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Posco (005490) Company Update Summary

Core Content

This document provides an analysis of Posco (005490), a major global steelmaker, focusing on its performance, market dynamics, and future outlook. The report is from Samsung Securities and outlines the company's potential for recovery and growth in the second half of 2017. Key elements include the global steel supply-demand balance, the impact of China's fiscal and infrastructure policies, and the performance of Posco's subsidiaries on its consolidated ROE.

Main Points

Market Overview

• Current Price: KRW270,000
• Target Price: KRW380,000 (40.7% upside)
• Market Cap: KRW23.5t / USD20.9b
• Shares (float): 87,186,835 (78.9%)
• 52-Week High/Low: KRW296,500 / KRW194,000
• Avg Daily Trading Value (60-day): KRW82.5b / USD73.5m

One-Year Performance

Key Changes (2017E)

Analyst Ratings

• Number of Estimates: 21
• Target Price: KRW362,857
• Recommendation: 4.0 (BUY★★★:5, BUY:4, HOLD:3, SELL:2, SELL★★★:1)

Key Insights

Supply and Demand Dynamics

• Historical Context: From 2010 to 2015, steel supply outpaced demand, leading to price distortions and reduced profitability for steelmakers.
• Shift in 2016: Steel supply began to align with demand due to reduced capacity expansions and restructuring efforts in China, which positively impacted steel prices.
• Industry Outlook: The improving supply-demand dynamics are expected to continue, with a likely upturn in the steel industry that may last longer than one year.

China's Fiscal Spending and Steel Demand

• Demand Concerns: Steel shares corrected in early 2017 due to concerns over slowing demand in China, stemming from real estate regulations and liquidity issues.
• Government Policy: The People's Bank of China reaffirmed a neutral monetary stance and resumed liquidity injections, suggesting potential for fiscal stimulus in the second half of 2017.
• Infrastructure Investments: The designation of Xiongan New Area as a special economic zone and the 'One Belt, One Road' initiative are expected to boost steel demand in China.
• Estimated Impact: The Xiongan project could increase annual steel demand in China by 1.6%, while the 'One Belt, One Road' policy could boost it by 3.1%, leading to a rise in steel price spreads and improved operating profits for Posco.

Subsidiaries and ROE

• ROE Decline: Posco's consolidated ROE declined from 21.9% in 2005 to 2.7% in 2014 due to underperformance of subsidiaries and restructuring.
• Subsidiary Recovery: Posco's overseas and non-steel subsidiaries are showing improved earnings, contributing positively to ROE.
• Expected Impact: The improved performance of subsidiaries, combined with the steel business, is expected to accelerate ROE growth in 2H 2017.

Key Information

Impact of Xiongan New Area

• Fixed Asset Investments: Estimated at CNY2t over 15 years, accounting for 19% of total steel demand.
• Steel Demand Boost: Expected to increase annual steel demand in China by 1.6%.
• Spread Impact: Estimated to widen steel spreads by USD10/tonne, increasing Posco's 2017 operating profit by 10%.

Impact of 'One Belt, One Road' Policy

• Annual Investment: Estimated at USD89ob, with 15% allocated to steel.
• Steel Demand Boost: Expected to increase annual steel demand in China by 3.1%.
• Spread Impact: Estimated to widen steel spreads by USD18/tonne, increasing Posco's 2017 operating profit by 17%.

Posco's Financial Impact

Summary of Analysis

• Recommendation: BUY for 2H 2017, with a target price of KRW380,000.
• Reasoning: The company is expected to benefit from improving supply-demand dynamics in the steel industry, increased fiscal spending in China, and better performance from its subsidiaries.
• Investor Focus Shift: The report suggests that investors should shift their focus from supply-side issues to demand-side opportunities in the steel sector.

Conclusion

The report highlights that Posco is well-positioned for recovery in the second half of 2017, driven by improved earnings from its subsidiaries and the potential for increased steel demand in China due to infrastructure investments and fiscal policies. The analyst maintains a BUY recommendation with a KRW380,000 target price, indicating confidence in the company's prospects despite current market corrections.