November 27, 2012 KOREA Morning Company News & Analysis Major Indices Close Chg Chg (%) Hansol Chemical (Buy/TP: W35,000) Initiate coverage KOSPI 1,908.51 -2.82 -0.15 A rising star to be reckoned with KOSPI 200 250.73 -0.71 -0.28 KOSDAQ 496.24 -2.58 -0.52 Economy & Strategy Update Turnover ('000 shares, Wbn) Fixed income weekly Volume Value KOSPI 273,780 3,178 Remains too early to unload positions KOSPI 200 52,232 2,422 KOSDAQ 498,576 1,751 Market Cap (Wbn) Value KOSPI 1,103,306 KOSDAQ 109,156 KOSPI Turnover (Wbn) Buy Sell Net Foreign 755 732 23 Institutional 850 778 71 Retail 1,547 1,641 -94 KOSDAQ Turnover (Wbn) Buy Sell Net Foreign 67 60 7 Institutional 71 85 -14 Retail 1,610 1,604 6 Program Buy / Sell (Wbn) Buy Sell Net KOSPI 598 460 138 KOSDAQ 12 14 -2 Advances & Declines Advances Declines Unchanged KOSPI 403 390 101 KOSDAQ 450 495 53 KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Samsung Electronics 1,404,000 -33,000 381 KODEX LEVERAGE 11,585 -55 185 LG Electronics 76,200 -100 130 KODEX INVERSE 7,815 25 100 Hynix 25,800 100 97 KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Tera Resource Co., Ltd 1,680 65 76 Hicel 3,455 90 30 SM 45,050 -1,350 29 Mobilians 13,000 -650 25 Melfas 27,950 -350 24 Note: As of November 26, 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 November 26, 2012 IT parts and materials Hansol Chemical (014680 KS) Daewoo Securities Co., Ltd. Will Cho A rising star to be reckoned with +822-768-4306 [email protected] Earnings: In 2013, we expect Hansol Chemical to report revenues of W336.2bn (+13.2% YoY) and an operating profit of W37.1bn (+32.5 YoY). The companyÊs hydrogen peroxide sales are projected to surge 21% YoY, as capacity expansion completed this year is likely to drive top-line growth. Although electronic materials will generate only W15bn in revenues, their contribution to the companyÊs overall profitability improvement should be significant. Growth theme: 1) Hydrogen peroxide, despite its wide usage across various industries, is produced by only a small number of makers. Thanks to the oligopolistic nature of the Buy (Maintain) market, downward pricing pressure is low and demand is stable, allowing these makers Target Price (12M, W) 35,000 to post healthy earnings irrespective of overall economic conditions. Share Price (11/23/12, W) 25,800 2) From 2013, we expect Hansol ChemicalÊs high-end semiconductor material sales to Expected Return (%) 35.7 EPS Growth (12F, %) 126.4 pick up full swing. Despite the businessÊ modest revenues of around W10~20bn, its OP Market EPS Growth (12F, %) 9.6 margin is extremely high, at over 30%. For small-cap companies like Hansol (annual P/E (12F, x) 9.7 revenues of around W300bn and operating profit of around W30bn), semiconductor Market P/E (12F, x) 10.2 materials can deliver huge operating leverage effects. KOSPI 1,911.33 Catalysts: 1) The growing contribution of electronic materials to HansolÊs revenues will Market Cap (Wbn) 291 allow the stock to undergo a re-rating. Three years ago, Cheil Industries saw its Shares Outstanding (mn) 11 profitability surge as its sales of high-end semiconductor materials accelerated. We Avg Trading Volume (60D, '000) 52 believe that Hansol is following a similar path to Cheil Industries, which is now widely Avg Trading Value (60D, Wbn) 1 viewed as an IT materials maker, rather than a chemicals producer. 2) If Hansol Dividend Yield (12F, %) 1.9 becomes the exclusive supplier of semiconductor materials to Samsung ElectronicsÊ Free Float (%) 63.4 (SEC) NAND fab in China (slated to begin operations in 2014), the companyÊs profitability 52-Week Low (W) 15,400 52-Week High (W) 26,800 should improve further. Beta (12M, Daily Rate of Return) 0.21 Risks: Risks include delays to customersÊ approval of new semiconductor materials and Price Return Volatility (12M Daily, %, SD) 1.8 a failure to win supply contracts. A possible supply glut in the hydrogen peroxide market Foreign Ownership (%) 2.1 also raises concerns, as Taekwang Industrial has joined the competition (the number of Major Shareholder(s) producers remains small, however). Nevertheless, since Taekwang Industrial caters to Cho, Dong-Hyuk et al. (18.03%) different customer segments, the impact of its entry into the market should be limited. Allianz Global Investors (14.58%) Treasury stock (10.68%) Valuation: We initiate our coverage of Hansol Chemical with a Buy rating and a target Price Performance price of W35,000 (fair P/E of 14.7x applied to 2013F EPS). The stock is currently (%) 1M 6M 12M trading at a 2013F P/E of 11x, close to the average P/E of the companyÊs peer group Absolute 5.7 58.3 40.2 (cyclical electronic materials stocks). We believe that the stock is undervalued, Relative 6.5 52.6 33.0 considering Hansol ChemicalÊs stable customer base, high earnings visibility, and profitability improvements on increasing revenues from its growth drivers. Share price FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 150 KOSPI (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (X) (X) (X) 130 12/10 228 23 10.1 14 1,251 27 -19 11.1 12.6 1.2 8.7 12/11 279 23 8.1 13 1,179 32 -19 9.3 15.9 1.4 9.4 110 12/12F 297 28 9.4 30 2,668 29 -28 19.2 9.7 1.8 13.2 90 12/13F 336 37 11.0 26 2,330 32 24 15.5 11.1 1.8 12.1 70 12/14F 377 44 11.6 31 2,740 32 24 17.5 9.4 1.8 12.0 11/11 3/12 7/12 11/12 Note: All figures are based on non-consolidated K-IFRS 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 November 26, 2012 Table 1. Earnings and forecasts (Wbn, %) 1Q12 2Q12 3Q12 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 11 12F 13F 14F Revenues 69.8 76.4 74.6 76.1 77.3 85.3 85.5 88.2 278.6 297.0 336.2 376.8 COGS 58.0 63.9 60.7 63.2 64.7 71.6 68.8 72.4 235.1 245.8 277.4 310.6 SG&A 4.7 5.3 6.0 6.9 4.7 4.6 5.1 7.1 19.4 23.0 21.5 22.3 Other operating gains 2.0 -0.1 0.0 -2.1 2.0 0.0 0.0 -2.1 -1.4 -0.3 -0.2 -0.2 Operating profit 9.1 7.2 7.8 3.8 9.9 9.0 11.6 6.6 22.7 28.0 37.1 43.7 Non-operating profit -0.8 17.6 -4.9 -1.3 0.1 -1.8 -0.9 -1.6 -5.0 10.6 -4.2 -5.0 Pretax profit 8.3 24.8 2.9 2.6 10.0 7.2 10.7 5.0 17.7 38.6 32.9 38.7 Net profit 6.3 19.4 2.4 2.1 8.0 5.8 8.5 4.0 13.3 30.1 26.3 30.9 OP margin (%) 13.0 9.4 10.5 5.1 12.8 10.5 13.6 7.5 8.1 9.4 11.0 11.6 Pretax margin (%) 11.8 32.5 3.9 3.4 12.9 8.4 12.5 5.7 6.3 13.0 9.8 10.3 Net margin (%) 9.0 25.4 3.2 2.7 10.3 6.8 10.0 4.6 4.8 10.1 7.8 8.2 QoQ/YoY growth Revenues -2.7 9.4 -2.3 2.0 1.5 10.3 0.2 3.2 22.1 6.6 13.2 12.1 Operating profit 299.6 -21.3 9.3 -50.9 157.8 -9.6 29.3 -43.2 11.5 23.3 32.5 17.9 Pretax profit TTB 199.9 -88.2 -12.3 288.9 -28.0 48.3 -52.8 -17.1 118.4 -14.7 17.6 Net profit TTB 207.8 -87.7 -14.0 288.9 -28.0 48.3 -52.8 -12.0 126.8 -12.7 17.6 Source: KDB Daewoo Securities Research Table 2.