New Growth Drivers on the Horizon
The author is an analyst of KB Securities. She can be reached at hyejung.jung@kbfg.com. -- Ed.
4Q22P operating loss of KRW425.0bn (turn to red YoY) misses market consensus
ㅡ POSCO Holdings reported 4Q22P revenue of KRW19.2tn (-9.8% YoY, -9.0% QoQ), operating loss of KRW425.3bn (turn to red YoY/QoQ) and net loss of KRW737.0bn (turn to red YoY/QoQ). OP missed the market consensus by KRW986.4bn.
Operating loss inevitable due to typhoon, market slowdown
ㅡ In 4Q22, POSCO Holdings crude steel production volume declined 15.8% YoY/9.2% QoQ (9.55mn mt in 4Q21→8.04mn mt in 4Q22). As a result, steel product production volume fell 13.3% YoY (8.75mn mt in 4Q21→7.58mn mt in 4Q22). Steel product sales volume slid only 0.9% YoY (8.62mn mt in 4Q21→8.55mn mt in 4Q22). The decrease in production volume was inevitable, as Pohang operations were suspended after a typhoon flooded the plant in September.
ㅡ Steel product ASP fell 14.3% YoY/16.8% QoQ to KRW1.076mn/mt, marking the first YoY decline in seven quarters. ASP was weighed down by a sluggish steel market since 2H22, falling KRW/USD and deteriorating product mix. After the Pohang disruption, sales volume of relatively expensive stainless steel/premium WTP products fell while that of slabs (intermediary products) rose.
ㅡ POSCO reported one-off typhoon-related expenses for two consecutive quarters (KRW904.5bn in 4Q22; KRW1.34tn cumulative). The one-offs (incl. KRW568.3bn from lower production/sales, KRW288.4bn for restoration) widened operating losses. On the non-operating side, KRW235.6bn in 2H22 cumulative expenses for damage to tangible assets was incurred. Insurance reimbursement of KRW234.0bn for partially insured damage appears to have offset earnings deterioration to some extent but failed to prevent a turn to red.
ㅡ Major overseas steel subsidiaries also delivered disappointing 4Q22 results amid the slumping global steel market. The company’s four major subsidiaries saw combined revenue shrink 7.3% YoY to KRW5.5tn and an overall turn to red (-KRW623.2bn). We note that the subsidiaries in Malaysia, China and India suffered considerably, as slowing price hikes and rising feedstock costs worked to depress margins.
New growth drivers on the horizon
ㅡ As of Jan 20, operations fully recovered from the typhoon. Also, part of the damage recognized last year should be offset by additional insurance reimbursement this year. However, the steel market should remain in the doldrums for a while. Steel product demand is unlikely to recover anytime soon considering high interest rates and the economic slowdown. The market’s future will hinge on China’s economic stimulus.
ㅡ Despite the market slump, we see upside for POSCO stock given that investments in rechargeable battery materials are boosting enterprise value. POSCO HY Clean Metal’s No. 1 plant (expected to extract lithium, nickel and cobalt via recycling processes) is to be completed in February and generate revenue in 3Q23. Furthermore, investments in overseas lithium production projects (i.e., Hombre Muerto salt lake in Argentina; JV with Australia-based Pilbara Minerals) are going full steam and expected to make meaningful earnings contribution starting in 2025.