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 Kia 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 Nippon Steel 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