. Polysilicon supply to remain tight until 2012
Polysilicon market is The global polysilicon market is increasingly polarizing despite its high growth potential and polarizing profitability. While leading companies are aggressively expanding capacities based on strong cost competitiveness, second-tier and below companies are finding it difficult to expand capacity due to weak competitiveness in terms of production costs and quality. In addition, the Chinese government began to control less competitive domestic companies. As a result, the polysilicon market is starting to be dominated by a handful of leaders.
From 4Q10 to 4Q11, We project polysilicon supply will remain tight until 2012. Production capacity at major ChinaÊs module capacity module manufacturers in China is expected to increase by 5GW YoY in 4Q11. However, the to increase by 5GW vs. combined production volume at six leading companies is forecast to only expand by 2GW. polysilicon capacity to Thus, the supply shortage is unlikely to ease for a considerable period of time. Although increase by 2GW major producers plan to ramp up production in 2012, the supply of high-purity silicon is expected to remain short.
Cost and quality Meanwhile, competition in the global polysilicon market will likely intensify after 2013 due to competition to intensify capacity expansion at existing players and the entry of new players. In the past, only a small after 2013 number of companies in advanced economies were capable of producing polysilicon due to high technology barriers. However, the barriers have lowered significantly thanks to the help of specialized equipment producers and production consultants. As a result, large companies (with sufficient capital) in search of next-generation growth engines are increasingly entering the market.
Table 7. Polysilicon supply and demand (tonne) 07 08 09 10 11F 12F 13F Hemlock 10,000 13,000 19,000 27,500 34,000 42,000 48,000 Wacker 10,000 14,500 19,150 27,000 31,450 47,025 52,963 OCI - 5,000 17,000 20,063 31,950 65,200 75,200 REC 6,000 6,500 11,500 13,500 17,000 17,000 17,000 1st tier MEMC 6,000 8,000 8,500 12,500 12,500 12,500 12,500 Tokuyama 5,800 5,800 8,000 8,200 8,200 8,200 8,200 Mitsubishi 3,150 3,450 3,450 3,450 3,450 3,450 3,450 Sumitomo 1,000 1,050 1,300 1,300 1,300 1,300 1,300 Total 41,950 57,300 87,900 113,513 139,850 196,675 218,613 L D K 11,000 18,000 18,000 18,000 GCL 200 1,850 7,454 17,302 28,740 47,676 57,676 Renesolar 3,000 3,500 3,500 3,500 Daqu 3,000 3,000 3,000 2nd tier Korea Silicon 3,000 5,000 7,000 Woongjin polysilicon 3,000 5,000 7,000 Others 400 6,800 13,000 10,000 3,000 3,000 3,000 Total 600 8,650 20,454 41,302 62,240 85,176 99,176 Samsung fine chemical-MEMC 8,000 Hanwha Chemical 8,000 New comers Others Total ------16,000 42,550 65,950 108,354 154,815 202,090 281,851 333,789 For semiconductor (tonne) 24,864 26,173 27,550 29,000 30,450 31,973 33,571 Solar PV total (tonne) 17,686 39,778 80,804 125,815 171,640 249,879 300,217 Solar PV 1st (tonne) 17,086 31,128 60,350 84,513 109,400 164,703 185,041 Total Required g per watt (g/w) 8.0 8.0 8.0 7.5 7.5 7.5 7.5 polysilicon Available solar PV production volume total (MW) 2,211 4,972 10,101 16,775 22,885 33,317 40,029 production Available solar PV production volume of 1st tier producers (MW) 2,136 3,891 7,544 11,268 14,587 21,960 24,672 Solar PV demand (MW) 2,685 5,520 6,000 15,997 21,386 25,038 28,122 Thin solar cell production volume (MW) 403 828 1,036 1,502 2,254 2,879 4,000 Crystal form solar PV demand (MW) 2,282 4,692 4,964 14,495 19,132 22,159 24,122 Polysilicon Total (MW) -71 280 5,137 2,280 3,753 11,158 15,907 oversupply 1st (MW) -146 -801 2,580 -3,227 -4,545 -199 551 Source: Daewoo Securities Research
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Table 8. Assumptions for production volume of major polysilicon producers (tonne, MW) 1Q10 2Q10 3Q10 4Q10 1Q11F 2Q11F 3Q11F 4Q11F Wacker Chemie 6,263 6,513 7,113 7,113 7,600 7,600 7,600 11,163 Hemlock 6,875 6,875 6,875 6,875 7,500 8,500 9,500 10,500 OCI 4,198 4,208 4,208 5,138 6,213 6,963 6,963 10,713 GCL Poly 3,112 3,919 5,068 5,206 5,417 6,152 7,814 9,358 MEMC 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 REC 2,441 2,474 2,688 3,856 4,000 4,300 4,300 4,300 Total (tonne) 24,889 25,989 27,952 30,188 32,730 35,515 38,177 48,033 For semiconductor (tonne) 7,250 7,250 7,250 7,250 7,613 7,613 7,613 7,613 For solar PV (tonne) 17,639 18,739 20,702 22,938 25,117 27,902 30,564 40,421 Required g per watt (g/w) 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 Production volume for solar cell (MW) 2,352 2,498 2,760 3,058 3,349 3,720 4,075 5,389 Major module facilities in China (MW) 2,070 2,620 3,525 3,675 6,730 7,190 7,650 8,400 Source: Industry data, Daewoo Securities Research
Figure 49. Chinese polysilicon producersÊ solar cell capacities Figure 50. Regulations on polysilicon producers in China
(MW) (MW) 60,000 Wacker Chemie Hemlock 60,000 REC OCI GCL Poly MEMC 50,000 MEMC REC 50,000 GCL Poly OCI Hemlock 40,000 40,000 Wacker Chemie
30,000 30,000
20,000 20,000
10,000 10,000
- 0 1Q10 2Q10 3Q10 4Q10 1Q11F 2Q11F 3Q11F 4Q11F 1Q10 2Q10 3Q10 4Q10 1Q11F 2Q11F 3Q11F 4Q11F
Source: Industry data, Daewoo Securities Research Source: Industry data, Daewoo Securities Research
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IV. Investment points
1. Polysilicon prices to stay robust on strong solar power demand
OCIÊs operating profit to In 2011, polysilicon prices are anticipated to stay high, driven by greater-than-expected solar show a CAGR of 53% power demand. Given that OCIÊs polysilicon production is forecast to expand 68% in 2011 during 2010~2012 following aggressive capacity expansion, we forecast its operating profit to surge 68% YoY this year. The companyÊs operating profit is expected to show a CAGR of 53% during 2010~2012, as: 1) high-purity polysilicon supply is forecast to remain tight until end-2012, and 2) OCIÊs production costs are projected to drop on the launch of a new factory.
Solar power demand to Solar power demand is likely to grow to 21GW this year, beating market expectations. rise in 2011 Concerned about the potential negative effects of nuclear power in the wake of the crisis in Japan, European governments are unlikely to reduce their budgets for solar power subsidy programs. The solar power markets in the U.S. and China are also expected to grow to 2GW and 1GW, respectively. Given that current solar module prices will keep the profitability of solar power plants high, demand should remain high until governmentsÊ subsidies shrink in 2012.
Polysilicon prices to stay Among supply chain materials for solar power generation, polysilicon is in the tightest supply. high in 2011 on supply Although a number of players have entered the market over the past several years, only a scarcity few top-tier firms (with cost and quality competitiveness) have pushed ahead with aggressive capacity expansion. Production at the six largest polysilicon producers is likely to increase by only 2GW YoY in 4Q11 (vs. a 5GW increase in module capacity in China).
Figure 51. Forecast for facility expansion at 7 major solar cell companies in China (4Q10 vs. 4Q11)
(MW) 5,000 4,725
4,000 3,590
3,000 2,506
2,000
976 1,000
0 Polysilicon(MW) ingot/wafer cell module
Source: Industry data, Daewoo Securities Research
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Figure 52. OCIÊs polysilicon ASP and cost estimate
(US$/KG) 350 Manufacturing cost Polysilicon ASP
300
250
200
150
100
50
0 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11
Source: Daewoo Securities Research
Figure 53. OCIÊs operating profit forecast
(Wbn) 4,000
3,000
2,000
1,000
0 08 09 10 11F 12F
Source: Daewoo Securities Research
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2. Stiff competition after 2013 unlikely to hamper growth
Although competition in the polysilicon market is anticipated to stiffen after 2013, we believe that OCI will maintain its competitive position in light of its high quality products and strong cost competitiveness.
High-purity silicon OCI is producing polysilicon that displays purity comparable even to that of semiconductors. should enable cell OCI estimates that its high-purity polysilicon will enable cell makers to cut production costs makers to reduce costs by 43%. If the polysilicon market enters oversupply, high-purity polysilicon is likely to be by 43% priced at a premium relative to other types of silicon.
Close partnership with OCI also has strong cost competitiveness. Polysilicon production costs are mostly consist of core equipment depreciation expenses, raw material expenses, and energy expenses. As such, the efficient producer GT Solar operation of productive but low-priced equipment should be the key to the improvement of cost competitiveness.
Production expansion OCI has been a close business partner of GT Solar since they jointly developed core equipment through debottlenecking for polysilicon production in 2008. In addition, the company has proved its efficiency by technology expanding the capacity of its third factory·without additional investments·using its debottlenecking technology. If the third factory begins full operations in 2012, the companyÊs polysilicon production costs are projected to decline to US$25/kg·the worldÊs top-tier level.
Table 9. Production cost by plant (W/US$, tonne, US$/Kg) 08 09 10 11F 12F 13F 14F 1,101 1,277 1,153 1,033 1,000 1,000 1,000 P1 2,293 5,159 6,700 7,150 6,435 6,435 6,435 P2 4,025 10,800 11,550 10,395 10,395 10,395 Total production P3 - 9,875 24,750 24,750 24,750 volume P4 2,000 19,000 19,800 계 2,293 9,184 17,500 28,575 43,580 60,580 61,380 Weight P1 100% 56% 38% 25% 15% 11% 10% P2 0% 44% 62% 40% 24% 17% 17% P3 0% 0% 0% 35% 57% 41% 40% P4 0% 0% 0% 0% 5% 31% 32% Total costs P1 60 36 33 33 37 38 39 P2 38 26 27 30 30 31 P3 0 32 22 22 23 P4 24 24 Weighted average costs 59.9 37.0 28.9 30.3 25.0 25.8 26.1 Source: Daewoo Securities Research
Figure 54. OCIÊs cost structure by plant Figure 55. OCIÊs chlorinator capacity by plant
(%) 120 Raw materials Utility Others Depreciation cost
100
80
60
40
20
0 Gen 1 Gen 2/3 Gen 4
Source: OCI Source: OCI
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Figure 56. Benefits of high quality polysilicon
Source: OCI
Figure 57. Energy consumption and production capacity by plant
Source: OCI
Figure 58. GT SolarÊs cost forecasts Figure 59. Cost structure estimate for polysilicon (2010, GT Solar)
Labor costs Maintenance and 7% others Depreciation cost 7% 29%
Emergy 25%
Intersts, Insurance costs Raw material 19% 13%
Source: GT Solar Source: GT Solar
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V. Earnings forecasts
1. 1Q Earnings to beat market consensus thanks to robust polysilicon prices
2011 OP to soar by 68% We expect OCIÊs operating profit to increase at a CAGR of 53% to W1.7tr in 2012, backed YoY to W1.2tr by 1) solid polysilicon prices and 2) aggressive capacity expansion. We forecast 2011 sales and operating profit to rise by 29% and 68% YoY, respectively.
In 1Q11, operating profit is projected to exceed market consensus, reaching W290.5bn, aided by 1) higher-than-expected polysilicon prices and 2) the faster-than-anticipated operation of the third plant. Strong polysilicon prices will likely continue into 2Q11. Operating profit is forecast at W340.9bn during the quarter. Although polysilicon prices are expected to decline in 2H, production costs are likely to plunge from 4Q once the debottlenecking facility at the third factory begins full operations.
Table 10. Earnings consensus comparison (Wbn, %) Daewoo Consensus Diff. Sales 3,396 3,408 -0.3 Operating profit 1,206 1,078 10.8 Pre-tax profit 1,258 1,081 15.3 Net profit 1,032 896 14.1 Source: FN guide, Daewoo Securities Research
Table 11. OCIÊs earnings forecasts (Wbn, %) 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 09 10 11F 12F 13F Total 611.0 625.9 636.3 733.2 805.1 889.7 823.6 877.9 2,101.8 2,626.0 3,396.3 3,980.4 4,292.2 Sales Polysilicon 272.6 278.2 282.6 370.7 470.7 525.6 465.7 506.2 812.0 1,204.1 1,968.2 2,654.0 2,926.0 Chemicals 338.4 347.7 353.7 362.5 334.4 364.0 358.0 371.7 1,289.8 1,421.9 1,428.1 1,326.4 1,366.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Sales portion Polysilicon 44.6 44.5 44.4 50.6 58.5 59.1 56.5 57.7 38.6 45.9 58.0 66.7 68.2 Chemicals 55.4 55.5 55.6 49.4 41.5 40.9 43.5 42.3 61.4 54.1 42.0 33.3 31.8 Total 145.5 178.1 171.5 221.7 290.5 340.9 279.3 295.7 537.9 716.8 1,206.3 1,681.1 1,478.5 Operating Polysilicon 85.8 111.4 120.0 183.7 250.8 297.0 237.0 250.9 345.8 500.8 1,035.7 1,527.1 1,310.7 profit Chemicals 59.8 66.7 51.5 38.0 39.7 43.9 42.3 44.8 192.1 216.0 170.6 154.0 167.8 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 OP portion Polysilicon 58.9 62.6 70.0 82.8 86.3 87.1 84.9 84.9 64.3 69.9 85.9 90.8 88.6 Chemicals 41.1 37.4 30.0 17.2 13.7 12.9 15.1 15.1 35.7 30.1 14.1 9.2 11.4 Total 23.8 28.5 27.0 30.2 36.1 38.3 33.9 33.7 25.6 27.3 35.5 42.2 34.4 OP margin Polysilicon 31.5 40.0 42.5 49.5 53.3 56.5 50.9 49.6 42.6 41.6 52.6 57.5 44.8 Chemicals 17.7 19.2 14.6 10.5 11.9 12.1 11.8 12.0 14.9 15.2 11.9 11.6 12.3 Total 199.3 235.9 227.2 276.6 376.2 426.6 365.1 400.8 693.4 954.9 1,568.7 2,153.5 2,094.5 EBITDA Polysilicon 127.5 156.7 163.9 227.6 325.0 371.2 311.3 344.6 454.9 675.7 1,352.1 1,949.9 1,877.8 Chemicals 71.8 79.2 63.3 49.0 51.2 55.4 53.8 56.3 238.6 279.2 216.6 203.6 216.6 Polysiliocn Production 4,197.5 4,207.5 4,207.5 5,137.5 6,425.0 7,175.0 7,175.0 7,800.0 9,183.8 17,750.0 28,575.0 43,580.0 60,580.0 volume (tonne) Major ASP (US$/Kg) 56.4 55.6 57.2 61.6 66.6 66.6 59.0 59.0 60.7 57.9 62.6 58.0 46.0 assumptions (US$/Kg) 39.4 31.4 31.4 31.8 31.1 29.0 29.0 29.8 40.5 33.4 29.4 24.6 25.4 ASP-raw 17.0 24.2 25.8 29.8 35.5 37.6 30.0 29.2 20.3 24.5 33.3 33.4 20.6 material W/US$ 1,143.9 1,166.0 1,182.6 1,118.3 1,100.0 1,100.0 1,100.0 1,100.0 1,277.2 1,152.7 1,100.0 1,050.0 1,050.0 Source: Daewoo Securities Research
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VI. Financial status and risks
1. Risks: Rights offering and contraction in solar cell demand
Risks facing OCIÊs share performance include: 1) the likelihood of a rights offering to fund additional investments and 2) a possible polysilicon supply glut due to contraction in solar cell demand.
Investment in plant #5 Currently, OCI is considering the expansion of plant #5. Capacity expansion by 20,000 might require rights tonnes/year would require the company to invest W1.5~2tr. If the company funds the offering; Mid- to long- investment through a rights offering, it might lead to overhang. However, the negative term impact to be impact should be limited considering that the new investment would boost the companyÊs limited mid- to long-term growth. In addition, OCI boasts strong competitiveness in the polysilicon market.
Solar cell demand As global solar cell demand is propped up by government support in Europe, demand could unlikely to decrease in shrink if support dwindles. Module prices would fall on the back of a solar cell supply glut 2011 from lower demand, adding to downward pressure on polysilicon prices. In our view, the risks are also limited, since we project solar cell demand will remain robust through 2011.
Figure 60. Cash flows from operations and investments
(Wbn) 20,000 Cash flow from operating activities Cash flow from investing activities 15,000
10,000
5,000
0
-5,000
-10,000
-15,000 07 08 09 10P 11F 12F
Source: Daewoo Securities Research
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OCI (010060 KS/Buy/TP: W670,000)
Income Statement (Summarized) Balance Sheet (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F (Wbn) 12/10 12/11F 12/12F 12/13F Sales 2,606 3,396 3,980 4,292 Current Assets 1,080 1,445 1,893 2,407 Cost of Goods Sold 1,737 2,030 2,121 2,621 Cash and Cash Equivalents 314 530 905 1,021 Gross Profit 870 1,366 1,859 1,672 Accounts Receivable 333 386 438 494 SG&A 153 160 178 193 Inventories 204 275 318 343 Operating Profit 717 1,206 1,681 1,479 Other Current Assets 229 254 232 548 Non-Operating Income 3 52 107 143 Non-Current Assets 3,183 3,881 4,521 5,034 Interest Income/Expense -16 -11 11 37 Investment Assets 473 539 661 794 F/X-Related Gain/Loss -4 0 4 -5 Property, Plant and Equipment 2,705 3,339 3,858 4,239 Equity Method Gain/Loss 40 66 102 108 Intangible Assets 5 3 2 0 Asset Disposal Gain/Loss -23 0 0 0 Total Assets 4,264 5,326 6,414 7,441 Other Non-Operating Profit/Loss 5 -3 -10 3 Current Liabilities 834 871 825 816 Pretax Profit 719 1,258 1,788 1,621 Accounts Payable 105 142 199 215 Tax 103 226 393 357 Short-Term Debt 2 2 -3 -6 Profit from Continuing Operation 617 1,032 1,395 1,265 Current Long-Term Debt 149 149 51 30 Profit from Discontinued Operation 0 0 0 0 Other Current Liabilities 578 578 578 578 Tax Effect 0 0 0 0 Non-Current Liabilities 1,370 1,364 1,177 1,022 Net Profit 617 1,032 1,395 1,265 Bonds 199 199 199 199 Residual Income 617 1,032 1,395 1,265 Long-Term Debt 396 396 209 53 EBITDA 936 1,570 2,154 2,095 Other Non-Current Liabilities 774 768 769 769 Free Cash Flow 209 243 735 707 Total Liabilities 2,204 2,235 2,002 1,838 Gross Profit Margin (%) 33.4 40.2 46.7 39.0 Paid-In Capital 122 122 122 122 EBITDA Margin (%) 35.9 46.2 54.1 48.8 Capital Surplus 619 619 619 619 Operating Margin (%) 27.5 35.5 42.2 34.5 Retained Earnings 1,481 2,513 3,834 5,024 Net Margin (%) 23.7 30.4 35.0 29.5 Stockholders' Equity 2,060 3,092 4,412 5,603
Cash Flow (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F 12/10 12/11F 12/12F 12/13F Cash Flow from Operating Activities 865 1,238 1,727 1,704 P/E (x) 12.3 11.2 8.3 9.1 Net Profit 617 1,032 1,395 1,265 P/CF (x) 9.1 7.9 5.9 5.9 Non-Cash Income and Expense 238 295 371 505 P/B (x) 3.7 3.7 2.6 2.1 Tangible Assets Depreciation 218 362 472 616 EV/EBITDA (x) 8.4 7.3 5.0 4.9 Intangible Assets Depreciation 2 1 1 0 EPS (W) 26,912 44,624 60,321 54,699 Others 18 -69 -102 -111 CFPS (W) 36,413 60,298 80,752 81,340 Chg in Working Capital 11 -88 -39 -65 BPS (W) 88,876 133,570 190,757 242,313 Chg in Accounts Receivable -72 -54 -52 -56 DPS (W) 3,250 3,250 3,250 3,250 Chg in Inventories -1 -71 -44 -25 Payout Ratio (%) 12.0 7.2 5.3 5.9 Chg in Accounts Payable 12 37 57 16 Dividend Yield (%) 1.0 0.7 0.7 0.7 Others 71 0 0 0 Sales Growth (%) 24.0 30.3 17.2 7.8 Cash Flow from Investment Activities -803 -1,017 -992 -1,330 EBITDA Growth (%) 34.8 67.7 37.2 -2.8 Chg in Tangible Assets -657 -996 -992 -998 Operating Profit Growth (%) 33.2 68.4 39.4 -12.1 Chg in Intangible Assets 0 0 1 1 EPS Growth (%) 48.2 65.8 35.2 -9.3 Chg in Investment Assets -19 3 -28 -8 Accounts Receivable Turnover (x) 8.8 9.5 9.7 9.2 Others -128 -25 27 -326 Inventory Turnover (x) 12.8 14.2 13.4 13.0 Cash Flow from Financing Activities -103 -6 -361 -258 Accounts Payable Turnover (x) 26.2 27.5 23.3 20.8 Chg in Borrowings -71 -6 -290 -180 ROA (%) 16.2 21.5 23.8 18.3 Chg in Equity -32 0 -74 -74 ROE (%) 34.9 40.1 37.2 25.3 Dividends -47 0 -74 -74 ROIC (%) 31.1 43.3 46.9 35.1 Others 0 0 3 -4 Liability to Equity Ratio (%) 107.0 72.3 45.4 32.8 Chg in Cash -41 216 375 117 Current Ratio (%) 129.5 166.0 229.6 294.8 Beginning Cash Balance 355 314 530 905 Net Debt to Equity Ratio (%) 11.4 -0.2 -14.7 -22.5 Ending Cash Balance 314 530 905 1,021 Interest Coverage Ratio (x) 20.4 35.9 62.0 89.5 Source: Daewoo Securities Research
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Important Disclosures & Disclaimers As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of OCI Company Ltd. 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 OCI Company Ltd. as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. Analyst of the subject company or member of the analyst's household does not have any financial interest in the securities of the subject company and the nature of the financial interest (including without limitation, whether it consists of any option, right, warrant, future, long or short position). This report reflects the sole opinion of the analyst without any external influences by third parties.
Buy Relative performance of 20% or greater (W) OCI Stock Trading Buy Relative performance of 10% or greater, but with volatility 800,000 Ratings Hold Relative performance of -10% and 10% 600,000
Sell Relative performance of -10% 400,000
Overweight Fundamentals are favorable or improving 200,000 Industry Neutral Fundamentals are steady without any material changes Ratings 0 4/09 10/09 3/10 9/10 3/11 Underweight Fundamentals are unfavorable or worsening * 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.
This report has been provided by the research division of Daewoo Securities Co., Ltd. The stock ratings, target prices, estimates and overall viewpoints are from the research division of Daewoo Securities. Investors can access Daewoo SecuritiesÊ research directly through our website (www.bestez.com), FirstCall Research, Reuters, FnGuide, WiseFn, FactSet and Bloomberg (DWIR). This document was prepared by Daewoo Securities Co., Ltd. („Daewoo‰). Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith. The information has not been independently verified. Daewoo makes no guarantee, representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information and opinions contained in this document. Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for information purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed or published in whole or in part for any purpose. Daewoo and/or other affiliate companies, their directors, representatives, or employees may have long or short positions in any of the securities or other financial instruments mentioned in this document or issuers described herein at any time and may purchase and/or sale, or offer to purchase and/or sale such securities or other financial instruments in the open market or otherwise, in each case either as principal or agent. This document is for distribution within the United Kingdom to persons authorized under the Financial Services Act 1986. Daewoo Securities is the sole provider of information contained in this document. DaewooÊs U.S. affiliate, Daewoo Securities (America) Inc., a member of FINRA/SIPC, is the sole distributor of this document within the U.S. This document may be distributed in the U.S. only to major U.S. institutional investors as defined in Rule 15a-6 of the U.S. Securities Exchange Act of 1934. Any U.S. recipient of this document wishing to effect any transactions in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc.
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