20171214-三星证券-Structural_change_in_steel_cycle_bodes_well_48页_3mb

Sector Update Summary: Steel/Nonferrous Metals (OVERWEIGHT)

Core Content

This document provides an outlook for the steel and nonferrous metals sector, with a focus on the potential for continued growth and positive price movements in 2018. The analysis highlights the structural changes in the steel cycle, the impact of global economic recovery, and the performance of key companies such as Posco, Hyundai Steel, Korea Zinc, and Seah Steel.

Main Points

Steel Outlook

• Positive Demand Outlook: Despite concerns about a real estate market slowdown, the steel sector is expected to see stronger-than-forecast demand in China, driven by a real estate soft landing, increased infrastructure investments, and steel industry restructuring.
• Steel Spread Improvements: Steel spreads are expected to widen structurally due to the decoupling of steel supply growth from iron-ore supply growth since 2014. This decoupling is supported by the stability of steel prices relative to iron ore prices and rising inflation expectations.
• Cost-Push Price Hikes: The steelmakers are likely to benefit from cost-push product price hikes as Chinese miners' cash costs are around USD60/tonne, and global economic recovery is expected to drive inflation.
• China's Steel Demand Growth: The document forecasts a 1.5% growth in China's steel demand for 2018, which is more bullish than the World Steel Association's forecast of no change. This is expected to support steel prices and Posco's ROE.
• Global Economic Recovery: The global economic recovery is anticipated to lead to increased capex by manufacturers and infrastructure investments, which will support steel demand.
• Posco as Top Pick: Posco is highlighted as the top pick due to its potential to benefit from improved industry conditions, with a revised 2018 target price of KRW440,000 (31.5% upside) and a raised operating profit forecast.

Nonferrous Metals Outlook

• Positive Price Trends: Nonferrous metals, including zinc, lead, and copper, are expected to maintain positive price movements in 2018, supported by global economic growth, increased capex, and infrastructure investments.
• Supply-Demand Dynamics: The magnitude of price movements will depend on each metal's supply. For example, zinc prices are expected to remain strong due to Glencore's production control and China's environmental regulations.
• Copper Stability: Copper prices are likely to remain solid due to limited capacity additions, possible decline in copper treatment charges, and growing demand from a recovering global economy.
• Korea Zinc Recommendation: Korea Zinc is recommended as a BUY due to stable earnings momentum from nonferrous metal price trends.

Key Information

Company-Specific Highlights

• Posco (005490 KS, KRW334,500): Target price KRW440,000 (31.5% upside), with expectations of ROE improvement due to stronger demand, spread widening, and cost-push price hikes. The company is currently trading at 0.59x 2017 P/B.
• Hyundai Steel (004020 KS, KRW59,100): Target price KRW73,000 (23.5% upside). While it may not benefit as much as Posco, its attractive valuation is noted.
• Korea Zinc (010130 KS, KRW475,000): Target price KRW650,000 (36.8% upside). Recommended as a BUY based on stable earnings momentum.
• Seah Steel (003030 KS, KRW99,500): Target price KRW130,000 (30.7% upside). The company is expected to benefit from the resolution of uncertainties related to the US Commerce Department's Section 232 investigation.

Financial Performance

• Posco's Financials:
  • Revenue is expected to grow from KRW53,084 billion in 2016 to KRW61,621 billion in 2018.
  • Adjusted EPS is forecasted to rise from KRW27,923 in 2017 to KRW35,237 in 2018.
  • ROE is projected to decrease slightly from 6.9% in 2017 to 6.7% in 2018.
  • P/B is expected to remain stable at around 0.6x.

Market Trends

• Steel vs. Iron Ore: Steel production is expected to shrink while iron ore production expands. This dynamic should lead to structural widening of steel spreads and a rebound in iron ore prices.
• Global Capex: Increased capex in the machinery and automotive sectors is expected to support steel demand and nonferrous metal prices.
• Inflation Expectations: Rising inflation expectations are likely to drive cost-push price hikes in the steel sector.

Conclusion

The steel and nonferrous metals sector is viewed as a BUY, with Posco as the top recommendation. The positive outlook is driven by structural changes in the steel cycle, improved demand in China, and the global economic recovery. Nonferrous metals are also expected to maintain solid price trends, with Korea Zinc and Seah Steel highlighted as attractive investment options.