Further Expansion Anticipated
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
Korea Zinc’s advancement into the rechargeable battery electrolytic copper foil business is expected to increase its EV via efficient use of capital and external growth. In addition to its hike in 2019 DPS, we favorably view such ongoing business developments. From an investment perspective, we advise approaching the company from a long-term stance, rather than focusing on short-term changes in metals prices.
Advance into rechargeable battery electrolytic copper foil business represents more than just external growth
Korea Zinc has announced plans to enter the rechargeable battery electrolytic copper foil business in earnest via the establishment of a subsidiary (KZAM Corporation, 100% stake). The firm aims to invest W152.7bn by Oct 2022 into a site near its Onsan smelting facility, with annual production of rechargeable battery electrolytic copper foil expected to reach 13,000 tons.
We expect the electrolytic copper foil business to log 2023 sales of W208bn and OP of W41.6bn, figures which represent just 3.0% and 5.2%, respectively, of Korea Zinc’s consolidated 2019 sales and OP. If operations prove stable and product quality robust, further expansion is anticipated both at home and abroad.
Korea Zinc is a producer of copper (26,000 tons in 2019) and sulfuric acid, the main raw materials needed for the production of electrolytic copper foil. We expect the firm’s know-how regarding the electrolysis process used in zinc smelting to be well-utilized in its production of electrolytic copper foil. Moreover, backed by its existing Onsan smelting facility infrastructure, access to raw materials, and process technology, Korean Zinc should be able to secure superior profitability versus competitors.
In addition to improving top-line growth, the advancement of its electrolytic copper foil business should push up Korea Zinc’s ROE (which has been weighed upon by weak utilization of cash holdings in recent years) and boost EV (via efficient use of capital).
1Q20 preview: Earnings to meet expectations
We forecast Korea Zinc’s consolidated 1Q20 sales at W1.69tn (+13.4% y-y, -2.6% q-q), OP at W175.8bn (-0.9% y-y, -0.6% q-q), and NP at W145.3bn (-5.3% y-y, +2.7% q-q), with both sales and OP arriving in line with consensus.
Despite currently weak zinc and lead metals prices, if the 2020 benchmark TCs are set in the near future, we expect the firm’s consolidated 2Q20 OP to climb to W205.8bn (+17.0% q-q) on the retroactive reflection of expected TC increases in 2Q20 earnings.
NH Investment & Securities