20160708-三星证券-Trading_company_NEUTRAL_2H_investment_strategy_25页_1mb

Sector Update Summary

Core Content

This document is a 2H investment strategy report on Korean trading companies, focusing on LG International, Posco Daewoo, and SK Networks. It evaluates the current performance, future outlook, and valuation metrics for these companies, with specific investment recommendations and target prices.

Main Points

• Sector Overview: Korean trading companies experienced year-over-year (y-y) earnings improvements in 1H16 due to commodity price recovery, particularly for oil. However, the sustainability of this recovery is uncertain due to lack of demand growth and market uncertainties. Earnings are expected to normalize this year, as commodity prices are unlikely to re-attain 2015's lows.

• Investment Strategy by Firm:

  • LG International: Maintains a BUY recommendation due to the potential for earnings growth in logistics and project management operations, driven by revamped group governance and Turkmenistan's photochemical plant projects. The stock is currently trading at 12x 2016 P/E, which is undervalued relative to its fundamentals.
  • Posco Daewoo: Suggested to be a trading-buy opportunity. The enterprise value estimate is KRW2.9t based on a long-term oil price assumption of USD50/bbl. Despite recent positive developments like the second gas field discovery in Myanmar, earnings visibility remains uncertain.
  • SK Networks: Maintains a HOLD recommendation due to the unclear earnings visibility and doubts regarding the DFS business resuming operations and the rental car business achieving sufficient market share before altering its strategy.

Key Information

Valuation and Performance

• LG International:

  • Target price: KRW45,000 (up 7% from previous estimate)
  • 2016E EPS: KRW3,048 (up 7.6% from 2015)
  • P/E ratio: 12.0x (2016E)
  • ROE: 9.4%
  • P/B ratio: 1.1x
  • EV/EBITDA: 9.2x

• Posco Daewoo:

  • Target price: KRW27,000 (up 10.4% from current price)
  • 2016E EPS: KRW2,861 (up 69.4% from 2015)
  • P/E ratio: 12.7x (2016E)
  • ROE: 8.7%
  • P/B ratio: 1.1x
  • EV/EBITDA: 12.5x

• SK Networks:

  • Target price: KRW6,500 (up 10% from current price)
  • 2016E EPS: KRW2,861 (up 69.4% from 2015)
  • P/E ratio: 18.5x (2016E)
  • ROE: 3.1%
  • P/B ratio: 0.6x
  • EV/EBITDA: 8.5x

Financial Performance

• LG International:

  • 2Q16E sales: KRW3.4t (+13.5% q-q)
  • 2Q16E operating profit: KRW52.1b (flat q-q due to hedging adjustments)
  • EBITDA margin: 2.0% (2016E)
  • Operating margin: 1.6% (2016E)

• Posco Daewoo:

  • 2Q16E sales: KRW4.2t (+7.6% q-q)
  • 2Q16E operating profit: KRW71.8b (-26.4% q-q)
  • EBITDA margin: 1.3% (2016E)
  • Operating margin: 2.0% (2016E)

• SK Networks:

  • 2Q16E sales: KRW5.2t (+14.5% q-q)
  • 2Q16E operating profit: KRW40.6b (+97.8% q-q)
  • EBITDA margin: 4.2% (2016E)
  • Operating margin: 0.8% (2016E)

Valuation Comparison with Global Peers

Summary Financial Data

Conclusion

The report suggests that the Korean trading sector is poised for normalization in earnings due to commodity price recovery, but the sustainability of this recovery is uncertain. LG International is recommended as a BUY due to its potential for growth in logistics and project management, while Posco Daewoo and SK Networks are advised to be approached with caution. Investors are encouraged to consider long-term valuation metrics rather than daily commodity price fluctuations.