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July 19, 2018

Korea Morning Focus

Sector News & Analysis Major Indices Close Chg Chg (%) Chemicals/Solar PV/Oil Refining (Overweight) KOSPI 2,290.11 -7.81 -0.34 Poised for a near-term pickup KOSPI 200 296.47 -0.41 -0.14 KOSDAQ 810.44 -9.28 -1.13

Turnover ('000 shares, Wbn) Volume Value KOSPI 395,774 4,838 KOSPI 200 76,480 3,414 KOSDAQ 806,892 4,246

Market Cap (Wbn) Value KOSPI 1,531,112 KOSDAQ 267,922

KOSPI Turnover (Wbn) Buy Sell Net Foreign 1,366 1,273 93 Institutional 826 1,090 -264 Retail 2,637 2,474 163

KOSDAQ Turnover (Wbn) Buy Sell Net Foreign 398 413 -15 Institutional 233 238 -5 Retail 3,614 3,571 44

Program Buy / Sell (Wbn) Buy Sell Net KOSPI 1,064 991 73 KOSDAQ 200 158 42

Advances & Declines Advances Declines Unchanged KOSPI 187 649 56 KOSDAQ 305 869 63

KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Electronics 46,550 700 508 Hynix 89,300 700 171 KODEX KOSDAQ150 17,040 -365 147 LEVERAGE AEROSPACE 34,450 -3,550 145 KODEX LEVERAGE 14,520 -75 143

KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Woori Technology 4,320 325 228 New Pride 4,095 945 219 OliX 65,600 -6,400 184 HLB 77,000 -4,500 127 JeilSteel 3,900 -260 114 Note: As of July 18, 2018 Mirae Asset Daewoo Research This document is a summary of a report prepared by Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) and published on our website. Please review the compliance notices contained in the original report. Information and opinions contained herein have been compiled in good faith from sources deemed to be reliable. However, the information has not been independently verified. Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy or completeness of the information and opinions contained in this document. Mirae Asset 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 informational 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.

Chemicals/Solar PV/Oil Refining Poised for a near-term pickup

Overweight (Maintain) [Chemicals] Poised for a near-term pickup; LG Chem remains our top pick Sluggish chemicals cycle to cripple 3Q18 earnings: The chemicals cycle has Industry Report weakened sharply since March. While we expect 2Q18 earnings results to be in July 19, 2018 with the consensus, it looks increasingly likely that 3Q18 earnings will be 10-20% lower than consensus expectations, if current conditions continue. The key issue will be the recovery of the chemicals cycle.

Mirae Asset Daewoo Co., Ltd. Weak demand largely due to ’s credit tightening: We believe one of the [Oil Refining/Chemicals/Renewables] biggest reasons for the weakness in the chemicals cycle is China’s credit tightening, which has dampened infrastructure spending and stymied cash liquidity. However, Yeon-ju Park recent concerns about economic growth have prompted the People's Bank of China +822-3774-1755 (PBOC) to cut the reserve requirement ratio and shift to a more easing stance. As such, [email protected] we think China’s infrastructure spending is likely to pick up in 2H18, supporting a near- Minkyung Kim term recovery in the chemicals cycle in 3Q18. We also note that MEG inventory has +822-3774-1732 come down to more normal levels. Considering that chemicals stocks have already [email protected] pulled back quite a bit and typically move in line with spot spreads, we believe a near- term recovery in the chemicals cycle will trigger a rebound in stock prices across the

sector. Strength of rebound: We think the sector rebound may prove to be weaker compared to the past several years, given: 1) lingering worries over demand due to US rate hikes and trade tensions; 2) the expected increase in supply from 2022, which may make stocks less attractive to long-term investors; and 3) the decreasing appeal of naphtha crackers relative to ethane crackers as a result of tight crude supply. At the stock level, we believe non-ethylene/downstream names (rather than ethylene names) or stocks with individual momentum are better positioned for a rebound.

LG Chem (Buy/TP: W460,000) remains our top pick: We believe LG Chem is currently undervalued, given the value of its mid/large-sized battery business. We expect the stock to bounce back if the chemicals cycle picks up in the near term.

[Solar PV/Oil refining] Polysilicon prices bottoming out; Balancing between oil prices and IMO rules Polysilicon prices bottoming out: Polysilicon prices have slumped to the cash cost level of leading polysilicon suppliers, which are now beginning to adjust utilization. As such, we believe polysilicon prices are bottoming out.

Balancing between oil prices and IMO rules; Favor S-Oil: We expect refining stocks to remain range-bound as investors weigh worries about oil prices against the positive impact of the International Maritime Organization’s (IMO) regulations. Within the sector, we favor S-Oil, given its high dividend yield and pure exposure to oil refining.

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. July 19, 2018 Chemicals/Solar PV/Oil Refining

1. Near-term outlook hinges on China’s monetary policy; A pickup in 3Q18 looks likely

The chemicals cycle, which began to weaken in March, has yet to pick up as of mid-July. While we expect 2Q18 results to be in line with the consensus, it looks increasingly likely that earnings will contract in 3Q18. The question is: Why is the chemicals cycle softening, and when will it recover? Some blame the softness on the operation of ethane crackers and rising oil prices, but we believe the main culprit is weak demand, considering that prices are also falling for products facing no capacity additions (ABS, PVC, etc.).

We believe one of the biggest reasons for the weakness in demand is China’s credit tightening. This has led to a steep decline in China’s fixed asset investments (including infrastructure spending), which are closely tied to demand for chemical products. We think China’s tighter financial conditions have squeezed liquidity for those related to the chemicals supply chain. In addition, the trade dispute between the US and China is likely to have had some negative impact on export orders.

Recently, however, Chinese authorities have been moving toward easing monetary policy, including cutting the reserve requirement ratios. If infrastructure spending gets back on track, this should help revive demand, supporting a near-term recovery in the chemicals cycle. MEG inventory has also come down to more normal levels, further raising the prospect of a recovery in 3Q18. 2. Strength of rebound; LG Chem remains our top pick

Chemicals stocks have generally pulled back due to the softening chemicals cycle, rising oil prices, and concerns about global growth. While earnings estimates for the coming quarters will likely move lower, we think this has been more than reflected in the pullback in stock prices, making valuations more attractive. We believe a near-term recovery in the chemicals cycle will trigger a rebound in stock prices across the sector.

That said, we think the sector rebound may prove to be weaker compared to the past several years, given: 1) lingering worries over demand due to US rate hikes and trade tensions; 2) the expected increase in supply from 2022, which may make chemical stocks less attractive to medium/long-term investors; and 3) the decreasing appeal of naphtha crackers relative to ethane crackers as a result of tight crude supply. At the stock level, we believe non-ethylene/downstream names (rather than ethylene names) or stocks with individual momentum will deliver better returns.

We maintain LG Chem (Buy/TP: W460,000) as our top pick. LG Chem’s stock has come under pressure on worries about the chemicals segment. However, we believe the battery business alone is worth W12tr and think concerns about chemicals have now beThe more electric cars, the worse the oil demand. There is a concern in the market that some 'electric cars are as good as they are now'. Concerns over electric cars are positive for oil demand.en largely priced in. We expect the stock to bounce back if the chemicals cycle picks up in 3Q18.

From a medium-term perspective, we remain bullish on (Buy/TP: 150,000), as the company is mainly engaged in the non-ethylene/downstream chain, which is likely to recover over the medium term.

Mirae Asset Daewoo Research 2 July 19, 2018 Chemicals/Solar PV/Oil Refining

3. [Solar PV] Polysilicon prices are bottoming out

Prices across the solar PV supply chain have plummeted, after China’s unexpected announcement of policy changes in May. We believe the virtual disappearance of China demand in the near term has sparked aggressive inventory adjustments across the supply chain. However, with polysilicon prices now down to the cash cost level (US$11/kg) of leading suppliers, many are now beginning to scale back utilization. As such, we believe polysilicon prices are bottoming out.

We expect earnings at related companies to decline sharply in 2Q-3Q18. In particular, weaker polysilicon prices coupled with increased costs due to lower utilization should weigh heavily on 3Q18 earnings. That said, we think earnings momentum is bottoming out, alongside polysilicon prices.

Looking ahead, the pace of recovery will likely hinge on demand. The good news is that demand forecasts are being revised upwards in several markets. Among them, India has recently revealed plans to auction 30GW of solar power over the next two years and install 30GW annually through 2028. China’s demand, though essentially nonexistent in the near term, should also recover heading into 4Q18, led by the top runner and poverty alleviation programs.

With some polysilicon capacity expansions planned in 4Q18-1Q19, the pace of market recovery will likely depend on how fast demand turns around. Nevertheless, we believe polysilicon prices have now reached levels where further downside is fairly limited. 4. [Oil refining] Balancing between oil prices and IMO rules; Favor S-Oil

In our view, the share prices of oil refineries will be largely determined by oil price levels and the implementation of IMO regulations.

While refining margins have lately been weaker than expected, margins have historically rebounded after touching US$4/bbl—the level at which refineries start to adjust utilization. We thus think any sharp declines in refining margins are unlikely. That said, oil price levels will likely be a more important variable in the near term, as any rise in oil prices would erode earnings power by pushing up official selling prices (OSP) and fuel costs.

Meanwhile, expectations on the IMO regulations could start to build in 2019. The implementation of the IMO rules is likely to cripple high-sulfur fuel oil (HFO) margins and boost diesel/kerosene margins. From a medium-term perspective, it is also positive that refiners face limited risks of capacity expansions.

That said, we believe refining stocks will generally remain range-bound, as it remains uncertain where oil prices are headed or whether the IMO requirements will be mandatory.

Within the sector, we favor S-Oil (Buy/TP: W150,000). We believe the stock’s high dividend yield makes it more resilient against macro uncertainties, and its pure exposure to oil refining means the company has strong upside potential to earnings when refining margins pick up.

Mirae Asset Daewoo Research

Mirae Asset Daewoo Research Key Universe Valuations July 19, 2018

※All data as of close July 17, 2018, unless otherwise noted.

18F Earnings growth Mkt Cap Price P/E (x) P/B (x) ROE (%) Ticker Company Div Yield OP EPS (Wbn) (W) (%) 18F 19F 18F 19F 18F 19F 18F 19F 18F 19F 005930 298,820 46,550 3.0 25.9 2.0 37.2 7.2 6.3 5.8 1.3 1.1 23.6 21.0 000660 SK Hynix 65,011 89,300 1.7 55.3 11.6 49.6 12.6 4.1 3.6 1.3 1.0 38.6 31.3 068270 , Inc. 36,365 290,000 - - - - 0.0 0.0 005490 POSCO 27,813 319,000 2.5 20.8 3.5 31.6 3.3 7.6 7.3 0.6 0.5 8.2 7.9 207940 27,425 414,500 4.5 277.0 - 375.1 529.6 111.5 6.8 6.4 1.3 5.9 005380 Hyundai Motor 27,314 124,000 3.2 -19.4 10.5 -16.9 17.9 10.6 9.0 0.5 0.5 4.8 5.3 035420 25,183 764,000 0.2 -3.2 45.8 -1.1 44.5 32.9 22.8 3.8 3.3 15.1 18.7 051910 LG Chem 23,366 331,000 1.8 -12.3 11.9 -0.6 12.1 13.4 11.9 1.5 1.3 11.5 11.9 105560 KB Financial Group 23,080 55,200 20.3 5.9 7.7 3.9 6.4 6.1 0.6 0.6 10.3 10.0 028260 Samsung C&T Corporation 22,668 119,500 1.7 14.5 11.3 66.5 6.1 21.5 20.2 0.9 0.9 4.6 4.7 012330 21,513 221,000 1.6 -2.1 10.7 27.8 12.8 10.7 9.5 0.7 0.6 6.6 7.1 055550 21,315 44,950 19.5 4.2 14.8 4.0 6.4 6.1 0.6 0.6 10.0 9.8 051900 LG Household & Health Care 20,850 1,335,000 0.8 9.0 10.1 13.1 10.5 34.5 31.2 6.5 5.6 20.9 19.7 015760 KEPCO 19,997 31,150 -80.1 280.7 - - - 13.4 0.3 0.3 - 2.1 032830 Samsung Life 19,340 96,700 - - - - 0.0 0.0 017670 SK Telecom 19,177 237,500 4.2 -13.7 9.5 8.2 -4.9 6.8 7.2 0.8 0.8 14.4 12.0 034730 SK Holdings 18,927 269,000 1.5 4.6 7.0 26.5 6.1 9.0 8.5 1.2 1.0 14.5 13.6 096770 SK Innovation 17,707 191,500 4.2 -13.7 0.1 -6.0 4.3 9.1 8.7 0.9 0.9 10.7 10.5 090430 AmorePacific 16,398 280,500 0.6 16.7 20.7 23.6 19.5 39.8 33.3 4.3 3.9 11.2 12.2 018260 Samsung SDS 16,133 208,500 1.2 17.9 13.1 22.7 10.7 24.8 22.4 2.6 2.4 11.1 11.2 006400 Samsung SDI 15,610 227,000 0.4 418.7 36.7 11.6 31.3 21.8 16.6 1.3 1.2 6.3 7.8 033780 KT&G 14,759 107,500 4.3 -6.9 16.5 -12.8 13.5 14.5 12.8 1.8 1.7 13.1 14.3 091990 Celltrion Healthcare 14,052 100,000 79.4 45.2 65.7 17.5 48.1 41.0 7.0 6.2 15.7 16.1 066570 LG Electronics 13,206 80,700 0.9 48.8 15.3 19.7 29.6 7.1 5.5 1.0 0.8 14.5 16.2 086790 12,985 43,250 23.4 10.0 17.5 9.0 5.3 4.9 0.5 0.4 9.6 9.6 010950 S-Oil 12,891 114,500 5.0 9.6 38.7 -9.6 39.0 11.9 8.5 2.0 1.8 16.6 21.9 000270 Motors 12,809 31,600 3.2 75.8 15.7 44.0 19.4 9.2 7.7 0.5 0.4 5.1 5.8 251270 12,651 148,500 0.2 -19.4 10.7 -7.6 10.4 44.1 39.9 2.8 2.6 6.4 6.7 003550 LG Corp. 12,648 73,300 1.8 0.8 6.8 -21.5 7.1 6.9 6.4 0.7 0.7 11.1 10.8 000810 Samsung F&M 12,531 264,500 - - - - 0.0 0.0 011170 Lotte Chemical 11,602 338,500 3.1 -14.2 3.4 -7.5 8.2 5.6 5.2 0.9 0.8 16.9 16.1 009150 Samsung Electro-Mechanics 11,465 153,500 0.5 142.3 16.9 193.3 14.5 25.1 21.9 2.5 2.2 10.6 11.0 024110 8,680 15,500 22.7 7.2 19.3 7.0 5.7 5.3 0.5 0.5 8.9 9.0 035720 Corp. 8,620 113,000 0.1 -39.5 76.0 -19.1 46.6 87.2 59.5 2.1 2.0 2.4 3.5 002790 AmoreG 8,493 103,000 0.5 24.5 12.2 30.3 7.7 34.6 32.2 2.7 2.5 8.5 8.5 036570 NCSOFT 8,490 387,000 2.1 19.0 70.1 14.5 70.3 16.8 9.9 2.6 2.1 17.2 24.6 034220 LG Display 7,264 20,300 2.5 ------0.5 0.5 - - 030200 KT 7,246 27,750 3.6 -10.3 -0.3 30.1 18.3 11.7 9.9 0.6 0.5 5.2 5.9 010130 Korea Zinc 7,142 378,500 2.6 -2.6 2.9 7.8 4.8 10.5 10.0 1.1 1.0 10.9 10.5 021240 Coway 6,671 90,400 4.5 10.9 5.4 13.2 4.2 18.5 17.7 5.5 5.2 35.6 34.8 004020 6,405 48,000 1.6 -0.9 3.7 10.9 3.4 8.1 7.8 0.4 0.4 4.7 4.7 139480 Emart 6,328 227,000 0.8 5.2 12.7 -28.1 18.6 14.3 12.0 0.7 0.7 5.3 6.0 032640 LG Uplus 6,309 14,450 3.8 -2.2 1.9 -7.7 0.9 12.5 12.4 0.9 0.9 8.5 7.4 018880 Hanon Systems 5,765 10,800 - - - - 0.0 0.0 000720 Hyundai E&C 5,757 51,700 1.0 9.7 2.9 146.5 3.0 11.6 11.3 0.9 0.9 7.7 7.8 023530 Lotte Shopping 5,723 203,500 2.6 36.3 16.2 - 123.4 25.9 11.6 0.5 0.4 1.7 3.8 036460 KOGAS 5,363 58,100 1.7 29.8 4.9 - 6.8 7.7 7.2 0.6 0.6 8.6 8.4 271560 Orion 5,297 134,000 0.5 172.8 13.3 54.9 16.9 26.5 22.7 3.5 3.1 14.3 14.6 128940 5,032 442,000 0.1 -1.8 108.0 -14.0 129.7 96.8 42.2 6.5 5.7 7.1 14.6 097950 CJ CheilJedang 4,968 330,000 0.9 5.8 11.8 109.9 -60.3 6.2 15.5 1.1 1.0 21.2 7.0 Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research Market Data July 19, 2018

※All data as of close July 18, 2018, unless otherwise noted.

Other Major Indices Economic Indicators Close Net Chg 1D (%) YTD (%) Close 1D ago 1M ago 1Y ago MSCI Korea* 487.94 1.06 0.22 -11.95 USD/KRW 1,125.20 1,128.70 1,091.40 1,128.20 KOSPI 2,290.11 -7.81 -0.34 -7.64 JPY100/KRW 995.84 1,004.63 986.84 1,001.64 KOSDAQ 810.44 -9.28 -1.13 -0.25 EUR/KRW 1,311.31 1,321.59 1,265.64 1,294.95 Dow Jones* 25,119.89 55.53 0.22 1.19 3Y Treasury 2.09 2.09 2.18 1.75 S&P 500* 2,809.55 11.12 0.40 4.22 3Y Corporate 2.74 2.75 2.81 2.29 NASDAQ* 7,855.12 49.40 0.63 12.11 DDR2 1Gb* 1.34 1.34 1.35 1.22 Philadelphia Semicon* 1,358.99 19.75 1.47 5.54 NAND 16Gb* 2.83 2.83 2.85 2.96 FTSE 100* 7,626.33 25.88 0.34 -0.28 Oil (Dubai)* 70.36 72.95 74.31 47.65 Nikkei 225 22,794.19 96.83 0.43 -3.03 Gold* 1,227.30 1,239.70 1,274.60 1,233.70 Hang Seng* 28,181.68 -357.98 -1.25 -7.65 Customer deposits (Wbn)* 25,429 26,189 28,655 23,532 Taiwan (Weighted) 10,842.46 63.47 0.59 1.23 Equity type BC (Wbn)(Jul. 16) 81,760 81,765 80,865 68,897 Note: * as of July 17, 2018 Source: KSDA, Wisefn, DRAMeXchange, MSCI

KOSPI Top 10 Foreign Net Buy / Net Sell (Wbn) KOSPI Top 10 Institutional Net Buy / Net Sell (Wbn) Net Buy Net Sell Net Buy Net Sell Samsung Electronics 88.26 KODEX 200 29.57 KODEX 200 26.95 Samsung Electronics 29.45 Hynix 26.04 KOREA AEROSPACE 26.07 LG Chem 17.04 SEMCO 20.70 SAMSUNG BIOLOGICS 14.28 TNC 9.75 LG Electronics 10.29 KODEX KOSDAQ150 LEVERAGE 20.61 Honam Petrochemical 9.32 HYOSUNG HEAVY 7.70 HYOSUNG HEAVY 9.88 KOREA AEROSPACE 18.62 Samsung Electronics (P) 7.80 HYOSUNG ADVANCED 7.31 SAMSUNG SDS 9.16 Celltrion 14.73 emart 6.98 LG Corp. 7.19 LG Corp. 4.67 KEPCO 11.55 Hyundai Eng. & Cosnt. 6.88 Hyundai Motor 6.80 3.87 DSME 10.46 LG Innotek 6.87 HYOSUNG CHEM 6.12 KODEX KOSDAQ150 INVERSE 3.30 GS Retail 8.30 DSME 6.61 LG Electronics 5.72 HYOSUNG TNC 2.64 Hyundai Eng. & Cosnt. 8.19 Hyundai Mobis 6.21 Hyosung Corp. 5.57 LG Display 2.51 Amore Pacific 7.51 Source: KSDA, Wisefn

KOSDAQ Top 10 Foreign Net Buy / Net Sell (Wbn) KOSDAQ Top 10 Institutional Net Buy / Net Sell (Wbn) Net Buy Net Sell Net Buy Net Sell HLB 15.27 OliX 5.53 OliX 6.69 CJ O Shopping 11.33 NATURECELL 6.83 ViroMed 3.72 ECOPRO 4.40 ISPLUS 5.20 Com2us 3.82 CJ O Shopping 3.48 ViroMed 4.10 Jtuen Entertainment 4.80 Winix 2.13 SillaJen 3.14 HLB 2.76 Cafe24 Corp. 4.13 SK Materials 2.08 Tes 2.68 Jenexine 2.54 BARREL 3.48 YG Entertainment 1.97 Robostar 2.33 Amotech 2.16 Celltrion Healthcare 3.44 1.95 ISPLUS 2.28 AP Systems 2.11 YG Entertainment 3.07 P&T 1.94 Jenexine 2.20 Paradise 2.06 ST Pharm 2.58 AP Systems 1.66 TK CHEMICAL 1.76 WONIK IPS 1.64 Icure Pharm. Inc. 2.52 Webzen 1.52 Kolon Life Science 1.68 P&T 1.63 JTC 2.33 Source: KSDA, Wisefn

KOSPI Top 10 by Market Cap (Wbn) KOSDAQ Top 10 by Market Cap (Wbn) Close (W) Chg (W) Mkt Cap Close (W) Chg (W) Mkt Cap Samsung Electronics 46,550 700 298,820 Celltrion Healthcare 100,000 -900 14,052 Hynix 89,300 700 65,011 CJ O Shopping 259,600 -15,100 5,692 Celltrion 290,000 -5,500 36,365 SillaJen 67,100 -1,600 4,663 Samsung Electronics (P) 37,900 900 34,248 Medy-tox 799,800 800 4,524 POSCO 319,000 0 27,813 NANOS 8,700 -470 4,270 SAMSUNG BIOLOGICS 414,500 1,500 27,425 ViroMed 237,700 1,900 3,793 Hyundai Motor 124,000 -2,500 27,314 Studio Dragon 111,500 1,100 3,126 NHN 764,000 5,000 25,183 PearlAbyss 228,500 -200 2,917 LG Chem 331,000 9,500 23,366 HLB 77,000 -4,500 2,833 KB Financial Group 55,200 -200 23,080 Celltrion 82,400 -1,100 2,805 Source: