The author is an analyst of NH Investment & Securities, He can be reached at firstname.lastname@example.org. -- Ed.
We downwardly adjust our earnings forecasts for POSCO Chem in light of falling coal tar sales and the sluggish performance of PMC Tech. While the firm’s share price has declined on Covid-19-driven concerns towards the EV industry, once the situation calms down, we expect that investment sentiment will quickly recover. Recently, the firm has confirmed that construction of its planned rechargeable battery artificial graphite anode plant remains on track.
To build 16,000-ton capacity artificial graphite anode plant in Pohang
POSCO Chemical (POSCO Chem) has announced plans for W217.7bn in facility investment, targeting artificial graphite anode capacity of 16,000 tons pa by 2024. We note that this level should be sufficient to supply 400,000 cars on a 40kw EV basis, with related sales likely coming in at around W180bn.
The company has expanded its portfolio of rechargeable battery materials business from natural graphite anodes to cathodes and artificial graphite anodes. As artificial graphite anodes facilitate high battery output and long charge/discharge lifespans, their use in the EV industry should expand going forward. Considering the planned facility investment, we expect the firm’s rechargeable battery anode production capacity to increase from 44,000 tons at end-2019 to 82,000 tons in 2021 and 90,000 tons in 2024.
Lower 2020E EPS by 51% in reflection of falling oil prices and sluggish performance of PMC Tech
We downwardly adjust our consolidated 2020E OP and EPS for POSCO Chem by 13.4% and 51.1%, respectively. Expecting profit decline at the existing business (refractory/shaft tunnel, burned lime production/distribution, etc) on a drop in coal tar ASP stemming from the recent plunge in oil prices, we also foresee profit deterioration at subsidiary PMC Tech due to falling needle coke prices. Considering these factors, we lower our TP by 21.4% from W70,000 to W55,000, while adhering to a Buy rating.
We expect POSCO Chem to report sluggish 1Q20 results, with consolidated sales of W399.1bn (+12.3% y-y), OP of W15.4bn (-29.8% y-y), and NP (excluding minority interests) of W4.2bn (-87.3% y-y). Our estimates fall generally in line with consensus, excluding for OP and NP (excluding minority interests), which miss the mark by 37.4% and 75.3%, respectively. We mainly attribute the likely earnings deterioration to coal tar ASP decrease, inventory valuation losses for cathode materials, and PMC Tech’s weak performance. We estimate the firm’s 2Q20 NP (excluding minority interests) at W10.1bn, anticipating a gradual recovery.
NH Investment & Securities