July 1, 2019 Korea Morning Focus Company News & Analysis Major Indices Close Chg Chg (%) Dongkuk Steel Mill (001230/Hold) KOSPI 2,130.62 -3.70 -0.17 Further debt reductions needed to increase shareholder value KOSPI 200 277.50 -0.25 -0.09 KOSDAQ 690.53 -7.68 -1.10 Turnover ('000 shares, Wbn) Volume Value KOSPI 529,504 4,282 KOSPI 200 66,427 2,827 KOSDAQ 766,070 4,241 Market Cap (Wbn) Value KOSPI 1,419,521 KOSDAQ 236,406 KOSPI Turnover (Wbn) Buy Sell Net Foreign 1,508 1,195 312 Institutional 859 969 -110 Retail 1,891 2,091 -199 KOSDAQ Turnover (Wbn) Buy Sell Net Foreign 414 426 -12 Institutional 193 201 -7 Retail 3,563 3,546 17 Program Buy / Sell (Wbn) Buy Sell Net KOSPI 1,040 975 65 KOSDAQ 355 375 -20 Advances & Declines Advances Declines Unchanged KOSPI 269 533 92 KOSDAQ 428 765 96 KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Samsung Electronics 47,000 500 574 Hynix 69,500 -700 216 KODEX Kosdaq150 8,930 -455 215 Leverage KODEX KOSDAQ150 8,140 185 200 INVERSE KODEX Leverage 12,695 -55 124 KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Hyundai IT 17,750 -1,400 286 Energy Solutions 5,710 -2,440 135 Linkgenesis 9,200 1,450 126 SillaJen 49,400 -2,900 101 ViroMed 168,600 -24,600 94 Note: As of June 28, 2019 This document is a summary of a report prepared by Mirae Asset Daewoo Co., Ltd. (“Mirae Asset 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. Mirae Asset 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. Mirae Asset 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. Dongkuk Steel Mill (001230 KS) Further debt reductions needed to increase shareholder value Steel 2Q19 preview: Lower sales mix of cheap rebars to drive earnings improvement Earnings Preview June 28, 2019 For 2Q19, we forecast Dongkuk Steel Mill to post non-consolidated revenue of W1.4tr (+1.3% YoY, +11.3% QoQ) and operating profit of W48bn (+117.9% YoY, +58.8% QoQ). We expect earnings to improve YoY and QoQ on the back of a seasonal increase in the sales volume of long products and a decline in the mix of low-priced rebars. Cold-rolled steel prices should also rise on higher prices of hot-rolled steel (raw material), further (Maintain) Hold supporting margins. That said, heavy plate margins are likely to remain under pressure, as 1H19 contract prices for shipbuilding steel were likely frozen despite Target Price (12M, W) - higher prices of slab (raw material). Share Price (06/27/19, W) 6,880 Monthly rebar price disclosure system taking hold Domestic rebar makers have stopped taking new orders and are currently only Expected Return - fulfilling existing contracts, after suspending quarterly price negotiations with the Korea Construction Procurement Part Association in January. Rebar makers are instead individually announcing monthly prices and demanding that changes in raw/secondary OP (19F, Wbn) 203 material prices are reflected in rebar prices so they can ensure a reasonable level of Consensus OP (19F, Wbn) 207 profitability. So far, the monthly price disclosure system appears to be taking hold. As a result, the sales mix of cheap rebars has been falling, contributing to rebar suppliers’ EPS Growth (19F, %) - margin improvements. That said, with the price dispute yet to be resolved, we believe Market EPS Growth (19F, %) -21.6 future developments need to be closely monitored. There are worries about sluggish P/E (19F, x) 10.5 demand in 2H19, but given the YoY growth in construction orders since March, we Market P/E (19F, x) 12.3 think increasing social overhead capital (SOC) spending could lead to stronger demand KOSPI 2,134.32 in the civil construction sector. Market Cap (Wbn) 657 Further debt reductions needed to increase shareholder value Shares Outstanding (mn) 95 Free Float (%) 72.7 While long steel margins are improving as a result of the industry’s new rebar pricing Foreign Ownership (%) 28.4 policy, flat steel margins remain constrained by the company’s limitation as a pure Beta (12M) 1.95 rolling mill. And while the company has reduced its leverage over the past five years 52-Week Low 6,350 through restructuring, its debt level is still high, with net debt of W2.3tr and a debt 52-Week High 9,680 ratio of 180% at end-1Q19. With the company’s recent announcement that it will inject US$150mn into its Brazilian affiliate CSP (in which it owns 30%) over the next three (%) 1M 6M 12M years (US$45mn in 2019, US$79.5mn in 2020, and US$25.5mn in 2021), the pace of Absolute 6.0 -2.7 -19.6 deleveraging is likely to slow. Applying an EV/EBITDA of 6x to EBITDA of roughly Relative 1.5 -7.5 -11.8 W400bn expected over the next 12 months, we come to a valuation of W2.4tr, which implies shareholders’ equity of just W100bn when accounting for net debt. We believe 120 Dongkuk Steel Mill KOSPI further debt reductions are needed for shareholder value to increase. 110 100 90 80 70 60 6.18 10.18 2.19 6.19 Mirae Asset Daewoo Co., Ltd. [ Advanced Materials/Metals] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 5,007 6,049 5,965 5,827 6,218 6,455 Jaekwang Rhee +822-3774-6022 OP (Wbn) 257 241 145 203 206 213 [email protected] OP margin (%) 5.1 4.0 2.4 3.5 3.3 3.3 NP (Wbn) 61 5 -298 62 78 83 EPS (W) 643 47 -3,121 654 815 871 ROE (%) 2.9 0.2 -14.3 3.2 3.8 3.9 P/E (x) 17.2 231.7 - 10.5 8.4 7.9 P/B (x) 0.5 0.5 0.4 0.3 0.3 0.3 Dividend yield (%) 1.4 0.9 0.0 0.0 0.0 0.0 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 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. June 28, 2019 Dongkuk Steel Mill Table 1. Quarterly and annual earnings (Wbn, %) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19F 3Q19F 4Q19F 2018 2019F 2020F Revenue 1,401 1,512 1,501 1,550 1,375 1,496 1,460 1,496 5,965 5,827 6,218 Dongkuk Steel Mill (parent) 1,264 1,353 1,346 1,401 1,232 1,371 1,335 1,371 5,365 5,308 5,710 Subsidiaries 137 159 155 149 143 125 125 125 600 518 508 Operating profit 21 32 53 39 48 56 49 50 145 203 206 Dongkuk Steel Mill (parent) 11 22 46 35 30 48 40 41 114 159 171 Subsidiaries 10 10 7 5 18 9 9 9 31 44 34 OP margin 1.5 2.1 3.5 2.5 3.5 3.8 3.3 3.3 2.4 3.5 3.3 Dongkuk Steel Mill (parent) 0.8 1.6 3.4 2.5 2.5 3.5 3.0 3.0 2.1 3.0 3.0 Subsidiaries 7.2 6.5 4.2 3.2 12.6 6.8 6.8 6.8 5.2 8.4 6.7 Pretax profit (37) (193) (11) (86) 3 31 23 24 (327) 80 102 Net profit (38) (193) (7) (59) 4 23 17 18 (298) 62 78 (controlling interests) Source: Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research Mirae Asset Daewoo Research Key Universe Valuations July 1, 2019 ※All data as of close June 27, 2019, unless otherwise noted. 19F Earnings growth Mkt Cap Price P/E (x) P/B (x) ROE (%) Ticker Company Div Yield OP EPS (Wbn) (W) (%) 19F 20F 19F 20F 19F 20F 19F 20F 19F 20F 005930 Samsung Electronics 280,580 47,000 3.0 -56.7 31.8 -49.5 27.8 15.5 12.1 1.2 1.2 8.3 10.0 000660 SK Hynix 50,596 69,500 2.2 -85.3 94.0 -85.4 87.6 22.3 11.9 1.0 0.9 4.8 8.5 005380 Hyundai Motor 29,914 140,000 2.9 61.8 9.5 143.0 11.5 10.8 9.7 0.5 0.5 5.2 5.6 068270 Celltrion 26,372 205,500 - - - - 0.0 0.0 051910 LG Chem 25,025 354,500 1.7 -21.5 56.7 -24.3 68.0 24.9 14.8 1.5 1.4 6.4 10.1 012330 Hyundai Mobis 22,445 235,500 1.5 9.1 10.2 27.0 7.4 9.6 8.9 0.7 0.6 7.5 7.6 005490 POSCO 21,317 244,500 4.1 -14.6 2.8 71.9 3.0 7.3 7.1 0.5 0.4 6.6 6.4 055550 Shinhan Financial Group 21,292 44,900 12.5 3.1 10.5 0.7 6.1 6.1 0.5 0.5 9.4 8.8 017670 SK Telecom 20,913 259,000 3.9 7.2 4.4 -51.8 65.3 13.9 8.4 0.8 0.8 6.6 10.3 051900 LG H&H 20,507 1,313,000 12.8 9.7 15.7 10.6 26.0 23.5 5.6 4.8 20.0 18.9 105560 KB Financial Group 19,170 45,850 9.7 3.8 10.8 4.0 5.7 5.4 0.5 0.5 9.3 9.0 035420 NAVER 18,789 114,000 0.3 -15.1 26.3 -31.4 68.6 42.2 25.0 2.7 2.5 8.2 12.5 028260 Samsung C&T 18,153 95,700 2.1 5.4 20.1 -4.2 20.7 14.4 11.9 0.7 0.6 5.2 5.9 000270 Kia Motors 17,836 44,000 1.8 20.5 19.7 54.5 16.7 10.0 8.6 0.6 0.6 6.3 7.0 032830 Samsung Life 16,720 83,600 - - - - 0.0 0.0 018260 Samsung SDS 16,636 215,000 1.3 11.6 16.5 12.7 15.4 23.4 20.3 2.5 2.3 11.3 12.0 015760 KEPCO 16,402 25,550 - - - - - - 0.2 0.2 - - 034730 SK Holdings 16,324 232,000 2.0 13.3 12.9 -32.3 20.1 10.8 9.0 0.9 0.8 8.9 9.8 006400 Samsung SDI 16,263 236,500 0.4 17.7 37.7 12.6 27.1 21.1 16.6 1.3 1.2 6.4 7.5 096770 SK Innovation 14,702 159,000 5.0 -46.5 75.4 -56.1 94.1 20.6 10.6 0.8 0.7 4.0 7.6 033780 KT&G 13,523 98,500 4.3 12.8 5.6 17.5 5.1 12.8 12.1 1.5 1.4 12.7 12.6 003550 LG Corp.