Hanwha Corp. ( KS)

Transcription

1 Company Report (88 KS) Holdings Companies Negatives priced in; Positives yet to be reflected Maintain Buy call with TP of W42, We maintain our Buy call on with a target price of W42,. Hanwha Corp.Ês shares are trading at a deep discount (44.7%) to the companyês net asset value (vs. its discount band of 25~4%). We attribute this to the sluggishness of Hanwha ChemicalÊs (a subsidiary) shares. However, downside risk for Hanwha ChemicalÊs shares appears minimal, given that their trading P/B has fallen to.8x. Furthermore, Hanwha Chemical is likely to show earnings improvements in light of an expected rise in PVC prices in 2H and rapid loss reductions at Hanwha SolarOne (a subsidiary of Hanwha Chemical). As such, any fall in Ês net asset value (due to a drop in investment asset value) should be limited. And the stock will likely appreciate, given its valuation merits and the growth potential of in-house operations and Hanwha E&C (a wholly-owned subsidiary). 2Q Review: Pretax profit missed forecasts due to a drop in equity-method gains For 2Q, posted revenues of W2.87tr (up 6.3% QoQ; down 3.3% YoY) and an operating profit of W91.9bn (up 15.8% QoQ; down 16.% YoY), under consolidated K-IFRS. Pretax profit came in at W11.1bn (down 2.9% QoQ; down 44.5% YoY), missing both our estimate and the consensus. In the quarter, Hanwha E&C incurred YoY margin deterioration due to a decline in margins at the housing unit as well as an increase in the proportion of public projectrelated revenues (out of its overall revenues). However, Hanwha Hotels & Resorts swung to positive QoQ, driven by a higher hotel room turnover rate (following renovations) and room rate hikes. Meanwhile, 2Q equity-method gains plunged 22.1% QoQ to W71bn, as Hanwha Chemical swung to a pretax loss of W17.2bn (despite loss reductions at Hanwha SolarOne), hurt by equity-method losses from Yeochun NCC. Value of Hanwha E&C to rise In May, Hanwha E&C signed a formal contract with the National Investment Commission (NIC; an Iraqi government agency) to build 1, housing units in Bismayah (a new city neighboring Baghdad). This seven-year project is worth a whopping US$7.75bn. As this project will be funded by the Iraqi government and presale proceeds, we believe the financial risks are limited. Furthermore, Hanwha E&C will perform construction work only upon advance payment. And any delays in payment would permit Hanwha E&C to suspend construction. With Ramadan ending, we believe that Hanwha E&C is likely to receive advance payments sometime soon and begin construction. As such, we anticipate the builder to show full-swing top-line growth going forward. We believe that the resulting rerating of Hanwha E&C should provide a big boost to Ês shares. Earnings & Valuation Metrics FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA (Wbn) (Wbn) (%) (Wbn) (W) (Wbn) (Wbn) (%) (X) (X) (X) 12/1 14, ,149 15, , /11 12, , /12F 12, , /13F 13, , /14F 14, , Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, estimates Daewoo Securities Co., Ltd. Dae-ro Jeong daero.jeong@dwsec.com Buy (Maintain) Target Price (12M, W) 42, Share Price (8/23/12, W) 31,4 Expected Return (%) 33.8 EPS Growth (12F, %) Market EPS Growth (12F, %) 14.1 P/E(12F, x) 6.6 Market P/E(12F, x) 1.3 KOSPI 1, Market Cap (Wbn) 2,354 Shares Outstanding (mn) 75 Avg Trading Volume (6D, ') 191 Avg Trading Value (6D, Wbn) 5 Dividend Yield (12F, %) 1.4 Free Float (%) Week Low 25,85 52-Week High 41,7 Beta (12M, Daily Rate of Return) 1.15 Price Return Volatility (12M Daily, %,SD) 2.2 Foreign Ownership (%) 21.2 Major Shareholder(s) Kim Seung Yeon, et al. (36.23%) Treasury shares (7.84%) NPS (7.17%) Price Performance (%) 1M 6M 12M Absolute Relative Key Business Engaging in in-house operations, trading, wholesale and retail sales Share price KOSPI 8/11 12/11 4/12 8/12 Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.

2 2Q Review: Pretax profit missed forecasts due to a drop in equity-method gains In-house operations and major consolidated subsidiaries showed healthy results; Equitymethod gains declined For 2Q, posted revenues of W2.87tr (up 6.3% QoQ; down 3.3% YoY) and an operating profit of W91.9bn (up 15.8% QoQ; down 16.% YoY), under consolidated K-IFRS. Pretax profit came in at W11.1bn (down 2.9% QoQ; down 44.5% YoY), missing both our estimate and the consensus. Although the companyês in-house operations and major subsidiaries (which are included in consolidated numbers) showed healthy results, a decline in equity-method gains dragged down the companyês 2Q pretax profit. In the quarter, Hanwha E&C incurred YoY margin deterioration due to a decline in margins at the housing unit as well as an increase in the proportion of public project-related revenues (out of its overall revenues). However, Hanwha Hotels & Resorts swung to positive QoQ, driven by a higher hotel room turnover rate (following renovations) and room rate hikes. Inhouse operations delivered QoQ earnings improvement, aided by strong manufacturing operations. Operating profit at in-house units expanded 31.8% YoY to W31.5bn. Meanwhile, 2Q equity-method gains plunged 22.1% QoQ to W71bn, as Hanwha Chemical swung to a pretax loss of W17.2bn (despite loss reductions at Hanwha SolarOne), hurt by equity-method losses from Yeochun NCC. Table 1. Earnings review (Wbn, %) 2Q12P Growth 2Q11 1Q12 Actual KDB Daewoo Consensus QoQ YoY Revenues 2, ,7.7 2, ,95.9 2, Operating profit Net profit OP margin Net profit Table 2. Earnings forecast revisions (Wbn, %, %p) Previous Revised Growth 212F 213F 212F 213F 212F 213F Revenues 12,717 13,717 12,261 13, Operating profit Net Profit OP margin NP margin Table 3. Quarterly earnings trend of by division (Wbn, %, %p) F FY2Q12 1Q 2Q 3Q 4Q Annual 1Q 2QP 3Q 4QF Annual QoQ YoY Revenues 1, , , , , ,352. 1,366. 1,37. 1, , Manufacturing , , Trade 1,98.6 1,21.6 1,6.3 1,16.3 4, ,16.8 1, ,72.8 1, , Eco Metro Operating profit Manufacturing Trade Eco Metro OP margin Manufacturing Trade Eco Metro

3 Table 4. Quarterly earnings trends of and its core subsidiaries (Wbn, %, %p) F FY12 2Q 1Q 2Q 3Q 4Q Annual 1Q 2QP 3Q 4QF Annual QoQ YoY Revenues 1, , , , , ,352. 1,366. 1,37. 1, , OP OP margin Hanwha E&C Revenues , , OP OP margin Hanwha hotel & resort Revenues , OP OP margin Hanwha TechM Revenues OP OP margin

4 Maintain Buy call with TP of W42, Downside risks for Hanwha ChemicalÊs shares appear minimal considering trading P/B of.8x Shares of to appreciate, given the growth potential of inhouse operations and Hanwha E&C We maintain our Buy call on with a target price of W42,. Ês shares are trading at a deep discount (44.7%) to the companyês net asset value (vs. its discount band of 25~4%). We attribute this to the sluggishness of Hanwha ChemicalÊs (a subsidiary) shares. However, downside risk for Hanwha ChemicalÊs shares appears minimal, given that their trading P/B has fallen to.8x. Furthermore, Hanwha Chemical is likely to show earnings improvements in light of an expected rise in PVC prices in 2H and rapid loss reductions at Hanwha SolarOne (a subsidiary of Hanwha Chemical). As such, any fall in Ês net asset value (due to a drop in investment asset value) should be limited. And the stock will likely appreciate, given its valuation merits and the growth potential of in-house operations and Hanwha E&C (a wholly-owned subsidiary). Figure 1. NAV, market cap and discount rate trends of (Wtr) Stake in Hanwha Chemical 's NAV 's market cap /1 6/1 9/1 12/1 3/11 6/11 9/11 12/11 3/12 6/12 (%) 6 NAV discount rate /1 6/1 9/1 12/1 3/11 6/11 9/11 12/11 3/12 6/12 4

5 Table 5. Calculation of target price for Value Remarks 1. Present value of future income 2,23 Value of in-house operations 1,67 1.x 212F EBIT Real estate 353 Fair value 2. Investment asset value 4,124 Listed subsidiaries 2,585 Based on market value Non-listed subsidiaries 1,539 Based on book value 3. Total asset value (1+2) 6, Net borrowings (-) 2,71 End-2Q 212 Treasury shares (+) NAV (3-4) 4,261 Market cap. 2,359 Including treasury shares Discount rate No. of shares (Â) 69,558 Free float 7. NAV per share (W) 61, Target price (W) 42, Current price (W) 31,4 As of August 27, 212 Upside potential (%) 33.8 (Wbn) Table 6. Estimated value of investment securities % of stake Book value Current price Value Remarks Listed subsidiaries 2,585 Based on market value Korea Life Insurance 21.7% 835 7,67 1,446 Hanwha Chemical 37.9% 1,91 21,45 1,139 Non-listed subsidiaries 1,539 Based on book value Hanwha Hotel & Resort 5.6% Hanwha E&C 1.% 1,59 1,59 Hanwha TechM 1.% (Wbn) Figure 2. NAV contribution for Figure 3. Share performances of and its core subsidiaries (1/1/11=1) In-house operations, 32.9% Korea Life, 23.5% Korea Life Hanwha Chemical Others, 7.8% Hanwha E&C, 17.2% Hanwha Chemical, 18.5% 6 4 1/11 4/11 7/11 1/11 1/12 4/12 7/12 5

6 Value of Hanwha E&C to rise In May, Hanwha E&C was contracted to build 1, housing units in a new city neighboring Baghdad Advance payments are imminent; Re-rating of Hanwha E&C to boost Ês shares. In May, Hanwha E&C signed a formal contract with the National Investment Commission (NIC; an Iraqi government agency) to build 1, housing units in Bismayah (a new city neighboring Baghdad). Hanwha E&C will manage the entire process (e.g., designing, procuring, and building). This seven-year project is worth a whopping US$7.75bn. In light of the political and economic uncertainties in Iraq, all projects must be carefully vetted for financing soundness before being taken on. The financial risks for this housing project appear limited in our opinion, as it will be funded by the Iraqi government and presale proceeds. Furthermore, Hanwha E&C will perform construction work only upon advance payment. And any delays in payment would permit Hanwha E&C to suspend construction. With Ramadan ending, we believe that Hanwha E&C is likely to receive advance payments sometime soon and begin construction. As such, we anticipate the builder to show fullswing top-line growth going forward. We believe that the resulting re-rating of Hanwha E&C should provide a big boost to Ês shares. Table 7. Bismayah New City Project Overview Project Bismayah New City Project Scale 1, housing units and infrastructure (roads, water, and sewage facilities) Period 7 years (2 years for precast concrete plants: 5 years for housing units) Amount US$7.75bn (+ inflation adjustment) Contractee NIC (National Investment Commission) Area Bismayah, 25 km southeast of Baghdad Land area 18,3,m2 Advanced payments (25%) Payment schedule - Contract payments: 1% - Intermediate payments: 15% Payment made based on progression of project Source: Company data, Figure 4. Hanwha E&CÊs order backlogs Figure 5. Hanwha E&CÊs overseas new order trend (Wtr) (Wbn) 1 8 Bismayah New City Project (US$7.75bn) 8, /12 2 1,366 1, F Source: Company date, Source: Company date, 6

7 Hanwha (88 KS/Buy/TP: W42,) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 12,186 12,261 13,25 14,225 Current Assets 4,853 4,893 6,23 6,125 Cost of Sales 11,267 11,21 12,99 13,1 Cash and Cash Equivalents 351 1,412 1,942 2,81 Gross Profit 919 1,51 1,16 1,224 AR & Other Receivables 3,52 2,217 2,466 2,572 SG&A Expenses Inventories Operating Profit (Adj) Other Current Assets Operating Profit Non-Current Assets 1,177 11,45 12,619 13,871 Non-Operating Profit Investments in Associates 5,811 5,848 5,939 6,31 Net Financial Income Property, Plant and Equipment 3,63 3,241 3,41 3,538 Net Gain from Inv in Associates Intangible Assets Pretax Profit Total Assets 15,3 16,297 18,642 19,995 Income Tax Current Liabilities 5,748 5,189 5,522 5,695 Profit from Continuing Operations AP & Other Payables 2,16 1,569 1,769 1,95 Profit from Discontinued Operations Short-Term Financial Liabilities 2,598 2,48 2,525 2,467 Net Profit Other Current Liabilities 1,134 1,141 1,229 1,323 Controlling Interests Non-Current Liabilities 4,223 5,74 7,345 8,47 Non-Controlling Interests Long-Term Financial Liabilities 2,391 3,452 4,652 5,563 Total Comprehensive Profit Other Non-Current Liabilities 1,551 2,7 2,412 2,23 Controlling Interests Total Liabilities 9,971 1,928 12,866 13,742 Non-Controlling Interests Controlling Interests 4,686 4,992 5,389 5,856 EBITDA Capital Stock FCF (Free Cash Flow) Capital Surplus EBITDA Margin (%) Retained Earnings 3,937 4,267 4,686 5,175 Operating Profit Margin (%) Non-Controlling Interests Net Profit Margin (%) Stockholders' Equity 5,59 5,369 5,776 6,253 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 645 1, P/E (x) Net Profit P/CF (x) Non-Cash Income and Expense P/B (x) Depreciation EV/EBITDA (x) Amortization EPS (W) 1,783 4,771 5,977 6,894 Others CFPS (W) 3,438 5,678 6,968 7,913 Chg in Working Capital 251 1, BPS (W) 6,265 63,774 68,533 74,341 Chg in AR & Other Receivables DPS (W) Chg in Inventories Payout ratio (%) Chg in AP & Other Payables Dividend Yield (%) Income Tax Paid Revenue Growth (%) Cash Flows from Inv Activities , EBITDA Growth (%) Chg in PP&E Operating Profit Growth (%) Chg in Intangible Assets EPS Growth (%) Chg in Financial Assets Accounts Receivable Turnover (x) Others Inventory Turnover (x) Cash Flows from Fin Activities Accounts Payable Turnover (x) Chg in Financial Liabilities ROA (%) Chg in Equity ROE (%) Dividends Paid ROIC (%) Others Liability to Equity Ratio (%) Increase (Decrease) in Cash 133 1, Current Ratio (%) Beginning Balance ,48 2,1 Net Debt to Equity Ratio (%) Ending Balance 351 1,48 2,1 2,149 Interest Coverage Ratio (x) Source: Company data, estimates 7

8 Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Stock Ratings Industry Ratings Buy Relative performance of 2% or greater Trading Buy Relative performance of 1% or greater, but with volatility Hold Relative performance of -1% and 1% Sell Relative performance of -1% Overweight Fundamentals are favorable or improving Neutral Fundamentals are steady without any material changes Underweight Fundamentals are unfavorable or worsening (W) Hanwha 8, 6, 4, 2, 8/1 2/11 8/11 2/12 8/12 * Ratings and Target Price History (Share price (----), Target price (----), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analystês estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the AnalystÊs area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. ( Daewoo ), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. 8

9 Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2 (Financial Promotion) Order 25 (the Order ), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as Relevant Persons ). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction. KDB Daewoo Securities International Network Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office 34-3 Yeouido-dong, Yeongdeungpo-gu Seoul Korea Two International Finance Centre Suites Finance Street, Central Hong Kong 6 Lexington Avenue Suite 31 New York, NY 122 United States Tel: Tel: Tel: Daewoo Securities (Europe) Ltd. Tokyo Representative Office Beijing Representative Office Tower 42, Level Old Broad Street London EC2N 1HQ United Kingdom 7th Floor, Yusen Building Marunouchi, Chiyoda-ku Tokyo 1-5 Japan Suite 262, Twin Towers (East) B-12 Jianguomenwai Avenue Chaoyang District, Beijing 122 China Tel: Tel: Tel: Shanghai Representative Office Ho Chi Minh Representative Office Unit 13, 28 th Floor, Hang Seng Bank Tower Centec Tower 1 Lujiazui Ring Road Nguyen Thi Minh Khai Street Pudong New Area, Shanghai 212 Ward 6, District 3, Ho Chi Minh City China Vietnam Tel: Tel: