JunHong Park Rapid Recovery In Korean Director / Lead Analyst For Korean Corporates Corporate Creditworthiness S&P Global Ratings 7 July 2021 Key Takeaways
– Korea’s corporate credit quality is strengthening, leading to more positive actions compared to 2020.
– COVID conditions are driving demand for various export products including semiconductors.
– Other factors benefiting Korea’s corporate scene are reviving prices for oil and steel.
– Aggressive spending, including in the electric vehicle space, could be an overhang for financial profiles.
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Korean Corporate Credit Quality Recovering In 2021
– Positive rating actions outweigh negative rating actions in 2021 vs. 2019 and 2020. – Improving profitability drives upside actions on SK Hynix, LG Electronics, POSCO and S-Oil in 2021.
Rating Action Trend Notable Actions On Korean Corporates In 2020-2021*
# of actions Positive Negative Net Company Date To From 10 KCC Corp. Feb-2020 BB+/Stable BBB-/Negative E-Mart Feb-2020 BBB-/Negative BBB-/Stable 5 GS Caltex Mar-2020 BBB/Stable BBB+/Negative SK E&S Sep-2020 BBB-/Stable BBB/Negative 0 Apr-2020 BBB+/Watch Neg BBB+/Stable Hyundai Motor Group* -5 Sep-2020 BBB+/Negative BBB+/Watch Neg Feb-2020 BBB/Negative BBB/Stable SK Innovation -10 Nov-2020 BBB-/Negative BBB/Negative S-Oil Mar-2021 BBB/Stable BBB/Negative -15 SK Hynix Mar-2021 BBB-/Positive BBB-/Stable -20 SK Telecom Mar-2021 A-/Stable A-/Negative LG Electronics Apr-2021 BBB/Positive BBB/Stable -25 Magnachip Semiconductor Apr-2021 B+/Stable B/Positive 2016A 2017A 2018A 2019A 2020A 2021 YTD POSCO Jun-2021 BBB+/Positive BBB+/Stable Data as of July 5, 2021. *Hyundai Motor Group includes Hyundai Motor, Kia Motors, Hyundai Mobis, Hyundai Glovis and Hyundai Steel. A--Actual. YTD--Year to date. Source: S&P Global Ratings. E-Mart Jun-2021 BBB-/Watch Neg BBB-/Negative
3
Top 200 Korean Corporates’ Financial Metrics Improving
– Debt/EBITDA of top 200 Korean companies started to recover in 3Q20 from its peak in 2Q20. – Improvement in financial metrics are driven more by stronger profitability than debt reduction.
Top 200 Corporates Quarterly Debt To EBITDA Trend* Top 200 Corporates Quarterly Debt And EBITDA* Trend
(x) KRW tril. EBITDA (LHS) Debt (RHS) KRW tril. COVID-19 Rapid 80 700 5.5 peak impact recovery 612 5.0 599 600 594 70 579 554 600 4.5 525 537 539 60 4.0 500 3.5 50 52 400 3.0 40 2.5 42 39 39 300 30 35 36 2.0 33 31 32 200 1.5 20 1.0 10 100 0.5 0.0 0 0 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21
*Top 200 corporates by asset size (excluding financial institutions and unlisted government-related entities), excluding Samsung Electronics. Annualized EBITDA (sum of last four quarters’ EBITDA). Q--Quarter. KRW tril.--Trillion Korean won. LHS--Left hand side. RHS--Right hand side. Source: Capital IQ, S&P Global Ratings.
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Strong Performance in Tech, Auto, Steel, Chemical Sectors
– Technology, autos, steel, and refining/chemical sectors all show meaningful earnings growth since 3Q20. – Rapid demand recovery for various products (e.g. consumer electronics, auto) is driving strong profitability.
Top 200 Corporates* Quarterly OP Trend Top 200 Corporates* Quarterly OP By Sector
Auto and auto parts Electric Utilities Oil and Gas Refining KRW tril. Samsung Electronics Top 200 excl. Samsung KRW tril. Steel Technology (RHS) 45 20
40 15 35
30 10
25 5 20
15 0
10 -5 5
0 -10 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 *Top 200 corporates by asset size (excluding financial institutions and unlisted government-related entities). OP--Operating profit. KRW tril.--Trillion Korean won. Q--Quarter. RHS--Right hand side. Source: Capital IQ, S&P Global Ratings.
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Technology: A Robust Sector
Semiconductor Companies Benefit From COVID-19
– Remote access and data processing/storage drive strong memory chip demand. – Operating profit grew 30% and 85% for Samsung and Hynix in 2020, respectively, with further growth expected in 1H21.
Samsung And SK Hynix’ OP And OPM Trend Semiconductor Global Demand
KRW tril. Samsung OP SK Hynix OP Samsung OPM SK Hynix OPM 1Gb equivalent mil. DRAM global demand NAND global demand 14 35% 180,000
160,000 12 30% 140,000 10 25% 120,000 8 20% 100,000
6 15% 80,000
60,000 4 10% 40,000 2 5% 20,000 0 0% 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21F
OP--Operating profit. OPM--Operating profit margin. KRW tril.--Trillion Korean won. Q--Quarter. F--Forecast. Gb--Gigabyte. mil.--Million. DRAM-- Dynamic Random Access Memory. Source: Company data, Omdia, S&P Global Ratings
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Favorable Operating Conditions For Memory Chip Players
– Memory prices remain strong in 1H21, aiding the memory chipmakers’ earnings. – Favorable supply-demand conditions expected in 2021 given disciplined investments from major players.
DRAM / NAND Price Trends DRAM / NAND Industry Capex Trend
NAND TLC Flash 256Gb contract price US$/unit US$ mil. DRAM NAND DRAM DDR4 - 8Gb - 1Gx8 2133/2400 MHz- spot price 7 35,000
6 30,000
5 25,000
4 20,000
3 15,000
2 10,000
1 5,000
0 0 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 2018 2019 2020 2021F 2022F
DRAM--Dynamic Random Access Memory. Gb--Gigabyte. mil.--Million. Source: Bloomberg, Omdia, S&P Global Ratings.
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LG Electronics Shows Strong Profitability Amid COVID-19
– We revised LGE outlook to positive in April 2021 mainly reflecting its strong profitability. – Higher mix of premium consumer electronics is supporting LGE’s strong operating performance.
LG Electronics’ Quarterly Operating Profit Breakdown By Division LG Electronics’ Premium Product Sales Portion
Home Appliance & Air Solution Home Entertainment KRW bil. Home Appliance & Air Solution TV Mobile Communications Vehicle Component Solutions 55% Business Solutions Total 2,000 50%
1,500 45%
1,000 40%
500 35%
0 30%
-500 25%
-1,000 20% 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2017 2018 2019 2020
KRW bil.--Billion Korean won. Q--Quarter. Source: Company data, S&P Global Ratings.
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Display Panel Makers Show Significant Profit Recovery
– LGD’s operating profit turned around in 3Q20 and grew significantly on panel price rebound and growing demand. – LCD panel prices recovery continues from increasing demand for TV, PC, and monitors.
LGD’s OP And OPM Trend 32” / 55” LCD ASP Trends
KRW bil. OP OPM (RHS) US$/unit 32" HD 50Hz/60Hz Open Cell 55" UHD 100/120Hz Open Cell 800 15% 300
600 10% 250
400 5% 200 200 0% 150 0 -5% 100 -200
50 -400 -10%
-600 -15% 0
LGD--LG display. OP--Operating profit. OPM--Operating profit margin. KRW bil.--Billion Korean won. LCD--Liquid crystal display. RHS--Right hand scale. Source: Company data, Bloomberg, S&P Global Ratings.
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Refining & Petrochemical: Rapid Earnings Recoveries
Rapid Earnings Recovery For Refining & Petrochem Companies
– Significant operating losses for oil refiners in 2020 due to inventory related losses and weak spreads. – Strong earnings in 1Q21 on rebounding spreads and increase in oil prices.
Korean Refineries’ OP Recovered In 1Q 2021 Korean Petrochem’s OP Also Significantly Grew In 1Q 2021
KRW bil. SK Innovation GS Caltex S-Oil KRW bil. LG Chem Hanwha Total SK Global Chemical 3,000 2,000
2,000 1,500 1,000
0 1,000
-1,000
500 -2,000
-3,000 0 -4,000
-5,000 -500 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21
KRW bil.--Billion Korean won. OP--Operating profit. Q--Quarter. Source: Company data, Capital IQ, S&P Global Ratings.
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Aggressive Investments From Refining / Chemical Companies
– Korean refining/chemical players significantly expanded investments in (1) EV battery business (LG Chem & SK Innovation), (2) vertical capacity expansions, and (3) downstream acquisitions. – Negative discretionary cash flows due to large capex and shareholder returns despite recent earning recovery.
Growing Investments (Capex + Acquisition) Trend Weakened Discretionary Cash Flow (OCF-Investments-Dividend)
KRW bil. SK Innovation GS Caltex S-Oil LG Chem Hanwha Total KRW bil. SK Innovation GS Caltex S-Oil LG Chem Hanwha Total 14,000 8,000
6,000 12,000 4,000 10,000 2,000
8,000 0
6,000 -2,000 -4,000 4,000 -6,000 2,000 -8,000
0 -10,000 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
KRW bil.--Billion Korean won. Source: Company data, S&P Global Ratings.
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Steel: Improving Operating Environment
Strong Operating Performance Expected For Steelmakers
– Korean makers have raised steel prices since 4Q20 to reflect rising raw material costs, backed by strong steel demand. – We revised POSCO’s outlook to positive in June 2021 due to expected record-high level profitability for 2021.
POSCO And Hyundai Steel Quarterly Operating Profit Trend POSCO’s HRC / CRC Prices Trend
KRW tril. POSCO Hyundai Steel HRC CRC 2.0 850,000
800,000 1.5 750,000
1.0 700,000
650,000 0.5
600,000 0.0 550,000
-0.5 500,000 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21F 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21
KRW tril.--Trillion Korean won. HRC--Hot roll steel. CRC--Cold roll steel. Q--Quarter. F--Forecast. Source: Company Data, Capital IQ, S&P Global Ratings.
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Auto: Demand Recovery Since Late 2020
Auto Industry Showing Recovery In 2021
2021 Sales Breakdown (estimate)
Source: S&P Global Ratings.
17
Improving Operating Performance Of Hyundai Motor Group
– HMC/Kia’s performance will likely remain strong in coming quarters supported by sales mix improvement and demand recovery.
HMC-Kia's Sales Performance Was Relatively Resilient HMC / Kia Quarterly Operating Profit Trend Compared To Broader Industry In 2020 KRW bil. HMC Kia Broader Industry HMC-Kia 2,000 10%
5% 1,500 0%
-5% 1,000
-10%
500 -15%
-20% 0 -25%
-500 -30% 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21F Global U.S. Korea Western Europe China
HMC--Hyundai Motor Company. KRW bil.--Billion Korean won. Q--Quarter. F--Forecast. Source: Company data, S&P Global Ratings.
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New Model Launches Drive Improvement in Fundamentals
– HMC-Kia achieved strong ASP growth in both domestic and overseas markets. – HMC-Kia’s incentives in the U.S. market also showing declining trend. – Downside risks: (1) Chip shortage disruptions, (2) unexpected costs due to quality issues, labor strikes, or regulations.
ASP Trends U.S. Incentive Trends
US$ ‘000 HMC-Korea HMC-Overseas Kia-Korea Kia-Overseas US$ HMC Kia US Big 3 Japan Big 3 35 5,500
5,000 30 4,500
25 4,000
3,500 20
3,000 15 2,500
10 2,000 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21
HMC--Hyundai Motor Company. ASP--Average selling price. Source: Company Filings, S&P Global Ratings.
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Electric Vehicle (EV): Active Investments On Way
EV & EV Battery Sales To See Strong Growth
– We anticipate EV and hybrid penetration rate to reach about 15% by 2025. – EU market leads the transition with tight GHG emission regulations, with China and the U.S. to follow on new government initiatives and competitive models launches.
Green Vehicles (Battery EV And Plug-In hybrids) Should Global Demand For Batteries Set To Rise As Cars Electrify Comprise One-In-Six Vehicle Sales By 2025
Gigawatt hours Battery installation (LHS)(left scale) Year-on-year growth (right(RHS) scale) 2019 2020 2021F 2025F 1,000 100% 900 90%
Europe 2.7% 10.0% 15%-20% 30% 800 80% 700 70% 600 60% China 4.7% 5.5% 6%-9% 20% 500 50% 400 40% 300 U.S. 2.0% 2.0% 2%-3% 10% 30% 200 20% 100 10% Global 2.5% 4.4% 6%-8% 15% 0 0% 2019 2020 2021fF 2022fF 2023fF 2024fF 2025fF
EV--Electric vehicles. F--Forecast. GHG--Greenhouse gas. Note: Battery installation for both battery electric vehicles and plug-in hybrids. F--Forecast. Source: EV Volumes, Business Next, S&P Global Ratings. LHS--Left hand scale. RHS--Right hand scale. Sources: EV Volume, S&P Global Ratings.
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Korean EV Battery Makers Are Aggressively Investing
– China will lead the EV battery industry, accounting for about half of global production capacity. – Korean players are aggressively investing on the back of close relationship with Korean, European, and U.S. automakers. – Uncertainty remains on supply-demand matching, new technology, cost structure, and production stability.
Korean EV Battery Makers Have Robust Market Position EV Battery Manufacturers Rapidly Adding New Capacities
LG Energy Solutions SK Innovation Samsung SDI CATL BYD Panasonic 2019 2020 additions 2021E additions 100% 90% SK Innovation 80% 70% BYD 60% Panasonic 50% 40% CATL 30% 20% LG Energy Solution 10% 0% 0 20 40 60 80 100 120 140 2016 2017 2018 2019 2020 1Q 2021 Gwh LG Solution is the electric-vehicle battery subsidiary of LG Chem. CATL--Contemporary Amprex CATL-- CATL--Contemporary Amprex Technology Co. Ltd. E--Estimate. Technology Co. Ltd. 1Q--First quarter. Sources: SNE Research, S&P Global Ratings. Source: As of June, News Articles, Company Statement, S&P Global Ratings.
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Korean Corporates Betting On EV’s Strong Growth Potential
Company Area of investment
Hyundai Motor Group – Aggressive EV market share target by 2025 (8%-10% by HMC and 6%-7% by Kia).
– 260GWh EV battery production capacity by 2025, from below 50GWh at end-2018. LG Chem – GM and LG Chem will invest $2.3 billion in a second U.S. battery cell plant for electric vehicles in Tennessee, U.S.
SK Innovation – EV battery production capacity of 125 GWh by 2025, from 4.7GWh in 2019.
– Harman acquired a Silicon Valley-based automotive technology company Savari, which develops vehicle-to-everything Samsung Electronics communications (V2X) technology. – Samsung announced it is actively considering large-sized M&As within the next three years.
– Announced to set up a JV with Magna International by spinning off part of its electric-car components business. LG Electronics The JV will manufacture e-motors, inverters, and onboard chargers.
– POSCO Chemical target to become No.1 EV battery raw material player through establishing cathode and anode POSCO production capacities worth 400,000 tons and 260,000 tons by 2030.
Source: Company Filings, S&P Global Ratings.
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Conclusion: Credit Quality Is Quickly Building
Rapid Recovery On Korean Corporate’s Credit Quality
– Improving credit quality of Korean corporates follows recovering operating performance amid COVID-19. – Favorable operating environment, mainly driven by strong demand across various industries. – Currently, about 25% of Korean companies have a negative outlook, while positive outlook increased to 8% of total. – Aggressive financial policy could weigh on creditworthiness for some companies such as SK Innovation and E-Mart.
B category CCC category Positive Rating Distribution 2% 3% Outlook Distribution 8%
BB category 5% Negative 25%
AA category 33% BBB category 44%
Stable 67% A category 13%
As of July 5, 2021. S&P Global Rating rates 39 Korean companies including 13 government related entities. Source: S&P Global Ratings.
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Appendix. S&P Korean Corporate Rating And Outlook
S&P Rating S&P Rating
Issuer LT Outlook Issuer LT Outlook
Samsung Electronics Co. Ltd. AA- Stable Hanwha Total Petrochemical Co. Ltd. BBB Stable
KT Corp. A- Stable GS Caltex Corp. BBB Stable
SK Telecom Co. Ltd. A- Stable S-Oil Corp. BBB Stable
SK Broadband Co. Ltd. A- Stable Hyundai Steel Co. BBB Negative
Naver Corp. A- Stable SK Hynix Co. Ltd. BBB- Positive
LG Chem Ltd. BBB+ Stable SK E&S Co. Ltd. BBB- Stable
POSCO BBB+ Positive SK Innovation Co. Ltd. BBB- Negative
Hyundai Motor Co. BBB+ Negative SK Global Chemical Co. Ltd. BBB- Negative
Kia Motors Corp. BBB+ Negative E-MART Co. Ltd. BBB- Watch Neg
Hyundai Mobis Co. Ltd. BBB+ Negative KCC Corp. BB+ Stable
Hyundai Glovis Co. Ltd. BBB+ Negative Doosan Bobcat Inc. BB Negative
LG Electronics Inc. BBB Positive Magnachip Semiconductor Corp. B+ Stable
Hankook Tire & Technology Co. Ltd. BBB Stable Hanjin International Corp. CCC+ Negative
As of July 5, 2021, Excluding the government related entities. Source: S&P Global Ratings.
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Thank You
JunHong Park (박준홍) Minjib Kim (김민집) Director, Lead Analyst For Korea Corporate Ratings Associate Director T: 852.2533.3538 T: 852.2533.3503 E-mail: [email protected] E-mail: [email protected]
Minsung Lee (이민성) Daye Park (박다예) Associate Director Associate T: 852.2532.8014 T: 852.2533.3581 E-mail: [email protected] E-mail: [email protected]
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