POSCO Chemical (003670.KS) Future Value to Rise on Aggressive Investment

POSCO Chemical (003670.KS) Future value to rise on aggressive investment

Company Note │Jul 20, 2020

POSCO Chem’s production capacity for rechargeable battery materials is ※ Refer to page 2 for projected to increase to 120,000 tons for cathodes and 90,000 tons for anodes ESG index/event tables by 2023. Backed by both POSCO Group’s willingness to foster rechargeable battery materials businesses and the rapid growth of the related market, the Buy (maintain) prospects for profit expansion at POSCO Chem are picking up strongly. TP W88,000 (raise) CP (’20/07/17) W76,400 Sector Non-ferrous metal Change base year for estimating rechargeable battery earnings to Kospi/Kosdaq 2,201.19 / 783.22 Market cap (common) US$3,866.80mn 2024 in TP calculation Outstanding shares (common) 61.0mn In consideration of the rapid growth of the rechargeable battery market, POSCO 52W high (’20/07/09) W82,900 Group’s willingness to foster rechargeable battery materials businesses, and low (’20/03/19) W33,100 POSCO Chem’s aggressive investment expansion, we change the earnings base Average trading value (60D) US$39.67mn Dividend yield (2020E) 0.52% year for the rechargeable battery business to 2024 in our SOTP-based TP Foreign ownership 7.0% calculation. Adhering to a Buy rating, we raise our TP on POSCO Chem by Major shareholders 29.4% from W68,000 to W88,000. POSCO and four others 65.1% NPS 6.1% We expect POSCO Chem’s 2Q20 earnings to arrive sluggish, forecasting consolidated sales of W430.2bn (+16.3% y-y), OP of W5bn (-70.0% y-y), and a Share perf 3M 6M 12M Absolute (%) 46.6 41.0 42.8 net loss (excluding minority interests) of W300mn (TTL y-y). Relative (%p) 27.5 44.1 34.5 2019 2020E 2021F 2022F Planning to boost production capacity for rechargeable battery Sales 1,484 1,837 2,412 2,931 materials by 2023 Chg 7.2 23.8 31.3 21.5 POSCO Chem is planning to expand its production capacity for rechargeable OP 89.9 71.7 136.6 191.9 battery materials to 120,000 tons for anodes (44,000 tons as of Dec 2019) and Chg -15.4 -20.2 90.5 40.5 90,000 tons for cathodes (39,000 tons as of May 2020). At the anode business, OPM 6.1 3.9 5.7 6.5 NP 101.0 47.4 93.2 139.9 we expect to see the addition of artificial graphite anodes (construction to kick EPS 1,672 777 1,529 2,295 off from July) to the current production of natural graphite anodes, noting that Chg -25.3 -53.5 96.8 50.1 artificial graphite anodes are anticipated to enjoy a strong uptick in EV-driven P/E 29.5 98.4 50.0 33.3 demand. Meanwhile, the cathode materials business has secured technology for P/B 3.0 4.6 4.3 3.9 the production of high-nickel NCMA cathode materials with the ability to EV/EBITDA 24.0 29.1 20.7 17.1 increase the range of EVs, with plans to supply the material to meet market ROE 11.6 4.7 8.8 12.2 demand in the future. Although it has entered the rechargeable battery materials Debt/equity 71.9 109.3 126.9 121.8 market as a latecomer, we expect POSCO Chem to successfully establish itself Net debt 194.6 530.1 663.8 645.2 as a major materials supplier in the global market. Unit: Wbn, %, won, x Note 1: NP excludes minority interests By 2030, rechargeable battery materials demand is projected to rise 12x (CAGR Note 2: EPS, P/E, P/B, ROE based on NP (excl minority interests) of 24%) versus the 2018 level for anodes and 17x (CAGR of 27%) for cathodes. Source: NH I&S Research Center estimates We estimate that the rechargeable battery materials business will log 2024 sales of W3.141tn and OP of W262bn, with its portion out of the firm’s overall OP climbing to 75.2%.

2Q20 preview (Unit: Wbn, %) 2Q20E 2Q19 3Q19 4Q19 1Q20 3Q20F Estimate y-y q-q Previous Consen Sales 369.8 371.7 386.9 387.5 430.2 16.3 11.0 414.7 401.0 490.8 OP 16.7 28.0 23.2 16.0 5.0 -70.0 -68.6 15.3 14.4 21.1 OPM 4.5 7.5 6.0 4.1 1.2 3.7 3.6 4.3 Will Byun, Analyst 822)768-7597, [email protected] Pre-tax profit 27.1 37.9 14.8 16.2 -0.3 TTL TTL 11.3 12.0 17.5 NP(excl minority Youngeun Lee, RA 23.3 29.9 14.9 14.1 -0.3 TTL TTL 9.1 10.6 13.6 822)2229-6742, [email protected] interests) Note: IFRS consolidated; Source: POSCO Chemical, FnGuide, NH I&S Research Center estimates POSCO Chemical www.nhqv.com

Summary

Established in 1963, POSCO Chem is a POSCO group affiliate which mainly engages in refractory and shaft tunnel business. On a preliminary basis, 2019 consolidated sales totaled W1.48tn (+7.2% y-y). The firm is re-centering its focus on refractory, rechargeable battery materials, and needle/pitch coke business. At present, POSCO Chem is expanding its anode and cathode capacity, with annual production expected to rise to 120,000 tons and 90,000 tons, respectively, by 2023. Moving ahead, we expect greater rechargeable battery materials demand to translate into additional sales growth. With all these factors considered, we offer a Buy rating and TP of W88,000.

Share price drivers/earnings momentum Downside risks

Rising rechargeable battery materials demand on EV market Prolonged Covid-19 crisis delaying EV production expansion normalization To benefit from rechargeable battery makers’ aggressive Delayed production yield improvement at major clients capacity expansion Weakening demand and falling prices for needle coke due to Boasts strong technological capabilities and solid financials as sluggish Chinese steel industry POSCO group’s leading advanced materials company

Cross valuations (Unit: x, %) Historical valuations (Unit: x, %)

P/E P/B ROE Company Valuations 2018 2019 2020E 2021F 2022F 2020E 2021F 2020E 2021F 2020E 2021F BYD 89.1 72.2 4.0 4.6 4.8 4.5 P/E 28.5 29.5 98.4 50.0 33.3 Ningbo Shanshan 50.3 34.3 1.5 1.5 3.3 3.6 P/B 5.0 3.0 4.6 4.3 3.9 Putailai 54.3 40.8 8.4 7.2 18.3 19.1 P/S 2.7 2.0 2.5 1.9 1.6 Umicore 38.9 29.8 3.8 3.5 10.6 12.3 ROE 19.0 11.6 4.7 8.8 12.2 ROIC 25.0 11.9 6.6 9.7 12.6 Source: Bloomberg, NH I&S Research Center Source: Bloomberg, NH I&S Research Center

ESG index (Unit: %, Wbn, years, hours, ‘000TJ, mn tCO2e, mn tons)

BOD composition Human resources 2017 2018 2019 Min Kyeong-joon CEO, BOD chair Inside Portion of female employees 4.4 4.7 5.8 Kang Deuk-sang - Inside Portion of contract workers 8.7 7.5 9.6 Chung Seok-mo Non-standing director Inside Avg service period per employee 15.8 14.9 2.6 Yoo Gyae-hyeon - Outside Avg training hours per employee 38.4 55.1 N/A Jeon Young-sun - Outside Environment 2017 2018 2019 Energy consumption 13 14 N/A Greenhouse gas emissions 2.3 2.4 N/A Recycled water consumption 0.1 0.2 N/A Recycled waste 0.4 0.4 N/A Source: POSCO Chemical, NH I&S Research Center

ESG events

2019.6 – Media reports released related to the company’s waste battery recycling project plans E 2020.2 – Established hydrogen peroxide JV with OCI 2019.5 – Co-established R&D center with POSTECH (W1.5bn invested) S 2020.3 – Received warning from Ministry of Employment and Labor regarding breach of labor-related regulations 2019.3 – POSCO Chemtech renamed POSCO Chemical G – Phoenix Materials (POSCO ESM’s shareholder) filed a lawsuit arguing for resettlement of share purchase price regarding 2019.5 POSCO Chemical-POSCO ESM merger Source: POSCO Chem, NH I&S Research Center

2 POSCO Chemical www.nhqv.com

Raise TP to W88,000 Change earnings Our SOTP-derived TP reflects the values of POSCO Chem’s existing businesses base year for (refractory/shaft tunnel, burned lime), the rechargeable battery anode business, the rechargeable rechargeable battery cathode business, and PMC Tech. As for the cathode/anode battery materials businesses, we note that POSCO Chem’s production capacity is to significantly increase business from 2022 by 2023, according to recent media reports. Accordingly, we have changed our earnings to 2024 base year for the cathode/anode businesses used in TP calculation from 2022 to 2024, a year when planned capacity additions are to wrap up and the operation of new facilities is to start in earnest. We have also taken into account both POSCO Group’s strong commitment to fostering rechargeable battery materials businesses and the rapid expansion of the rechargeable battery materials market, led by brisk EV industry growth.

Target P/E multiples for Considering the above, we adhere to a Buy rating and raise our SOTP-based TP by rechargeable battery 29.4% from W68,000 to W88,000. Of note, we have applied a target P/E multiple of 25x materials businesses for the anode business and 30x for the cathode business. We believe that these levels are lower than those of relatively low versus those for major peers both at home and abroad. peers

2Q20 preview: POSCO Chem likely saw sluggish 2Q20 earnings, with consolidated sales of W430.2bn Covid-19 impacts (+16.3% y-y), OP of W5bn (-70.0% y-y), and a net loss (excluding minority interests) of were likely W300mn (TTL y-y). Sales likely met consensus, but OP likely fell short by 65.3%, with inescapable NP missing the consensus of W10.6bn. We attribute the likely lackluster results to: 1) longer-than-expected repair work at the Gwangyang #3 blast furnace; and 2) delayed rechargeable battery materials shipments due to Covid-19. In addition, profitability was likely weighed upon by PMC Tech’s operating losses. But, in 3Q20, with 2Q20 negatives set to ease, we predict that NP will recover to W13.6bn (-54.8% y-y).

SOTP-derived TP calculation 2. Rechargeable battery 3. Rechargeable battery 1. Existing businesses 4. PMC Tech anode business cathode business – Refractory/shaft tunnel – Manufactures/distributes - Entry into cathode market - Uses 320,000 tons of coal – Burned lime production/ natural graphite anode via merger with ESM tar pa to produce oil, Overview distribution materials ※ 39,000 ton capacity as needle coke, and pitch – Operation of POSCO’s ※ 44,000 ton capacity by of May 2020 coke chemical plants Dec 2019 – Stable earnings backed – Foray into artificial - Investment mainly in EV - Structural changes in by captive orders from graphite anode arena NCM Chinese demand Current status and forecast POSCO – Strong growth potential - Strong growth potential - Decline in needle coke – Low growth potential ※ Capacity to expand to ※ Capacity to expand to prices – Stable dividend income 120,000 tons by 2023 90,000 tons by 2023 - 60% stake (40% owned by Mitsubishi) Business type – In-house business - In-house business - In-house business ※ Earnings booked as equity-method income Basis year 2020 2024 2024 2020 NP (Wbn) 60.8 48.3 146.7 -11.9 P/E (x) 11.0 25.0 30.0 0.5 TP calcul Operating value (Wbn) 669 993 3,621 91 ation Enterprise value (Wbn) 5,374 Number of outstanding 60,988 shares (‘000 shr) Value per share (won) 88,117 Source: NH I&S Research Center

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To benefit from rapid growth of rechargeable battery materials market Rechargeable Even amid the ongoing Covid-19 crisis, POSCO Chem is likely to benefit from the rapid battery materials growth of the rechargeable battery materials market, helped by rising xEV penetration. demand to expand Of note, the size of the rechargeable battery industry (including cathodes, anodes, at CAGR of 27% separators, and electrolytes) is expected to grow from US$15bn in 2018 to US$264bn in over 2018~2030 2030 (CAGR of 27%), according to SNE Research.

Global cathode and It is also predicted that the size of the cathode market, which represents the largest anode demand to portion out of the rechargeable battery materials industry, will surge from US$9bn in rise 12x and 17x, 2018 to US$14bn in 2020 to US$154bn in 2030, expanding more than tenfold in a respectively, by decade. As for the anode market, it is estimated to grow from US$3bn in 2018 to 2030 US$28bn in 2025 to US$55bn in 2030. The brisk growth prospects for the cathode and anode markets bode well for the rechargeable battery materials businesses of POSCO Chem, which has been aggressively expanding its cathode and anode production capacity (in line with battery makers’ capacity addition plans) as of late. Against this backdrop, expectations towards POSCO Chem’s top-line growth are mounting.

Rechargeable battery materials market to expand at CAGR of 27% over 2018~2030

(US$bn)

300 Cathodes Anodes Separators Electrylytes 264

250

200 55 150 43 100 28 154 111 50 15 67 3 5 0 9 14 '18 '20 '25 '28 '30

Source: SNE Research, NH I&S Research Center

Anode market to grow at CAGR of 24% over 2018~2030 Cathode market to rise at CAGR of 27% over 2018~2030

Source: SNE Research, NH I&S Research Center Source: SNE Research, NH I&S Research Center

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Aggressive capacity expansion to change future earnings structure 2024 anode sales to POSCO Chem has been carrying out aggressive capex projects for both cathode and reach W518.0bn anode production facilities. Its anode production capacity is expected to expand from 44,000 tons in end-2019 to 120,000 tons in 2023. While it currently produces anode only from natural graphite, on Jul 2, the firm commenced a construction project (investment amount of W218.9bn) for an anode production facility using synthetic graphite in order to respond to greater xEV-related anode demand. Its anode production capacity using synthetic graphite is set to rise to 16,000 tons by 2023. We estimate that the firm’s anode sales will jump from W121.0bn in 2019 to W518.0bn in 2024.

2024 cathode sales The firm’s cathode production capacity (for rechargeable batteries) has also been on the sized at W2.6tn increase. Following the merger of POSCO ESM in Apr 2019, the firm’s cathode capacity rose to 15,000 tons by end-2019. On May 14, 2020, it completed the addition of 24,000 tons of cathode production in Yeosu, Korea. The firm plans to expand its cathode capacity to 60,000 tons in 2021 and to 90,000 tons in 2023. We predict that cathode sales (for rechargeable batteries) will soar 26x from W98bn in 2019 to W2,623.0bn in 2024.

POSCO Chem’s anode capacity to grow to 120,000 tons in 2024 (sales of W518.0bn)

( '000 tons) (Wbn) 200 600 Capacity (LHS) Sales (RHS)

500 150 400

120 120 100 300

200 50 54 100 44 24 0 0 '18 '19 '20E '21F '22F '23F '24F

Source: POSCO Chem, NH I&S Research Center

POSCO Chem’s cathode capacity to grow to 90,000 tons in 2024 (sales of W2.6tn)

( '000 tons) (Wbn) 200 Capacity (LHS) Sales (RHS) 3,000

2,500 150 2,000

100 1,500

90 90 1,000 50 500 15 9 39 0 0 '18 '19 '20E '21F '22F '23F '24F

Source: POSCO Chem, NH I&S Research Center

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Rechargeable Given POSCO Chem’s capacity additions for rechargeable battery materials, we believe battery materials that related earnings will show notable growth going forward. We expect rechargeable portion of OP to battery materials OP to increase from W17bn in 2019 to W123bn in 2022 to W262bn in jump to 75% in 2024, with the related portion out of overall OP widening from 15.3% in 2019 to 54.4% 2024 in 2022 to 75.2% in 2024.

POSCO Chem’s rechargeable battery materials OP to jump to W262bn by 2024

(Wbn) 300 262 250

193 200

150 123

100 72

50 15 17 17 0 '18 '19 '20 '21 '22 '23 '24

Source: POSCO Chem, NH I&S Research Center estimates

POSCO Chem’s OP breakdown (2019) POSCO Chem’s OP breakdown (2024E)

Cathodes 3% Burned lime 6% Refractory/ shaft tunnel Anodes Chemical 11% Refractory/ 12% materials 4% shaft tunnel 27% PMC Tech 4% PMC Tech Cathodes 23% 56% Anodes Burned lime 19% 21% Chemical materials 14%

Source: POSCO Chem, NH I&S Research Center estimates Source: NH I&S Research Center estimates

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Competitiveness to further strengthen based on artificial graphite anodes and high-nickel cathode materials POSCO Group POSCO Group is showing strong willingness to foster rechargeable battery materials nurturing businesses. Based on POSCO’s lithium, POSCO Chem produces anodes and cathodes. rechargeable And, PMC Tech, in which POSCO Chem and Mitsubishi own 60% and 40% stakes, battery businesses respectively, manufactures electrodes and needle coke (for use in artificial graphite anodes) using POSCO’s coal tar.

POSCO Chem Having mainly produced natural graphite anodes, POSCO Chem embarked on the targets artificial construction of an artificial graphite anode plant on Jul 2. With construction to wrap up graphite anode in May 2024, POSCO Chem’s artificial graphite anode capacity is likely to reach 16,000 capacity of 16,000 tons pa. As a result, POSCO Chem should come to produce natural graphite anodes at its tons pa plant in Sejong and artificial graphite anodes at a plant to be built in the Blue Valley National Industrial Complex in Pohang. Of note, artificial graphite anode capacity of 16,000 tons should be sufficient to supply 420,000 cars on a 60kw EV basis.

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Artificial graphite While artificial graphite is similar to natural graphite in terms of energy density, the to be mainly used as former is superior to the latter regarding battery power performance and life. It stands rechargeable out in structural uniformity and stability, as well as fast-charging performance. battery anode Accordingly, even though artificial graphite is 2x more expensive than natural graphite, material demand for artificial graphite should pick up fast in line with EV fleet expansion. According to SNE Research, the artificial graphite portion out of rechargeable battery anode demand should climb from 42% in 2016 to 52% in 2021. With POSCO Chem receiving needle coke (raw material for artificial graphite) from subsidiary PMC Tech, POSCO Group has established a vertically-integrated value chain for the production of artificial graphite anode materials (POSCO (coal tar) - PMC Tech (needle coke) - POSCO Chem (artificial graphite)).

POSCO Chem to Having developed technology for NCMA (nickel, cobalt, manganese, aluminum) develop NCMA cathode materials—key materials for next-generation EV batteries—POSCO Chem cathode material plans to start commercial production to meet customer demand. NCMA cathode technologies to meet materials boast high energy density, resulting in improved driving range, higher battery high-nickel cathode stability and power, and lower costs. In order to supply high-nickel cathode materials materials demand (containing 80% nickel or more) to accommodate demand from battery makers, POSCO Chem is adding capacity at its cathode plant in the Yeosu Yulchon Industrial Complex.

LG Chem to use Samsung SDI is known to have signed a EUR2.9bn deal to supply NCA high-nickel NCMA cathode batteries to BMW over 2021~2031. LG Chem plans to supply NCM712 batteries from materials for its 2020 and use NCMA cathode materials for its batteries from 2022. POSCO Chem is batteries from 2022 expected to produce high-nickel cathode materials (including NCMA materials) in earnest to provide supply in time for battery makers’ delivery schedules. According to SNE Research, while the NCM cathode materials portion came to 55.3% in 2019, consumption of high-nickel cathode materials (including NCMA materials) is projected to accelerate rapidly going forward.

NCM portion out of global rechargeable battery anode materials demand rising steadily

Source: SNE Research, NH I&S Research Center

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Earnings forecasts (IFRS consolidated) (Unit: Wbn, won, x, %) 2019 2020E 2021F 2022F Sales - Revised 1,484 1,837 2,412 2,931 - Previous 1,484 1,833 2,521 3,123 - Change 0.2 -4.3 -6.1 OP - Revised 89.9 71.7 136.6 191.9 - Previous 89.9 83.5 155.0 244.6 - Change -14.1 -11.9 -21.5 OPM - Revised 6.1 3.9 5.7 6.5 EBITDA 133.8 178.5 257.8 311.2 NP (excl minority interest) 101.0 47.4 93.2 139.9 EPS - Revised 1,672 777 1,529 2,295 - Previous 920 1,752 2,928 - Change -15.5 -12.7 -21.6 P/E 29.5 98.4 50.0 33.3 P/B 3.0 4.6 4.3 3.9 EV/EBITDA 24.0 29.1 20.7 17.1 ROE 11.6 4.7 8.8 12.2 Note: EPS, P/E, P/B, and ROE based on NP (excluding minority interests) Source: NH I&S Research Center estimates

Quarterly earnings forecasts (Unit: Wbn, %) 2019 2020E 1Q 2Q 3Q 4Q Annual 1Q 2Q 3Q 4Q Annual Sales (Wbn) 355 370 372 387 1,484 388 430 491 529 1,837 OP (Wbn) 21.9 16.7 28.0 23.2 89.9 16.0 5.0 21.1 29.7 71.7 K-IFRS OPM (%) 6.2 4.5 7.5 6.0 6.1 4.1 1.2 4.3 5.6 3.9 consolidated Pre-tax profit (Wbn) 33.3 27.1 37.9 14.8 113.0 16.2 -0.3 17.5 25.7 59.1 NP (Wbn) 32.9 23.4 30.0 14.9 101.2 14.2 -0.3 13.6 19.9 47.4 Sales (Wbn) 343 358 359 374 1,435 377 419 476 513 1,785 OP (Wbn) 21.3 16.2 27.4 22.5 87.6 15.6 5.0 20.5 29.1 70.3 K-IFRS non- OPM (%) 6.2 4.5 7.6 6.0 6.1 4.1 1.2 4.3 5.7 3.9 consolidated Pre-tax profit (Wbn) 39.1 18.8 30.7 18.5 107.1 39.5 3.2 18.7 26.9 88.4 NP (Wbn) 30.8 16.1 23.9 18.8 89.6 34.3 2.5 14.5 20.9 72.2 Sales (Wbn) 64 66 52 35 217 35 26 34 33 128 OP (Wbn) 20.5 19.8 13.1 -10.4 43.0 -5.1 -4.4 -1.1 -1.4 -12.1 PMC Tech OPM (%) 31.9 30.0 25.3 -29.9 19.8 -14.7 -16.9 -3.1 -4.4 -9.4 Pre-tax profit (Wbn) 19.5 18.7 12.0 -11.5 36.9 -6.6 -5.9 -2.6 -3.0 -18.1 NP (Wbn) 16.6 13.3 10.6 -8.2 32.3 -8.3 -5.9 -2.6 -3.0 -19.8 Source: NH I&S Research Center estimates

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Earnings forecasts (non-consolidated basis) 2019 2020E 1Q 2Q 3Q 4Q Annual 1Q 2Q 3Q 4Q Annual Refractory and shaft tunnel 122.2 121.9 118.6 118.6 481.2 129.5 105.2 118.5 118.3 471.5 Burned lime 87.8 82.5 86.5 91.4 348.3 82.7 67.9 86.5 91.2 328.4 Sales Operation of POSCO’s chemical plants 100.8 91.4 95.4 98.5 386.0 77.5 75.4 60.6 62.5 276.0 (Wbn) Anode 32.0 31.2 26.6 30.8 120.6 41.0 46.8 57.6 71.2 216.5 Cathode 0.0 31.2 32.0 35.3 98.4 46.0 123.6 153.2 169.9 492.7 Total 358.1 359.0 374.5 1,434.5 376.7 418.7 476.4 513.3 1,785.1 Refractory and shaft tunnel 9.4 7.3 6.4 7.0 30.2 14.4 5.1 6.7 8.6 34.7 OPM (%) 7.7 6.0 5.4 5.9 6.3 11.1 4.8 5.7 7.3 7.4 Burned lime 5.9 2.5 6.8 9.0 24.1 4.3 1.4 4.5 4.6 14.7 OP OPM (%) 6.7 3.0 7.8 9.9 6.9 5.2 2.0 5.2 5.1 4.5 (Wbn) Operation of POSCO’s chemical plants 2.3 1.4 8.8 3.4 15.9 -2.1 0.7 2.1 2.8 3.5 OPM (%) 2.2 1.6 9.2 3.5 4.1 -2.7 0.9 3.5 4.5 1.3 Rechargeable battery materials 3.8 5.0 5.4 3.1 17.3 -0.9 -2.1 7.2 13.1 17.3 OPM (%) 12.0 8.0 9.3 4.7 7.9 -1.1 -1.3 3.4 5.4 2.4 Total 21.3 16.2 27.4 22.5 87.6 15.6 5.0 20.5 29.1 70.3 Source: NH I&S Research Center estimates

10 POSCO Chemical www.nhqv.com

Peer analysis: Earnings (Unit: US$mn) POSCO ECOPRO Iljin NINGBO Company LANDF Chunbo BYD PUTAILAI Umicore Chemical BM Materials SHANSHAN Share price(US$) 62.9 109.0 32.1 78.4 42.2 12.2 1.7 15.2 49.8 Market cap 3,836.7 2,284.5 832.6 784.3 1,947.9 30,280.5 2,694.7 6,636.0 12,276.9 Sales 2019 1,274 529 269 116 472 17,632 1,257 695 19,574 2020E 1,490 695 377 147 541 19,556 1,377 852 4,784 2021F 1,949 1,171 510 211 702 22,664 1,586 1,117 5,374 OP 2019 77 32 -7 23 40 845 62 124 527 2020E 73 47 8 30 55 514 71 147 555 2021F 125 95 26 45 87 667 96 199 686 EBITDA 2019 115 57 3 31 70 2,269 126 141 799 2020E 130 73 24 38 92 2,252 181 177 856 2021F 195 132 45 55 133 2,484 220 239 1,033 NP 2019 87 30 -8 20 40 234 39 94 322 2020E 55 36 6 25 51 367 55 124 319 2021F 98 70 17 38 73 465 74 167 415 EPS (US$) 2019 1.4 1.5 -0.4 2.0 0.9 0.1 0.0 0.2 1.3 2020E 0.9 1.7 0.2 2.6 1.1 0.1 0.0 0.3 1.3 2021F 1.6 3.3 0.7 3.6 1.6 0.2 0.0 0.4 1.7 BPS (US$) 2019 14.2 15.7 5.1 18.2 10.7 2.8 1.0 1.1 12.1 2020E 14.2 16.1 5.0 19.5 11.3 3.0 1.1 1.8 13.2 2021F 15.4 19.3 5.7 21.5 12.8 2.6 1.1 2.1 14.2 Net debt 2019 228 162 203 -69 -323 9,485 832 176 1,621 (-Net cash) 2020E 415 258 176 -55 -186 11,140 821 -550 1,917 2021F 546 326 221 -66 -172 13,509 927 -506 2,132 Note: Based on Jul 16 closing prices; Source: Bloomberg

Peer analysis: Valuations (Unit: x, %) POSCO Iljin NINGBO Company ECOPRO BM LANDF Chunbo BYD PUTAILAI Umicore Chemical Materials SHANSHAN P/E 2019 29.46 30.29 N/A 26.24 44.44 69.46 56.29 56.77 36.13 2020E 68.23 64.86 149.76 30.23 38.36 89.06 50.30 54.29 38.86 2021F 39.02 33.31 46.42 21.83 26.76 72.20 34.33 40.79 29.77 P/B 2019 3.01 2.93 3.56 2.93 3.45 1.81 1.28 10.82 4.03 2020E 4.46 6.82 6.42 4.01 3.76 4.01 1.49 8.43 3.78 2021F 4.09 5.69 5.71 3.63 3.32 4.64 1.52 7.23 3.51 EV/EBITDA 2019 24.49 19.20 196.70 14.93 22.67 12.41 26.13 39.47 16.75 2020E 32.73 34.62 42.10 19.18 21.44 19.05 20.89 34.58 16.69 2021F 22.48 19.80 23.47 13.01 15.06 18.22 17.67 25.77 14.05 ROE 2019 11.57 12.99 -6.66 14.49 8.52 2.62 2.40 20.61 11.06 2020E 6.55 10.95 5.73 14.97 10.22 4.77 3.29 18.25 10.59 2021F 10.84 18.31 15.14 18.02 12.96 4.45 3.57 19.11 12.30 ROA 2019 7.55 6.19 -2.41 12.46 5.42 0.83 1.11 8.80 4.40 2020E 3.78 5.83 1.72 12.68 5.68 1.68 1.48 8.52 4.17 2021F 5.60 8.47 4.62 14.99 7.30 1.70 1.74 8.94 4.72 Div yield 2019 0.81 0.28 0.23 0.49 0.12 0.17 0.89 0.53 0.86 2020E 0.51 0.11 0.20 0.29 0.10 0.14 0.72 0.49 1.09 2021F 0.54 0.12 0.28 0.29 0.12 0.18 0.63 0.64 1.58 Note: Based on Jul 16 closing prices; Source: Bloomberg

11 POSCO Chemical www.nhqv.com

STATEMENT OF COMPREHENSIVE INCOME Valuation / Profitability / Stability (Wbn) 2019/12A 2020/12E 2021/12F 2022/12F 2019/12A 2020/12E 2021/12F 2022/12F Sales 1,484 1,837 2,412 2,931 Price/ Earnings (X) 29.5 98.4 50.0 33.3 Growth (%) 7.2 23.8 31.3 21.5 Price/ Book Value (X) 3.0 4.6 4.3 3.9 COGS 1,317 1,682 2,192 2,652 Price/ Gross Cash Flow (X) 17.3 27.8 19.3 15.9 Gross Profit 166.5 154.7 220.2 279.2 Price/ Sales (X) 2.0 2.5 1.9 1.6 Gross margin (%) 11.2 8.4 9.1 9.5 EV/ EBITDA (X) 24.0 29.1 20.7 17.1 SG&A 76.7 83.0 83.6 87.3 EV/ EBIT (X) 35.7 72.5 39.0 27.7 Operating Income 89.9 71.7 136.6 191.9 Fully diluted EPS (W) 1,672 777 1,529 2,295 Growth (%) -15.4 -20.2 90.5 40.5 BVPS (W) 16,356 16,733 17,861 19,756 Operating margin (%) 6.1 3.9 5.7 6.5 Sales PS (W) 24,553 30,122 39,548 48,059 EBITDA 133.8 178.5 257.8 311.2 ROE (%) 11.6 4.7 8.8 12.2 Non-Operating Profit 23.1 -12.7 -16.1 -11.1 ROA (%) 7.6 2.4 4.0 5.4 Financial Income(Costs) 1.1 -5.8 -14.4 -19.4 ROIC (%) 11.9 6.6 9.7 12.6 Other Non-Operating Profit 0.7 5.0 4.7 7.7 Dividend Yield (%) 0.8 0.5 0.5 0.5 Gains(Losses) in Associates, Subsidiaries and JVs 21.3 -11.9 -6.4 0.6 Payout Ratio (%) 24.1 51.5 26.2 17.4 Pre-tax Profit from Cont. Op. 113.0 59.1 120.5 180.8 Total Cash Dividend (Wbn) 24.4 24.4 24.4 24.4 Income Taxes 11.8 11.6 27.1 40.7 Cash DPS (W) 400 400 400 400 Profit from Continuing Op. 101.2 47.4 93.4 140.1 Net debt(cash)/ equity (%) 19.3 51.5 60.4 53.1 Net Profit 101.2 47.4 93.4 140.1 Debt/ equity (%) 71.9 109.3 126.9 121.8 Growth (%) -23.8 -53.2 97.0 50.0 Interest-Bearing Debts (Wbn) 416.0 760.0 930.0 925.0 Net margin (%) 6.8 2.6 3.9 4.8 Current Ratio (%) 259.2 236.8 218.2 207.9 Net Profit of Parent 101.0 47.4 93.2 139.9 Total shares (mn) 61 61 61 61 Net Profit to Non-Controlling 0.1 0.1 0.1 0.2 Par value (W) 500 500 500 500 Other Comprehensive Income -1.0 0.0 0.0 0.0 Share price (W) 49,250 76,400 76,400 76,400 Total Comprehensive Income 100.2 47.4 93.4 140.1 Market Cap (Wbn) 3,004 4,660 4,660 4,660

STATEMENT OF FINANCIAL POSITION CASH FLOW STATEMENT (Wbn) 2019/12A 2020/12E 2021/12F 2022/12F (Wbn) 2019/12A 2020/12E 2021/12F 2022/12F Cash and Cash Equivalents 210.1 216.4 251.2 263.3 Operating Cash Flow 62.8 140.4 196.6 220.3 Accounts Receivables 208.9 258.6 339.6 412.7 Net Profit 101.2 47.4 93.4 140.1 Total Current Assets 649.6 741.3 895.3 1,032 Depreciation&Amortization 43.9 106.8 121.2 119.3 Tangible Assets 755.3 1,058 1,169 1,167 + Loss(Gains) from Subs -21.3 11.9 6.4 -0.6 Investment Assets 200.8 241.6 317.2 385.5 + FC translation loss(profit) 0.9 0.0 0.0 0.0 Non-Current Assets 1,080 1,413 1,597 1,661 Gross Cash Flow 172.1 167.6 241.4 293.9 Assets 1,730 2,154 2,492 2,693 - Incr. (Decr.) in WC -100.9 -25.7 -24.3 -38.5 Short-Term Debt 20.0 27.5 35.4 40.7 Investing Cash Flow -291.4 -453.2 -313.2 -184.2 Account Payables 94.3 116.7 153.2 186.2 + Decr. In Tangible Assets 0.5 5.0 10.0 20.0 Current Liabilities 250.7 313.1 410.3 496.3 - Incr. In Tangible Assets(CAPEX) -308.7 -410.0 -240.0 -135.0 Long-Term Debt 462.5 798.4 966.5 961.6 + Disp.(Acq.) of Inv. Assets 13.9 -52.7 -82.0 -67.7 Long-Term Allowance 3.4 4.2 5.5 6.6 Free Cash Flow -245.9 -269.6 -43.4 85.3 Non-Current Liabilities 473.2 811.6 983.8 982.6 Net Cash Flow -228.6 -312.7 -116.7 36.1 Liabilities 723.8 1,125 1,394 1,479 Financing Cash Flow 318.2 319.0 151.6 -24.0 Capital Stock 30.5 30.5 30.5 30.5 Equity Financing 171.8 0.0 0.0 0.0 Capital Surplus 194.5 194.5 194.5 194.5 Debt Financing 146.4 319.0 151.6 -24.0 Retained Earnings 773.5 796.5 865.3 980.9 Incr.(Decr.) in Cash 89.6 6.3 34.9 12.1 Non-Controlling Interests Equity 8.8 8.9 9.0 9.1 Ending Cash and Cash Equivalents 210.1 216.4 251.2 263.3 Shareholders' Equity 1,006 1,029 1,098 1,214 Net Debt (Cash) 194.6 530.1 663.8 645.2

12 POSCO Chemical www.nhqv.com

Rating and TP update POSCO Chemical (003670.KS) Disparity ratio (%) Date Rating TP Avg Max/Min (won) Closing Price Target price(12M) 2020.07.17 Buy W88,000(12M) - - 120,000 2020.05.22 Buy W68,000(12M) 3.1% 21.9% 100,000 2020.04.23 Buy W65,000(12M) -18.5% -10.5% 80,000 2020.04.02 Buy W55,000(12M) -12.3% -3.3% 2020.02.02 Buy W70,000(12M) -23.3% -8.6% 60,000 2019.10.04 Buy W61,000(12M) -20.0% -0.5% 40,000 2019.06.03 Buy W68,000(12M) -24.7% -15.4% 20,000 2018.10.31 Blackout - - 0 2018.04.18 Hold W38,500(12M) 33.9% - '18.7 '18.11 '19.3 '19.7 '19.11 '20.3

NH Investment & Securities stock ratings

1. Rating based on a stock’s forecasted absolute return over a period of 12 months from the date of publication.

l Buy: Greater than +15% l Hold: -15% to +15% l Sell: Less than -15% 2. Regarding listed companies under NH I&S’ coverage, our stock ratings break down as follows (as of Jul 10, 2020).

l NH I&S’ stock rating distribution Buy Hold Sell 72.0% 27.5% 0.5%

- The stock rating on an individual company can change at irregular intervals. Our stock rating distribution is calculated on a weekly basis.

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l NH I&S does not have a stake greater than or equal to 1% in POSCO Chemical as of the preparation date. l NH I&S has not provided this material to any institutional investor or other third party in advance. l The analyst and his/her spouse do not own any securities of POSCO Chemical as of the preparation date. l This report correctly reflects the analyst’s opinion and was written without any external influence or intervention.

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