July 10, 2012 KOREA Morning Company News & Analysis Major Indices Close Chg Chg (%) Hyundai Steel (Buy/TP: W140,000) KOSPI 1,836.13 -22.07 -1.19 Now is the time for patience; Liftoff expected in 2013 KOSPI 200 241.73 -3.34 -1.36 KOSDAQ 495.23 -1.98 -0.40 Hana Financial Group (Buy/TP: W61,000) Solid fundamentals clouded by weak earnings Turnover ('000 shares, Wbn) Volume Value Doosan Corp. (Buy/TP: W210,000) KOSPI 277,613 3,252 Positive momentum to rise in 2H KOSPI 200 51,289 2,697 KOSDAQ 588,307 1,685 Market Cap (Wbn) Economy & Strategy Update Value Fixed Income Weekly KOSPI 1,057,064 The Rubicon is crossed KOSDAQ 107,611 KOSPI Turnover (Wbn) Buy Sell Net Foreign 699 1,033 -334 Institutional 684 730 -46 Retail 1,633 1,387 246 KOSDAQ Turnover (Wbn) Buy Sell Net Foreign 41 58 -17 Institutional 53 53 1 Retail 1,585 1,568 17 Program Buy / Sell (Wbn) Buy Sell Net KOSPI 580 511 69 KOSDAQ 7 10 -3 Advances & Declines Advances Declines Unchanged KOSPI 296 519 74 KOSDAQ 407 537 52 KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Samsung Electronics 1,126,000 -35,000 481 KODEX LEVERAGE 11,055 -275 187 KODEX INVERSE 8,070 95 132 Hyundai Motor 228,500 -1,500 99 LG Chem 307,000 -6,500 94 KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Agabang 15,250 -300 62 AHNLAB 109,000 1,300 59 EG 70,700 -3,800 37 iMBC 8,160 40 34 Atinum Investment 2,040 140 30 Note: As of July 9, 2012 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. Company July 10, 2012 Steel Hyundai Steel (004020 KS) Daewoo Securities Co., Ltd. Seung-hun Jeon Now is the time for patience; Liftoff expected in 2013 +822-768-2713 [email protected] Maintain Buy call with TP of W140,000 Aiden Lee +822-768-3297 We maintain our Buy call on Hyundai Steel with a target price of W140,000. We [email protected] believe that the company’s potential 2012 earnings deterioration has already been priced in. Excluding the value of Hyundai Mobis shares, the company’s shares are trading at a 2012F P/B of only 0.9x on a ROE of 10.1%. If the present value of Hyundai Steel’s third blast furnace (W15,000/sh) is taken into account, the attractiveness of the company’s shares should further increase. We expect Hyundai Buy (Maintain) Steel’s shares to skyrocket once the steel market turns around. Target Price (12M, W) 140,000 Share Price (07/09/12, W) 86,200 2Q Preview: Solid results likely thanks to limited product price cuts Expected Return (%) 62.4 EPS Growth (12F, %) 6.0 For 2Q, we project Hyundai Steel to post revenues of W3.83tr (up 7.6% QoQ) and Market EPS Growth (12F, %) 18.1 an operating profit of W330.5bn (up 108.1% QoQ) under consolidated K-IFRS. The P/E (12F, x) 9.3 company’s 2Q operating profit is likely to slightly exceed the consensus (W321.5bn), Market P/E (12F, x) 9.4 as: 1) Hyundai Steel’s product price cuts were smaller than input cost declines, and KOSPI 1,836.13 2) the company received compensation for its efforts to conserve energy during Market Cap (Wbn) 7,354 peak hours. For the quarter, we forecast that profits per tonne for hot-rolled coils Shares Outstanding (mn) 85 (HRC) and heavy plates increased on the back of an 8% QoQ decline in blast Avg Trading Volume (60D, '000) 385 Avg Trading Value (60D, Wbn) 35 furnace input costs and limited ASP drops (down 0.5% and 1.4% for HRCs and Dividend Yield (12F, %) 0.6 heavy plates, respectively). And we also forecast that rebar profits per tonne rose Free Float (%) 64.7 3.4% QoQ. Meanwhile, despite a drop in the ASP (down 1.0% QoQ), we estimate 52-Week Low (W) 74,200 that the company achieved revenue growth on the back of a 10.3% QoQ increase in 52-Week High (W) 139,000 overall sales volume (driven by strong seasonality). Beta (12M, Daily Rate of Return) 1.44 Price Return Volatility (12M Daily, %, SD) 2.9 In 3Q, we project Hyundai Steel’s operating profit to deteriorate 13.0% QoQ to Foreign Ownership (%) 18.9 W287.7bn, as: 1) we forecast 3Q sales volume to decrease 7.6% QoQ due to the Major Shareholder(s) arrival of a weak season, 2) high US$/W rates during 2Q should be reflected in 3Q Kia Motors et al.(33.89%) costs, and 3) product prices are likely to drop due to the contractions of overseas NPS (9.13%) Capital Group International lnc. (5.26%) steel markets. Price Performance Three catalysts expected to come after 4Q (%) 1M 6M 12M Absolute 0.2 -9.2 -37.3 We expect Hyundai Steel to see three catalysts after 4Q. Relative 0.2 -9.7 -21.5 Key Business First, if concerns over the global economy linger, the Chinese government will need Hyundai Steel produces flat and long to expand infrastructure investments. Given that the country’s net exports are products. The company has constructed making a negative contribution to GDP growth and consumption is unlikely to surge blast furnaces and is supplier of core materials to the Hyundai-Kia Automotive in the near term, investment expansion (at least in the near term) is likely to be the Group country’s only option for averting a hard landing. Share price FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 120 KOSPI (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (X) (X) (X) 100 12/10 10,236 1,059 10.4 922 10,812 1,459 -3,014 12.3 11.5 1.3 12.4 80 12/11 15,260 1,304 8.6 747 8,758 1,977 -835 8.5 10.9 0.9 8.6 12/12F 14,598 1,102 7.6 792 9,281 1,811 -2 8.4 9.3 0.8 9.0 60 12/13F 15,869 1,542 9.7 1,060 12,426 2,237 197 10.2 6.9 0.7 7.4 40 12/14F 17,301 1,894 11.0 1,264 14,817 2,731 1,287 11.0 5.8 0.6 5.7 7/11 11/11 3/12 7/12 Notes: 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 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. Company July 10, 2012 Second, we believe that Hyundai Steel’s low self-production of iron ore (which has been considered a major weakness) should emerge as a strength after 2013. As iron ore production expansion is likely to outpace steel production growth, steelmakers’ pricing power is highly likely to recover. Third, if steelmakers’ earnings improve thanks to the aforementioned catalysts, the value of Hyundai Steel’s third blast furnace (scheduled to be launched in 2H13) should re-emerge. The company’s current share price does not reflect the value of the third blast furnace. Table 1. Quarterly earnings forecasts for Hyundai Steel 2011 2012F 2Q12 change % 1Q 2Q 3Q 4Q Annual 1Q 2QF 3QF 4QF Annual QoQ YoY Revenue (Wbn) 3,564 4,056 3,749 3,890 15,260 3,558 3,829 3,499 3,711 14,598 7.6 -5.6 Operating profit (Wbn) 309 416 286 294 1,304 159 330 288 325 1,102 108.1 -20.5 Pretax profit (Wbn) 341 429 -192 331 909 181 232 263 302 978 28.3 -45.8 Net profit (Wbn) 267 344 -137 273 747 154 186 211 241 792 20.7 -46.0 OP margin (%) 8.7 10.3 7.6 7.5 8.5 4.5 8.6 8.2 8.8 7.6 - Pretax margin (%) 9.6 10.6 -5.1 8.5 6.0 5.1 6.1 7.5 8.1 6.7 - - Net profit margin (%) 7.5 8.5 -3.7 7.0 4.9 4.3 4.9 6.0 6.5 5.4 - - US$/W 1,120 1,083 1,086 1,144 1,108 1,131 1,152 1,135 1,120 1,135 1.8 6.3 Source: Company data, KDB Daewoo Securities Research Figure 1.