Cheil Industries (001300 KS) and Materials
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April 12, 2011 Company Report Electronic Parts Cheil Industries (001300 KS) and Materials Growth engines remain intact Will Cho +822-768-4306 [email protected] Maintain Buy call with TP of W150,000 (vs. current share price of W117,000) We reiterate our Buy call on Cheil Industries with a target price of W150,000. Cheil IndustriesÊ share price has underperformed the KOSPI by 10.2% over the last two months, due to worries about weak 1Q earnings and delays in the companyÊs development of AMOLED materials. However, these weak 1Q earnings projections have already been priced in, and the company is anticipated to roll out AMOLED materials this year as scheduled. In light of rosy growth prospects for 2Q and beyond, we believe that now is the optimal time to buy Cheil Industries. 1Q11 Preview: OP to fall shy of market forecast, reaching W72.5bn Buy (Maintain) Cheil IndustriesÊ 1Q earnings are projected to fall shy of market consensus forecasts in the wake of the slow recovery of IT demand. Sales in 1Q are forecast Target Price (12M, W) 150,000 to remain flat QoQ at W1.31tr (down 0.1% QoQ; up 12.5% YoY), while operating Share Price (04/11/11, W) 117,000 profit is estimated to reach W72.5bn (up 28.3% QoQ; down 7.3% YoY; OP margin Expected Return (%): 28.2 28.2 of 5.5%), failing to meet the market consensus estimate of W83.5bn. EPS Growth (11F, %) 27.4 Market EPS Growth (11F, %) 23.2 Despite sluggish sales growth of polarizer and display materials from contraction in P/E (11F, x) 17.7 LCD TV demand, operating profit at the ECM division is forecast to jump 42.3% Market P/E (11F, x) 10.8 thanks to strong semiconductor materials sales. Operating profit at the chemicals KOSPI (04/11/11, p) 2,122.39 division is estimated to decline 7.4% QoQ, as the company failed to pass surging Market Cap (Wbn) 5,850 feedstock prices on to consumers amid weak IT demand. With high value-added Shares Outstanding (mn) 50 Avg Trading Volume (60D, '000) 481 EP sales shrinking, the chemicals division is thought to have experienced product Avg Trading Value (60D, Wbn) 56 mix deterioration. However, the fashion division is likely to post operating profit Dividend Yield (11F, %) 0.6 growth of 58.2% QoQ thanks to unusually cold weather and decline in marketing Free Float (%) 87.3 expenses. 52-Week Low 70,000 52-Week High 125,500 AMOLED materials to drive growth over the mid- to long-term Beta (12M, Daily Rate of Return) 0.8 Despite our projections for weaker-than-previously-expected 1Q earnings, we Price Return Volatility (12M Daily,%,SD) 2.3 remain optimistic about Cheil IndustriesÊ ECM division. As for AMOLED materials, Foreign Ownership (%) 26.3 Major Shareholder(s): HTL and ETL materials are forecast to generate sales starting in 3Q (after receiving Mirae Asset mgmt et al. (8.74%) approval in 2Q). Although the companyÊs AMOLED materials sales should be Samsung Card et al. (7.79%) minimal in 2011, sales are projected to skyrocket 879.2% to W110.2bn in 2012 and National Pension Service (7.77%) 192.6% to W322.3bn in 2013, driven by: 1) the projected surge in AMOLED panel Price Performance shipments, and 2) an increase in the companyÊs supply to Samsung Mobile Display. (%) 1M 6M 12M Absolute 3.5 28.3 63.2 Relative -5.0 16.0 40.1 § Earnings & Valuation Metrics Share price OP EV/ 200 KOSPI Sales OP NP EPS EBITDA FCF ROE P/E P/B FY Margin EBITDA (Wbn) (Wbn) (Wbn) (W) (Wbn) (Wbn) (%) (x) (x) 180 (%) (x) 160 12/09 4,261 264 6.2 127 2,540 395 340 7.1 22.3 1.5 8.1 140 12/10 5,019 334 6.7 259 5,174 468 201 10.9 21.5 2.0 12.5 120 12/11F 5,912 438 7.4 330 6,593 599 35 11.3 17.7 1.9 10.1 100 12/12F 6,899 559 8.1 424 8,474 732 135 12.9 13.8 1.7 8.1 80 12/13F 7,865 733 9.3 558 11,155 912 345 14.9 10.5 1.5 6.1 4/10 8/10 12/10 4/11 Source: Company data, Daewoo Securities Research estimates Please read carefully important disclosures at the end of this report. April 12, 2011 Cheil Industries 1Q11 Preview: OP to grow 28.3% QoQ to W72.5bn Sales and operating Cheil IndustriesÊ 1Q11 earnings are projected to fall shy of market consensus forecasts in profit in 1Q11 are the wake of the slow recovery of IT demand. Sales in 1Q are forecast to remain flat QoQ estimated at W1.3tr and at W1.31tr (down 0.1% QoQ; up 12.5% YoY), while operating profit is estimated to reach W72.5bn, respectively W72.5bn (up 28.3% QoQ; down 7.3% YoY; OP margin of 5.5%), failing to meet the market consensus estimate of W83.5bn. Despite lower than expected 1Q results, we believe that the companyÊs growth potential remains intact. Its profits are anticipated to improve in line with earnings growth at major customers, namely Samsung Electronics (SEC). Despite the sluggish growth of polarizer and display materials sales, Cheil IndustriesÊ ECM division is forecast to see its operating profit jump 42.3% QoQ thanks to strong semiconductor materials sales. The ECM division should see both top- and bottom-line expansion starting in 2Q, thanks to: 1) full-fledged growth of TV-use polarizer sales, and 2) an increase in the proportion of semiconductor patterning materials sales. Operating profit at the chemicals division is projected to remain sluggish, as the company failed to pass surging feedstock prices on to consumers amid weak IT demand. With high value-added EP sales shrinking, the chemicals division is thought to have experienced product mix deterioration. However, earnings at the chemicals division should steadily grow on the back of improvements in ASP and product mix. While the fashion divisionÊs sales are projected to decline 15% QoQ, operating profit is projected to grow 58.2% QoQ to W20.9bn (OP margin of 6.3%). Despite weak seasonality, unusually cold weather and decline in marketing expenses boosted operating profit, in our view. Table 1. Cheil IndustriesÊ earnings forecasts (on K-GAPP parent basis) (Wbn, %) 1Q11F 2Q11F 3Q11F 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F 2010 2011F 2012F Sales 1,310 1,443 1,523 1,637 1,547 1,716 1,790 1,846 5,019 5,912 6,899 Chemical 572 620 660 650 652 719 766 709 2,231 2,502 2,846 Electronic Material 395 455 551 554 546 623 708 696 1,415 1,954 2,573 Fashion 331 347 291 417 338 355 299 427 1,298 1,387 1,418 Others 12 21 20 17 11 19 18 15 80 70 62 Operating Profit 73 110 132 123 119 146 161 133 334 438 559 Chemical 25 40 48 41 42 51 57 45 142 154 195 Electronic Material 27 50 68 58 58 76 87 72 131 203 294 Fashion 21 20 17 24 18 20 18 16 63 83 73 OP margin 5.5 7.6 8.7 7.5 7.7 8.5 9.0 7.2 6.7 7.4 8.1 Chemical 4.3 6.5 7.2 6.3 6.5 7.1 7.4 6.3 6.3 6.2 6.8 Electronic Material 6.9 11.0 12.3 10.5 10.7 12.2 12.3 10.4 9.3 10.4 11.4 Fashion 6.3 5.8 5.9 5.9 5.4 5.7 6.0 3.9 4.8 6.0 5.1 Pretax income 63 103 123 112 109 135 150 121 314 401 515 Net Profit 47 85 104 93 89 113 126 96 259 330 424 RP margin 4.8 7.1 8.1 6.9 7.1 7.9 8.4 6.5 6.3 6.8 7.5 NP margin 3.6 5.9 6.9 5.7 5.7 6.6 7.1 5.2 5.2 5.6 6.1 Growth (QoQ/YoY) Sales -0.1 10.1 5.5 7.5 -5.5 10.9 4.3 3.1 17.8 17.8 16.7 Chemical 3.8 8.3 6.6 -1.6 0.4 10.2 6.5 -7.5 22.1 12.2 13.7 Electronic Material 11.8 15.2 21.0 0.5 -1.3 14.0 13.7 -1.6 17.0 38.1 31.7 Fashion -15.0 4.9 -16.1 43.0 -19.0 5.3 -16.0 42.8 13.7 6.8 2.3 Others -37.2 73.7 -2.1 -18.2 -36.1 73.7 -2.1 -18.2 -3.7 -12.6 -11.0 Operating Profit 28.3 52.1 19.8 -6.7 -3.8 23.4 10.2 -17.6 26.7 31.1 27.7 Chemical -7.4 63.5 18.6 -13.8 3.0 19.7 11.7 -20.9 14.9 8.8 26.5 Electronic Material 42.3 83.7 35.3 -13.8 -0.2 30.5 14.9 -17.3 38.2 54.6 44.6 Fashion 58.2 -3.6 -14.4 41.8 -24.8 9.3 -11.1 -8.1 19.9 32.1 -12.0 Pretax income 15.5 63.5 19.4 -8.4 -2.9 24.0 10.8 -19.5 100.4 27.4 28.5 Net Profit 5.3 80.9 22.2 -11.3 -4.2 26.9 12.1 -23.8 101.3 27.4 28.5 Source: Daewoo Securities Research Daewoo Securities Research 2 April 12, 2011 Cheil Industries ECM: Promising mid- to long-term growth prospects 1) IT market recovery in 2Q to boost earnings Earnings to take off in Polarizer sales are anticipated to increase just 12.2% QoQ to W160bn although Cheil 2Q on SECÊs 1) LED TV Industries began to supply TV-use polarizers to customers.