Hyundai Steel (004020 KS ) Share prices reflect worst -ever earnings

Steel Operating loss to persist through 1H20 due to COVID-19 Company Report For 1Q20, we expect Hyundai Steel to post a smaller operating loss QoQ due to a April 16, 2020 favorable comparison (W50bn in one-off expenses were recorded in 4Q19) and better long steel margins. That said, we forecast 1Q20 earnings to be weaker than originally anticipated, as our forecast at the beginning of the year was based on an expectation of price hikes for non-automotive steel products. Considering lead times, we anticipate the full impact of COVID-19 to be felt from 2Q20, as flat steel prices will likely fall more (Maintain) Buy steeply than raw material prices, crippling margins. Overseas plant shutdowns by Hyundai Motor (HMC; 005380 KS/Buy/TP: W178,000/CP: W100,000) and Motors Target Price (12M, W) ▼ 28,000 (000270 KS/Trading Buy/TP: W53,000/CP: W29,850) should lead to a decline in sales volume and higher fixed costs, further hurting earnings. For long steel, product prices Share Price (04/14/20, W) 19,750 have risen, while raw material prices have fallen. We expect margins to continue to improve in 2Q20, but largely because of production cuts by major domestic Expected Return 42% steelmakers. While mill margins are likely to improve, we believe the impact will be partially offset by an increase in fixed costs resulting from lower production.

OP (20F, Wbn) 69 Earnings to pick up gradually from 3Q20; Timing of HMC/Kia ’s production Consensus OP (20F, Wbn) 384 restart will be key We expect earnings to begin to pick up in 3Q20, as lockdowns outside China should EPS Growth (20F, %) - ease. The timing of HMC/Kia’s overseas production restart will be particularly Market EPS Growth (20F, %) 39.8 important for Hyundai Steel, given that automotive steel supplies to the two P/E (20F, x) - automakers are believed to account for the bulk of its profits. That said, even if end- Market P/E (20F, x) 11.3 market demand picks up in 3Q20 as expected , we believe the pace of earnings KOSPI 1,857.08 recovery will be gradual. Despite the expected drop in demand, supply is unlikely to Market Cap (Wbn) 2,636 decline to the same extent , given the inelastic nature of blast furnace production. We Shares Outstanding (mn) 133 thus believe increased inventory will prevent a sharp rise in prices, even if end-market Free Float (%) 62.4 demand bounces back in 3Q20. Foreign Ownership (%) 19.1 Share prices reflect worst-ever earnings Beta (12M) 1.81 52-Week Low 13,150 Hyundai Steel is trading at a P/B of 0.1-0.2x, the lowest level since 2000. We believe the 52-Week High 48,950 current valuation reflects both 1) the earnings deterioration that has already taken place due to US-China trade disputes and automotive steel margin contraction and 2) (%) 1M 6M 12M the earnings deterioration that is likely to occur due to COVID-19. If signs of an Absolute 3.4 -46.6 -59.0 earnings recovery (e.g., a drop in new infections, resumption of HMC/Kia’s overseas Relative -1.4 -40.6 -50.7 production, etc.) emerge, we believe shares will bounce back ahead of earnings. Hence, we maintain our Buy rating o n the stock. That said, we lower our target price from 120 Hyundai Steel KOSPI W37,000 to W28,000, as we reduced our sustainable ROIC to reflect lower steel prices. 100

80

60 40

20 4.19 8.19 12.19 4.20

Mirae Asset Daewoo Co., Ltd.

[ Metals & Mining/Machinery ] FY (Dec.) 12/17 12/18 12/19 12/20F 12/21F 12/22F Revenue (Wbn) 19,166 20,780 20,513 19,403 20,100 20,824 Jaekwang Rhee +822 -3774 -6022 OP (Wbn) 1,368 1,026 331 69 633 657 [email protected] OP margin (%) 7.1 4.9 1.6 0.4 3.1 3.2

NP (Wbn) 716 399 17 -156 267 286 EPS (W) 5,366 2,988 128 -1,172 2,004 2,143 ROE (%) 4.4 2.4 0.1 -0.9 1.5 1.6

P/E (x) 10.9 15.1 245.4 - 9.9 9.2 P/B (x) 0.5 0.4 0.2 0.1 0.1 0.1 Dividend yield (%) 1.3 1.7 2.4 3.8 3.8 3.8 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

April 16, 2020 Hyundai Steel

Figure 1. Iron production cost trends Figure 2. HRC price trends

(US$/tonne) (US$/tonne) 340 Iron production cost Quarterly avg. 650 China HRC Quarterly avg.

320 600

300 550 280 500 260 450 240

220 400

200 350 1/18 4/18 7/18 10/18 1/19 4/19 7/19 10/19 1/20 4/20 1/18 4/18 7/18 10/18 1/19 4/19 7/19 10/19 1/20 4/20

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Figure 3. HRC mill margin trends Figure 4. Steel scrap price trends

(US$/tonne) (W'000/tonne) 400 HRC mill margin Quarterly avg. 380 Quarterly avg. Quarterly avg. 360

350 340

320 300 300

280 250 260

200 240 220

150 200 1/18 4/18 7/18 10/18 1/19 4/19 7/19 10/19 1/20 4/20 1/18 4/18 7/18 10/18 1/19 4/19 7/19 10/19 1/20 4/20

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Figure 5. Steel rebar price trends Figure 6. Steel scrap mill margin trends

(W'000/tonne) (W'000/tonne) 750 Steel rebar Quarterly avg. 900 Steel scrap mill margin Quarterly avg.

850 700

800 650 750 600 700

550 650

500 600 1/18 4/18 7/18 10/18 1/19 4/19 7/19 10/19 1/20 4/20 1/18 4/18 7/18 10/18 1/19 4/19 7/19 10/19 1/20 4/20

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 April 16, 2020 Hyundai Steel

Table 1. Quarterly and annual earnings (Wbn, %) 1Q19 2Q19 3Q19 4Q19 1Q20F 2Q20F 3Q20F 4Q20F 2018 2019 2020F Revenue 5,072 5,572 5,047 4,822 4,755 4,833 4,826 4,989 20,780 20,513 19,403 Hyundai Steel (parent) 4,478 5,017 4,459 4,120 4,055 4,133 4,126 4,289 18,611 18,074 16,603 Subsidiaries 594 555 589 702 700 700 700 700 2,170 2,439 2,800 Operating profit 212 233 34 (148) (9) (48) 34 93 1,026 331 69 Hyundai Steel (parent) 169 218 34 (143) (16) (41) 41 86 933 278 69 Subsidiaries 43 14 0 (5) 7 (7) (7) 7 93 53 0 OP margin 4.2 4.2 0.7 (3.1) (0.2) (1.0) 0.7 1.9 4.9 1.6 0.4 Hyundai Steel (parent) 3.8 4.4 0.8 (3.5) (0.4) (1.0) 1.0 2.0 5.0 1.5 0.4 Subsidiaries 7.3 2.6 0.0 (0.7) 1.0 (1.0) (1.0) 1.0 4.3 2.2 0.0 Pretax profit 156 132 (65) (172) (60) (124) (41) 17 570 52 (208) Net profit (controlling) 114 46 (68) (75) (45) (93) (31) 13 399 17 (156) Source: Company data, Mirae Asset Daewoo Research estimates

Table 2. Global peer valuation table (US$mn, x, %)

Market cap P/E P/B EV/EBITDA OP margin ROE Dividend yield LTM NTM LTM NTM LTM NTM LTM NTM LTM NTM LTM NTM Hyundai Steel 2,219 48.8 12.7 0.2 0.2 7.4 6.9 1.8 2.8 0.3 1.2 3.7 3.7 POSCO 12,809 7.9 7.7 0.3 0.3 3.4 3.6 5.8 5.6 4.1 4.3 5.6 5.4 ArcelorMittal 10,704 - 14.3 0.3 0.2 5.2 5.3 3.1 3.5 (0.9) 1.7 3.0 3.2 Nucor 11,874 10.5 15.8 1.1 1.1 5.9 7.2 8.2 6.9 10.9 7.0 4.1 4.1 Baoshan 15,352 8.9 8.6 0.6 0.6 3.9 3.9 5.9 6.0 6.6 6.7 5.7 5.8 7,636 - 124.0 0.3 0.3 9.9 8.3 (5.2) (1.2) (15.4) 0.2 1.1 2.2 Note: LTM = last twelve months; NTM = next twelve months Source: Refinitiv, Mirae Asset Daewoo Research estimates

Table 3. TP calculation Sustainable ROIC % 4.0 WACC % 7.1 Fundamental EV/IC % 0.6 IC Wbn 25,000 EV Wbn 14,078 Net debt Wbn 10,000 Minority interest Wbn 335 Fair market cap Wbn 3,743 No. of shares mn 133 TP W 28,000 Source: Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 3 April 16, 2020 Hyundai Steel

Hyundai Steel (004020 KS/Buy/TP: W28,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/19 12/20F 12/21F 12/22F (Wbn) 12/19 12/20F 12/21F 12/22F Revenue 20,513 19,403 20,100 20,824 Current Assets 9,579 10,607 11,127 11,643 Cost of Sales 19,115 18,321 18,418 19,080 Cash and Cash Equivalents 916 1,485 1,936 2,141 Gross Profit 1,398 1,082 1,682 1,744 AR & Other Receivables 2,680 2,936 2,909 3,014 SG&A Expenses 1,066 1,013 1,049 1,087 Inventories 5,416 5,618 5,715 5,921 Operating Profit (Adj) 331 69 633 657 Other Current Assets 567 568 567 567 Operating Profit 331 69 633 657 Non-Current Assets 24,788 24,528 24,293 24,079 Non-Operating Profit -279 -277 -277 -277 Investments in Associates 124 124 124 124 Net Financial Income -302 -302 -302 -302 Property, Plant and Equipment 20,563 20,388 20,226 20,078 Net Gain from Inv in Associates 8 0 0 0 Intangible Assets 1,578 1,494 1,420 1,355 Pretax Profit 52 -208 356 380 Total Assets 34,366 35,136 35,420 35,722 Income Tax 26 -50 85 91 Current Liabilities 6,420 6,406 6,519 6,630 Profit from Continuing Operations 26 -158 270 289 AP & Other Payables 2,943 2,929 3,042 3,151 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 2,874 2,874 2,874 2,875 Net Profit 26 -158 270 289 Other Current Liabilities 603 603 603 604 Controlling Interests 17 -156 267 286 Non-Current Liabilities 10,712 10,712 10,712 10,712 Non-Controlling Interests 9 -2 3 3 Long-Term Financial Liabilities 9,433 9,433 9,433 9,433 Total Comprehensive Profit 310 -158 270 289 Other Non-Current Liabilities 1,279 1,279 1,279 1,279 Controlling Interests 301 -160 275 294 Total Liabilities 17,133 17,118 17,231 17,343 Non-Controlling Interests 9 3 -4 -5 Controlling Interests 16,899 17,683 17,853 18,040 EBITDA 1,879 1,529 2,068 2,071 Capital Stock 667 667 667 667 FCF (Free Cash Flow) -531 -372 549 303 Capital Surplus 3,914 3,914 3,914 3,914 EBITDA Margin (%) 9.2 7.9 10.3 9.9 Retained Earnings 11,488 11,234 11,403 11,590 Operating Profit Margin (%) 1.6 0.4 3.1 3.2 Non-Controlling Interests 335 334 336 339 Net Profit Margin (%) 0.1 -0.8 1.3 1.4 Stockholders' Equity 17,234 18,017 18,189 18,379

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/19 12/20F 12/21F 12/22F 12/19 12/20F 12/21F 12/22F Cash Flows from Op Activities 626 828 1,749 1,503 P/E (x) 245.4 - 9.9 9.2 Net Profit 26 -158 270 289 P/CF (x) 2.0 1.7 1.3 1.3 Non-Cash Income and Expense 2,023 1,712 1,823 1,808 P/B (x) 0.2 0.1 0.1 0.1 Depreciation 1,455 1,376 1,361 1,348 EV/EBITDA (x) 8.3 8.8 6.3 6.2 Amortization 93 84 74 66 EPS (W) 128 -1,172 2,004 2,143 Others 475 252 388 394 CFPS (W) 15,353 11,644 15,687 15,710 Chg in Working Capital -904 -473 43 -200 BPS (W) 127,599 133,482 134,748 136,154 Chg in AR & Other Receivables 26 -268 37 -101 DPS (W) 750 750 750 750 Chg in Inventories -483 -202 -97 -206 Payout ratio (%) 384.4 -62.3 36.4 34.1 Chg in AP & Other Payables -200 95 -3 46 Dividend Yield (%) 2.4 3.8 3.8 3.8 Income Tax Paid -253 50 -85 -91 Revenue Growth (%) -1.3 -5.4 3.6 3.6 Cash Flows from Inv Activities -1,163 -1,200 -1,200 -1,200 EBITDA Growth (%) -28.2 -18.6 35.3 0.1 Chg in PP&E -1,159 -1,200 -1,200 -1,200 Operating Profit Growth (%) -67.7 -79.2 817.4 3.8 Chg in Intangible Assets -13 0 0 0 EPS Growth (%) -95.7 - - 6.9 Chg in Financial Assets -14 0 0 0 Accounts Receivable Turnover (x) 7.9 7.2 7.1 7.3 Others 23 0 0 0 Inventory Turnover (x) 4.0 3.5 3.5 3.6 Cash Flows from Fin Activities 691 -98 -98 -98 Accounts Payable Turnover (x) 14.6 14.8 14.3 14.6 Chg in Financial Liabilities 932 0 0 1 ROA (%) 0.1 -0.5 0.8 0.8 Chg in Equity 0 0 0 0 ROE (%) 0.1 -0.9 1.5 1.6 Dividends Paid -99 -98 -98 -98 ROIC (%) 0.6 0.2 1.8 1.8 Others -142 0 0 -1 Liability to Equity Ratio (%) 99.4 95.0 94.7 94.4 Increase (Decrease) in Cash 154 569 450 205 Current Ratio (%) 149.2 165.6 170.7 175.6 Beginning Balance 762 916 1,485 1,936 Net Debt to Equity Ratio (%) 64.3 58.3 55.3 53.6 Ending Balance 916 1,485 1,936 2,141 Interest Coverage Ratio (x) 1.0 0.2 1.9 2.0 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 4 April 16, 2020 Hyundai Steel

APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price (W) Hyundai Steel Hyundai Steel (004020) 04/14/2020 Buy 28,000 80,000 01/10/2020 Buy 37,000 10/30/2019 Buy 42,000 60,000 10/06/2019 Buy 48,000 06/25/2019 Buy 59,000 40,000 01/27/2019 Buy 64,000 20,000 12/19/2018 Buy 58,000

06/25/2018 Buy 72,000 0 04/08/2018 Buy 64,000 Apr 18 Apr 19 Apr 20

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% 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 Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 82.04% 12.57% 5.39% 0.00% Investment Banking Services 80.77% 11.54% 7.69% 0.00% * Based on recommendations in the last 12-months (as of March 31, 2020)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of Hyundai Steel as an underlying asset; other than this, Mirae Asset Daewoo has no other special interests in the covered companies.

Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report was prepared by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the . Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial

Mirae Asset Daewoo Research 5 April 16, 2020 Hyundai Steel

situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo.

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Mirae Asset Daewoo Research 6 April 16, 2020 Hyundai Steel

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Mirae Asset Daewoo Research 7