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October 18, 2013 October 18, 2013 Korea Company News & Analysis Major Indices Close Chg Chg (%) KT&G (Buy/TP: W94,000) KOSPI 2,052.40 11.79 0.58 Moving into safer territory KOSPI 200 271.24 1.65 0.61 KOSDAQ 525.69 4.17 0.80 Samsung C&T (Buy/TP: W78,000) Raise TP Growth back on track Turnover ('000 shares, Wbn) Volume Value Woori I&S (Buy/TP: W15,500) Reinstate coverage KOSPI 252,614 4,375 Reclaiming lost glory KOSPI 200 72,325 3,703 KOSDAQ 289,725 1,559 Hanwha Corp. (Buy/TP: W49,000) Raise TP Market Cap (Wbn) Iraqi project progressing smoothly Value KOSPI 1,201,648 LG Display (Hold) KOSDAQ 122,843 A long, cold winter ahead KOSPI Turnover (Wbn) Buy Sell Net Sector News & Analysis Foreign 1,320 1,011 309 Institutional 927 1,092 -165 Steel (Neutral) Retail 2,095 2,222 -128 Preparing for the Hyundai Steel & Hysco merger KOSDAQ Turnover (Wbn) Buy Sell Net Economy & Strategy Update Foreign 122 59 63 Institutional 55 78 -23 Strategy Note Retail 1,382 1,423 -41 KOSPI moves in tandem with the won Program Buy / Sell (Wbn) Buy Sell Net KOSPI 820 626 193 KOSDAQ 22 17 4 Advances & Declines Advances Declines Unchanged KOSPI 457 343 85 KOSDAQ 546 358 78 KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value NHN 640,000 30,000 260 KODEX LEVERAGE 13,040 120 234 Samsung Electronics 1,472,000 9,000 229 KODEX 200 27,055 105 176 Hyundai Motor 256,500 -8,000 171 KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value INICIS 19,050 2,050 45 Sangsin Energy Display 8,000 1,040 41 Precision FASOO.COM 6,900 900 37 Celltrion 47,600 -350 33 CJ E&M 37,100 650 31 Note: As of October 18, 2013 This document is a summary of a report prepared by Daewoo Securities Co., Ltd. (“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. 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 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. KT&G (033780 KS) Moving into safer territory Tobacco 3Q OP meets consensus KT&G’s 3Q revenue and operating profit came in at W1.02tr (-3.7% YoY) and W293bn (-7.6% Results Comment YoY), respectively, broadly in line with the market consensus. Net profit slumped to W142.1bn (- 37.2% YoY), hurt by F/X-related losses and write-offs at the Iran subsidiary (also due to F/X). October 18, 2013 Tobacco exports to turn around in 1Q14 3Q tobacco exports plunged 47% YoY in volume and 42.2% YoY in value. This was mainly (Maintain) Buy because exports to Iran, a key market that accounts for 25% of exports, collapsed as a result of the rial’s depreciation (to IRR25,000 from IRR11,000 against the US$). In 4Q, Target Price (12M, W) 94,000 exports to Iran should remain challenging, given the considerably high import prices there. Share Price (10/17/13, W) 78,100 However, we expect exports to Iran to turn around in 1Q14, thanks to a low base effect and the fact that Iranian consumers are likely to become accustomed to high F/X rates, Expected Return 20% and will thus be less sensitive to higher prices. Faced with worsening conditions in the Middle East, KT&G has instead been focusing on exports to other regions, such as Southeast Asia, the US, and Africa, where ASP is higher than in the Middle East (ASP is a OP (13F, Wbn) 978 little over US$1 in the Middle East). As such, we expect the Middle Eastern region as a Consensus OP (13F, Wbn) 973 percentage of total exports to drop to 60% in 2013 from over 70% in 2012. EPS Growth (13F, %) -10.0 Exports should be a drag on earnings in 2013, but serve as a positive catalyst in 2014 as Market EPS Growth (13F, %) 20.7 exports grow not only to Iran but other regions as well. P/E (13F, x) 16.2 Red ginseng on path to recovery Market P/E (13F, x) 10.6 KOSPI 2,040.61 The red ginseng division staged a sharp turnaround in 3Q, beating the market consensus with 8.7% YoY growth in revenue and a 55.1% YoY surge in operating profit. The Market Cap (Wbn) 10,723 recovery was driven by a low base of comparison, effective promotions and inventory Shares Outstanding (mn) 137 reductions, rather than an underlying improvement in economic conditions. Free Float (%) 84.8 Foreign Ownership (%) 59.1 2012-2Q13 marked the worst period for the red ginseng business. However, we expect Beta (12M) 0.34 operating profit to recover in 2012-2Q13 and remain steady in 2014, supported by: 1) a modest 52-Week Low (W) 71,000 recovery in domestic consumption, 2) the end of Chinese destocking, 3) sales of mid-end brands, 52-Week High (W) 90,200 and 4) distribution system overhauls (retail margins, discounts, commissions, etc.). (%) 1M 6M 12M We believe cost control efforts and overseas exports will also serve as important profit Absolute 1.4 1.2 -12.9 drivers. The company has been conducting ads and marketing campaigns that are more Relative -0.3 -4.9 -17.3 effective in boosting sales, while reducing spending on the more cost-intensive home shopping channels. Exports are also increasing, especially to China, Taiwan and the US, Share price as inventory has become much leaner. 110 KOSPI 100 Earnings momentum to return in 2014 90 KT&G’s stock has seen very few catalysts other than its dividend yield this year. However, we 80 expect earnings momentum to revive in 2014 on tobacco export growth and stabilization in red 70 ginseng. The stock’s current valuation (2014F P/E of 13.9x) also looks attractive compared to 10/12 2/13 6/13 10/13 foreign tobacco makers. We maintain our Buy call and target price of W94,000. Daewoo Securities Co., Ltd. FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F Revenue (Wbn) 3,461 3,723 3,985 3,780 3,920 4,178 Food & Beverage/Tobacco OP (Wbn) 1,140 1,090 1,036 978 1,043 1,116 Mina Kim OP Margin (%) 32.9 29.3 26.0 25.9 26.6 26.7 +822-768-4163 NP (Wbn) 1,032 816 738 664 774 847 [email protected] EPS (W) 7,516 5,944 5,376 4,836 5,638 6,166 ROE (%) 24.2 17.5 14.9 12.7 14.0 14.2 P/E (x) 8.6 13.7 15.0 16.2 13.9 12.7 P/B (x) 1.9 2.3 2.1 2.0 1.8 1.7 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates 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. Samsung C&T (000830 KS) Growth back on track Construction 3Q earnings come in line, aided by one-off trading gain Construction delivers top-line growth: Samsung C&T’s construction unit posted 3Q revenue Results Comment of W3.4tr (+6.3% YoY), beating our estimate of W3.1tr. We believe revenues from the October 18, 2013 Dongducheon power plant project (to be completed in 2014 and subject to equity method), the Qurayyah power plant project in Saudi Arabia (to be completed in 2014) and several affiliate projects in China and Vietnam were recognized to a greater extent than expected. (Maintain) Buy Operating profit at the unit came in at W98.5bn, slightly above our forecast of W93.1bn, helped by top-line growth and a decline in the SG&A ratio. Although profitability is still below Target Price (12M, W) 78,000 par, we expect the Roy Hill mining project in Australia and Samsung Electronics’ Line 17 project to drive accelerated revenue growth and margin improvement in 4Q. Share Price (10/17/13, W) 64,900 Trading sees margin gains: The trading division saw revenue decline 5.5% YoY to W6.5tr in Expected Return 20% 3Q, affected by fewer trading items and organizational downsizing. Operating profit, on the other hand, exceeded expectations, climbing 17.3% YoY to W42.2bn. Although this included a W20bn organizing fee from the Ontario project, we believe the trading unit still saw OP OP (13F, Wbn) 475 margin gains from the removal of low-margin items and SG&A reductions. Consensus OP (13F, Wbn) 493 New orders and others: In 3Q, cumulative construction new orders totaled W15.7tr YTD.
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