March 23, 20111 Korea – Equity Research Seung hun Jeon +822-768-2713 [email protected]

Hyundai Hysco (010520 KS/Buy)

Concerns over Japanese HRC supply disruptions appear overblown

 Chinese steelmakers cut April HRC prices and froze CRC prices; Excessive concerns over cost burden  Investment points: 1) low risk of margin deterioration, 2) capacity expansion, and 3) strong 1Q11F operating profit  Maintain Buy with TP of W34,000

 Chinese steelmakers cut April HRC prices and froze CRC prices; Excessive concerns over cost burden

Hyundai Hysco’s share price has risen 3.2% since the earthquake hit Japan, underperforming POSCO (up 12.5%) and (up 12.1%). This seems attributable to investors’ belief that Hyundai Hysco’s cost burden will increase in the wake of the quake. The company imports hot-rolled coils (HRC) from JFE Steel, Nippon Steel, and Sumitomo Metals. Since JFE Steel, which supplies 80% of Hyundai Hysco’s HRC imports, shut down some of its furnaces, concerns over HRC supply have mounted. However, we do not believe the quake has had any direct impact on Hyundai Hysco. The JFE steel mill that provides HRC to Hyundai Hysco is located in western Japan (outside of the quake-stricken areas), and JFE’s mill in eastern Japan has resumed normal operations. Although market watchers are worrying about the indirect impacts of Japan’s HRC supply disruptions, their concerns appear overblown, as Chinese steelmakers have cut their HRC prices.

China’s Hebei Iron and Steel and Anshan Iron and Steel cut their April HRC prices by RMB300/tonne and RMB270/tonne, respectively, while keeping their cold-rolled coil (CRC) prices unchanged. These developments were in sharp contrast to market projections that HRC prices would be stronger than CRC prices. As such, we believe that Hyundai Hysco’s share price should catch up with those of POSCO and Hyundai Steel for the time being.

 Larger purchases of HRC from Hyundai Steel to be positive for earnings stability

As Hyundai Steel launched its second furnace, Hyundai Hysco is expected to increase its HRC purchases from Hyundai Steel, which should provide a boost to the company’s earnings stability and profitability. Hyundai Hysco is forecast to purchase 3mn tonnes from Hyundai Steel in 2011 (up from 1.46mn tonnes in 2010), reducing its dependence on Japanese HRC supply. As a result, its purchase of Japanese HRC is projected to make up 23.8% of total supply in 2011 (down from 41.3% in 2010). Given the projected decline in HRC purchases from Japanese firms, investors do not need to worry about the potential Japanese supply disruptions resulting from the quake.

In addition, concerns that increases in Hyundai Hysco’s HRC purchases from Hyundai Steel might push up the company’s cost burden appear excessive. Although Japanese HRC was W50,000~60,000/tonne less expensive than Korean HRC in 2010, Japanese prices are likely to rise to the level of Korean HRC prices in 2011. As such, greater purchases from Hyundai Steel are likely to have only a minimal impact on cost burden.

Earnings & Valuation Metrics FY Sales OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA (Wbn) (Wbn) (%) (Wbn) (W) (Wbn) (Wbn) (%) (x) (x) (x) 12/08 5,035 172 3.4 23 286 327 186 2.3 26.1 0.6 4.4 12/09 4,423 143 3.2 54 678 296 76 5.0 24.9 1.2 7.2 12/10 5,847 259 4.4 199 2,481 451 372 15.9 11.0 1.6 5.8 12/11F 6,249 280 4.5 234 2,916 476 60 16.1 9.3 1.4 5.6 12/12F 6,201 286 4.6 228 2,847 497 323 13.7 9.6 1.2 4.8 Source: Hyundai Hysco, Daewoo Securities Research estimates

Please read carefully important notices at the end of this report. March 23, 2011 Hyundai Hysco

 Maintain Buy with TP of W34,000; Why buy Hyundai Hysco?

1) We do not believe there is a risk of margin deterioration at Hyundai Hysco, even though blast furnaces are struggling to pass higher raw material prices (resulting from abnormal factors such as flooding in Australia and speculative demand) on to consumers. Hyundai Hysco’s profits should remain intact if the spread between CRC and HRC prices stays wide. Given that POSCO, which sets the prices in Korea, is focusing more on its CRC business (CRC accounts for 37.6% of its profits vs. 19.3% of HRC), the spread between CRC and HRC prices is unlikely to narrow. 2) Hyundai Hysco’s operating profit is expected to soar starting in 2013 thanks to a plunge in depreciation expenses. Currently, due to a temporary increase in depreciation, the company’s profits appear bleak, which is making its valuation (based on P/B and P/E) look high relative to its competitors. The company’s profitability should not be underestimated due to this temporary increase in depreciation. Depreciation is expected to plummet from 2013, boosting Hyundai Hysco’s operating profit growth. 3) As Hyundai Steel announced that it would build a third furnace, Hyundai Hysco is highly likely to construct a third CRC facility. Since Hyundai Hysco is running its facilities at full capacity, current production cannot fulfill the growing automotive steel demand from European automakers. As such, the company’s capacity increase should be regarded as its next driver of growth momentum. We expect Hyundai Hysco to announce this capacity expansion in 2H11. 4) Hyundai Hysco’s 1Q11 operating profit is projected to beat the market consensus forecast (W68.5bn), reaching W75bn, even though its domestic peers’ earnings are anticipated to fall shy of (or in line with, at best) market consensus.

Figure 1. Hyundai HyscoÊs HRC suppliers Figure 2. HRC price trend and forecast

('000 tonnes) (US$/tonne) 1,200 Japanese 6,000 Hyundai Steel POSCO Japanese Others POSCO 2Q Forecast 5,000 950 4,000

3,000 700

2,000 450 1,000

0 200 2010 2011F 04 05 06 07 08 09 10 11

Source: Company data, Daewoo Securities Research Source: Media outlets, Daewoo Securities Research estimates

Figure 3. 2011F EV/EBITDA comparison of major Korean steelmakers Figure 4. Hyundai HyscoÊs operating profit and depreciation

(x) (Wbn) 8.0 400 Operating profit (L) Depreciation (R)

6.0 300

4.0 200

2.0 100

0.0 0 Hyundai Hysco POSCO Hyundai Steel 03 04 05 06 07 08 09 10 11F 12F 13F 14F

Source: Daewoo Securities Research estimates Source: Company data, Daewoo Securities Research

Daewoo Securities Research 2

ㅋ March 23, 2011 Hyundai Hysco

Important Notices Equity Research for International Investors (ERII) As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of Hyundai Hysco 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 Hyundai Hysco 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.

Ratings Distribution (W) HHYSCO Buy Relative Performance of +20% or greater 40,000 Trading Buy Relative Performance of +10% or greater, but with volatility 35,000 30,000 Hold Relative Performance of -10% and +10% 25,000 Sell Relative Performance of -10% 20,000 Analyst Industry Ratings of Daewoo Securities 15,000 10,000 Overweight fundamentals are favorable or improving 5,000 Neutral fundamentals are steady without any material changes 0 3/09 9/09 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 through Daewoo research direct (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, 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 of issuers described herein and may purchase and/or sale, or offer to purchase and/or sale, at any time, such securities or other financial instruments in the open market or otherwise, as either a 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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