Korea Research Earnings review Korea / Industrials 11 January 2013 HOLD Target price Last price (9 Jan 13) KRW9,000 KRW8,590 Upside/downside (%) 4.8 KOSPI 1997.94 Mkt. cap (KRWbn/US$bn) 2,132/2.0 52 week range 7,860-11,800 Avg. trading volume daily (KRWbn) 5.0 Foreign ownership (%) 11.8 Forecast earnings & valuation Fiscal year ending Dec-11 Dec-12 Dec-13 Dec-14 Revenue (KRWbn) 27,536 28,665 31,701 34,111 EBIT (KRWbn) 346.0 304.2 353.7 401.4 Net profit (KRWbn) 141.8 107.8 172.3 212.2 Net profit(underlying) 145.8 115.9 172.3 212.2 EPS 587 467 694 855 EPS growth (%) (30.6) (20.5) 48.6 23.1 P/E (x) 17.2 18.1 12.4 10.0 EV/EBITDA (x) 10.6 10.3 9.5 8.4 Dividend yield (%) 1.5 1.8 1.7 1.7 P/B (x) 0.8 0.7 0.6 0.6 ROE (%) 4.6 3.6 5.3 6.2 Net debt/equity (%) 65.9 69.5 64.2 59.8 Performance KRW 10,505 9,505 8,505 7,505 Price(LHS) Jan-12 Apr-12 Jul-12 Oct-12 Performance 1M 3M 12M Absolute (%) 4.9 (13.2) (15.4) Absolute (US$, %) 6.6 (9.3) (7.5) Relative to KOSPI (%) 2.8 (14.0) (23.8) Haesoon Kwon, Analyst Rel. to KOSPI(RHS) 82 2 3774 6022 hskwon@miraeasset.com 97% 87% 77% 67% () Operating profit to fall by 25.8% YoY We estimate consolidated 4Q12 revenue at KRW7.6tn (+2% YoY, +4.6% QoQ) and operating profit at KRW103bn (-25.8% YoY, +117.4% QoQ, which are in line with our previous forecasts and consensus. We attribute the YoY fall in its operating profit to: 1) the likely unsatisfactory earnings recovery of its Trading & Investment (T&I) Company, despite the onset of peak demand season (4Q) for the company s fashion business and Walkerhill casino; and 2) the estimated YoY fall in 4Q12 operating margins of its Information Communication Technology Marketing (IM) Company, owing to the belated launch of the iphone 5. Meanwhile, we have lowered our net profit forecast for by 5.3% for 2013 and 13.3% for 2014, to reflect the likely continued equity method losses from its 13.8%-owned affiliate, Brazilbased iron ore company MMX (as the effects of its capacity expansion should not be felt until 2015). However, the downward revision has only a negligible impact on our target price for the company of KRW9,000, which we reiterate, along with our HOLD rating. 4Q12 earnings preview: Operating profit to fall by 25.8% YoY We expect to report a hefty 25.8% YoY fall in its consolidated operating profit, to KRW103bn, for 4Q12. This is due mainly to: 1) the likely unsatisfactory earnings recovery of its T&I Company, despite the start of peak demand season (4Q) for the company s fashion business and Walkerhill casino; and 2) the estimated YoY fall in its IM Company s 4Q12 operating margins, owing to the belated launch of the iphone 5. Meanwhile, we estimate that its T&I Company moved into profitability in 4Q12, thanks to partial dissipation of negatives that weighed on its 3Q12 earnings (3Q12 operating losses of KRW7.5bn), including: 1) sluggish exports of chemical products; 2) the decline in steel trading revenue (as a result of sanctions imposed on Iran); and 3) the write-off of goodwill, following adjustment of the company s stake in MMX. 2013 Outlook: Earnings to normalize; MMX profit stream after 2015 We expect earnings to normalize in 2013, with FY13E revenue of KRW31.7tn (+11% YoY) and operating profit of KRW354bn (+16% YoY). The company s operating profit fell by 12% YoY in 2012, due mainly to: 1) a spike in its IM Company s marketing expenses in 1H12; and 2) its T&I subsidiary s switch to operating losses in 3Q12. Meanwhile, Brazil-based iron-ore company MMX, 13.8% of which was purchased by for KRW850bn in December 2010, is likely to move into profitability after 2015. With the completion of Sudeste Port slated for 4Q12, MMX should expand its iron ore exports from end-2013; however, output expansion should only be possible from end-2014. As such, its operating cash flow is unlikely to cover its hefty debt-servicing expenses (total debt of US$1.3bn) until 2015. Reflecting equity method losses from MMX, we have lowered our net profit forecast for SK Networks by 5.3% for 2013 and 13.3% for 2014. Share price catalysts: Effective use of assets and E&P investments We believe the value of in the mid-to-long term will hinge on effective asset management through the liquidation of under-performing assets (selling struggling gas stations and developing idle properties) and E&P earnings growth. We expect to see the result of such efforts from 2014, on recovery of the Korean real estate market and growth in MMX s iron ore exports. See the last page of this report for important disclosures 1
HOLD and TP of KRW9,000 maintained As the aforementioned downward revision of earnings has only a negligible impact on our target price, we maintain our target price of KRW9,000 and HOLD rating for. Our target price is based on the sum of per-share value of: 1) its operations at KRW6,892 (P/E of 9x FY13E adjusted EPS, excluding equity method gains/losses from invested assets); and 2) investment equity at KRW1,847 (stakes in Brazilian iron ore mining company MMX and Chinese copper mine developer NCI). Our target price is equivalent to 12x FY13E P/E. Figure 1 SKN s 4Q12 preview (KRWbn, %) 4Q11 3Q12 4Q12E Mirae YoY QoQ 4Q12E Consensus Diff. 1Q13E Sales 7,460 7,273 7,607 2.0 4.6 7,534 1.0 7,514 Adj. operating profit 123 50 103 (16.4) 104.5 89 15.6 73 Operating profit 138 47 103 (25.8) 117.4 103 (0.3) 72 Net profit 53 16 58 8.9 259.6 71 (18.1) 30 Adj. operating profit margin 1.6 0.7 1.3 1.2 Operating margin 1.9 0.6 1.3 1.4 (0.0) 1.0 Net margin 0.7 0.2 0.8 0.9 (0.2) 0.4 Figure 2 SKN s sales trends by division (2011 vs. 2012E) Figure 3 SKN s OP trends by division (2011 vs. 2012E) Fashion 2% Hotel 2% Hotel 7% Trading 27% IM 28% Trading 4% Fashion 15% IM 42% E&C 41% E&C 32%, Quantiwise, Quantiwise 2 2
Figure 4 SKN s share price trends and issues in 2012 12,000 11,000 1) Falling commodity prices 2) Reflecting sluggish 1Q12 earnings Announcement of 3Q12 earnings much lower than market consensus 1) Reflecting expectations for improvement in 2H12 earnings 2) Increased valuation attractiveness (KRW bn) 120 100 10,000 80 9,000 60 8,000 Jan12 Apr12 Jul12 Oct12 40 SKN's share price (LHS) SKN's OP (RHS) Figure 5 SKN quarterly earnings trends and forecast (2011~2012E) (KRWbn) 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12E 2011 2012E YoY (%) Sales 6,293 6,898 6,885 7,460 6,637 7,148 7,273 7,607 27,536 28,665 4.1 IM 1,260 1,804 1,522 1,795 1,588 1,786 2,179 2,311 6,381 7,864 23.2 E&C 3,022 3,027 3,241 3,278 3,055 3,038 2,973 2,905 12,568 11,971 (4.8) Trading 1,603 1,637 1,689 1,840 1,750 2,055 1,883 2,051 6,769 7,740 14.3 Fashion 160 81 101 159 130 128 109 175 501 541 8.1 Walker Hills 81 93 108 118 94 109 111 125 400 439 9.7 Others 166 256 223 271 20 31 77 40 916 168 (81.7) Operating profit 65 72 70 138 50 105 47 103 346 304 (12.1) IM 35 41 30 43 31 37 38 46 150 152 1.7 E&C 33 45 28 30 20 42 31 27 135 120 (11.6) Trading 5 4 20 21 12 11 (9) 2 50 16 (67.5) Fashion 12 15 6 27 14 13 4 26 60 57 (4.1) Hotel (0) 5 3 12 (3) 7 8 13 19 25 32.2 Others (19) (37) (17) 5 (25) (5) (25) (11) (68) (66) (2.3) Net profit 38 45 6 57 20 20 19 58 146 116 (20.4) OP margin (%) 1.0 1.1 1.0 1.9 0.7 1.5 0.6 1.3 1.3 1.1 (0.2) IM 2.8 2.3 2.0 2.4 2.0 2.1 1.7 2.0 2.3 1.9 (0.4) E&C 1.1 1.5 0.9 0.9 0.7 1.4 1.0 0.9 1.1 1.0 (0.1) Trading 0.3 0.2 1.2 1.1 0.7 0.5 (0.5) 0.1 0.7 0.2 (0.5) Fashion 7.5 18.6 5.9 16.7 10.8 10.3 3.5 15.0 11.9 10.6 (1.3) Walker Hills (0.2) 5.2 2.3 10.3 (3.2) 6.7 7.5 10.3 4.8 5.8 1.0 NP margin (%) 0.6 0.6 0.1 0.8 0.3 0.3 0.3 0.8 0.5 0.4 (0.1) 3 3
Figure 6 SKN s valuation 1) Operating value Value (KRWbn) FY13E pretax profit 230 - ) Equity method gains of MMX, NCI (13) 2) Investment asset Adj. FY13E pretax profit 244 Tax rate (%) 22 Adj. FY13E net profit 190 Target P/E 9 MMX 208 NCI 250 Value for share 1,710 6,892 458 1,847 1) + 2) 2,169 8,739 Target price 9,000 Current price 8,590 Upside potential 4.8% Figure 7 SKN s 12M FWD P/B band chart Figure 8 SKN s 12M FWD P/E band chart 25,000 20,000 15,000 10,000 5,000 Share price 1.5x 1.3x 1.1x 0.8x 0.5x 25,000 20,000 15,000 10,000 5,000 Share price 24.0x 20.5x 17.0x 13.5x 10.0x 0 2008 2009 2010 2011 2012 2013, Quantiwise 0 2008 2009 2010 2011 2012 2013, Quantiwise 4 4
Summary financial statements Profit & loss Year end Dec 31 (KRWbn) 2011A 2012E 2013E 2014E Revenue 27,536 28,665 31,701 34,111 Cost of goods sold (25,647) (26,571) (29,404) (31,620) Gross profit 1,888 2,093 2,296 2,491 SG&A (1,529) (1,824) (1,934) (2,081) EBIT (Adj.) 359 269 363 410 EBIT 346 304 354 401 Net interest income (loss) (104) (92) (67) (64) Income (loss) from associates (3) 27 4 9 Others (21) (71) (60) (63) Recurring profit 219 168 230 283 Income tax (77) (60) (58) (71) Net profit 142 108 172 212 Net profit (Controlling Interests) 146 116 172 212 EPS (Controlling Interests, KRW) 587 467 694 855 Growth & margins (%) 2011A 2012E 2013E 2014E Revenue growth 13.7 4.1 10.6 7.6 Gross profit growth 13.5 10.9 9.7 8.5 EBIT growth 39.3 (12.1) 16.3 13.5 Net profit growth (30.6) (20.5) 48.6 23.1 EPS growth (30.6) (20.5) 48.6 23.1 Gross margin 6.9 7.3 7.2 7.3 EBIT margin 1.3 1.1 1.1 1.2 Net profit margin 0.5 0.4 0.5 0.6 Balance sheet Year end Dec 31 (KRWbn) 2011A 2012E 2013E 2014E Current assets 5,203 5,306 5,893 6,221 Cash & equivalents 1,257 1,306 1,385 1,420 Short-term financial asset 38 166 172 179 Accounts receivable 2,246 2,168 2,454 2,627 Inventory 1,332 1,334 1,545 1,654 Other current assets 330 333 337 340 Non-current assets 5,907 5,735 5,875 6,017 Net fixed assets 3,632 3,678 3,735 3,791 Investments 1,737 1,495 1,555 1,618 Other long-term assets 538 563 585 608 Total assets 11,110 11,041 11,768 12,238 Current liabilities 5,652 5,858 6,436 6,716 Accounts payable 3,617 3,335 3,908 4,184 Short-term debt 1,650 2,135 2,135 2,135 Other current liabilities 385 389 393 397 Non-current liabilities 2,184 1,940 1,954 1,969 Long-term debt 1,802 1,590 1,590 1,590 Other long-term liabilities 382 350 364 379 Total liabilities 7,836 7,798 8,390 8,684 Controlling Interests 3,231 3,195 3,330 3,505 Non-Controlling Interests 42 49 49 49 Shareholder's equity 3,273 3,243 3,378 3,553 BVPS 13,013 12,866 13,410 14,114 Source:, Mirae Asset Research estimates Source:, Mirae Asset Research estimates Cash flow Year end Dec 31 (KRWbn) 2011A 2012E 2013E 2014E Cash flow from operations 291 140 360 315 Net profit 142 108 172 212 Depr. & amortization 94 119 101 103 Others 79 9 10 6 Change in working capital (24) (96) 76 (6) Cash flow from investing (371) (193) (244) (242) Capital expenditures (94) (88) (140) (140) Others (277) (105) (104) (102) Cash flow from financing 405 102 (37) (37) Dividends (37) (37) (37) (37) Increase in equity Increase in debt 442 139 Beginning cash 1,020 1,257 1,306 1,385 Ending cash 1,257 1,306 1,385 1,420 Source:, Mirae Asset Research estimates Ratio analysis Year end Dec 31 2011A 2012E 2013E 2014E ROE (%) 4.6 3.6 5.3 6.2 ROA (%) 1.4 1.0 1.5 1.8 Inventory days 16.8 18.3 17.9 18.5 Receivables days 24.1 28.1 26.6 27.2 Payable days 47.0 47.7 45.0 46.7 Net debt/equity (%) 65.9 69.5 64.2 59.8 Interest cover (x) 3.3 3.3 5.3 6.3 Source:, Mirae Asset Research estimates 5 5
Recommendations By stock (12 months) Buy: A target price + 10% or more above the current price, Hold: Target price within - 10% to +10% of the current price Reduce: A target price of 10% or less below the current price By industry Overweight: over +10% of the current industry index Neutral: -10% to +10% of the current industry index Underweight: -10% or less than the current industry index Compliance Notice This report is distributed to our clients only, and none of the report material may be copied or distributed to any other party. While have taken all reasonable care to ensure its reliability, we do not guarantee that it is accurate or complete. Therefore, shall not be liable for any result from the use of this report. This report has never been provided to any institutional investor or third party. This report has been prepared without any undue external influence or interference, and accurately reflects the personal views of the analyst on the company herein. [Analyst: Haesoon Kwon] Stock Analyst Type Securities Held by the Analyst Number of Shares Purchase Price Purchase Date Holdings of share of over 1% Participation in Issuance of Securities REMARK: Korean analyst is responsible for Korean securities and relevant sectors only. Involvement with Affiliates Treasury Stock Held Target Price and Recommendation Chart Stock Price & Target Price Trend Stock Price Target Price Daewoo International (047050 KS) B - Buy H - Hold R - Reduce Date Recommendation 12M target price 2011-01-18 BUY (Initiate) 16,000 2011-02-21 BUY 16,000 2011-09-20 BUY 16,000 2012-03-06 HOLD 11,000 (Down) 2012-05-23 HOLD 11,000 2012-07-25 HOLD 11,000 2012-11-13 HOLD 9,000 (Down) 2013-01-11 HOLD 9,000 Hong Kong Compliance Disclosures The views expressed in this report accurately reflect the personal views of the analysts about the subject securities, issuer(s) or new listing applicant(s). 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