The author is an analyst of Shinhan Investment Corp. He can be reached at email@example.com. -- Ed.
Retain BUY for a revised-down target price of KRW53,000
We lower our target price for SKC by 23% to KRW53,000 on downward adjustment of the target multiple in light of weakening investment sentiment towards secondary battery materials businesses. Nevertheless, the newly acquired KCF Technologies (KCFT) will likely drive SKC’s structural growth, with its earnings included in consolidated financial statements from 1Q20. SKC shares are currently trading at a 2020F PER of 12x, higher than the average PER of domestic chemical peers but still lower than the average 21x of domestic secondary battery materials peers. Shares have corrected by 40% from the previous peak, due to concerns over the global economic slowdown and collapse of EV value chains amid the COVID-19 pandemic. The cut in target multiple is inevitable given ongoing decline in valuations. However, we note that earnings momentum from copper foil and semiconductor materials remains intact and strong upside potential should shine through sluggish market conditions.
Key investment points: 1) KCFT acquisition; 2) high value-added products; and 3) stable earnings from chemicals
First, demand for EV battery-use copper foil is forecast to grow at a CAGR of 37% from 180,000 tons (+50% YoY) in 2020 to 870,000 tons in 2025. KCFT’s operating profit should increase at a CAGR of 42% through 2022, with the copper foil business securing market leadership through preemptive capacity additions and benefiting from high ASP. Second, industrial materials and growth businesses will likely see a rise in sales share of high value-added IT-use products (semiconductor materials, MLCC-use materials, etc.) and continued downtrend in raw material prices. For 2020, operating profit margin from industrial materials is forecast at 4.1% (+0.8%p YoY), and growth businesses 4.4% (+2.3%p YoY). Third, the chemicals division should post stable operating margin of 13% for 2020 despite slowing demand amid the COVID-19 spread, backed by regular maintenance at major peers and increasing sales of high margin PG.
2020 OP forecast at KRW259.2bn (+67% YoY)
For 2020, we forecast sales at KRW3.06tr (+21% YoY) and operating profit at KRW259.2bn (+67%YoY).By division, operating profit from KCFT is projected at KRW91bn (+45%YoY), chemicals KRW87.3bn (-17%YoY), industrial materials KRW43.1bn (+27%YoY), and growth businesses KRW37.9bn (+140%YoY). We expect visible earnings improvement from secondary battery-use copper foil and growth businesses. KCFT will likely enjoy notable effects of capacity expansion from 2Q20 and see earnings momentum pick up towards 2H20. The subsidiary’s operating margin should reach 19.6% (+0.2%p YoY) in 2020 on strong copper foil spread with higher sales share of high-margin products vs. peers. Growth businesses are expected to show sharp earnings growth, driven by recovery in semiconductor market conditions and full-fledged start of 5G investments.