Sales of Industrial Metals Expected to Remain Intact
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
Due to economic downturn, it is difficult to forecast price growth for industrial metals at this time. However, Korea Zinc’s sales of industrial metals are expected to remain intact, alongside relatively solid profit figures. We recommend keeping an eye on the company’s strong liquidity, silver price increase driven by low interest rates, and the long-term growth prospects of the electrolytic copper foil business.
Despite TC increase, OP likely fell in 2Q20 due to zinc and lead metal price decline
We expect Korea Zinc to log consolidated 2Q20 sales of W1.50tn (-13.8% y-y), OP of W184.1bn (-23.9% y-y), and NP (excluding minority interests) of W140.3bn (-24.0% y-y), with sales, OP, and NP falling short of the market projections by 6.6%, 14.5%, and 14.0%, respectively.
On a non-consolidated basis, we estimate the firm’s 2Q20 OP at W179.7bn (-21.8% y-y, -8.7% q-q). By metal, we believe that zinc sales fell 3.5% q-q and lead sales dipped 2.4% q-q, showing only slight q-q decreases even amid Covid-19. However, we believe that despite the retroactive reflection of 1Q20 increases in benchmark TCs, 2Q20 OP deteriorated, with the prices of zinc, lead, and silver applied to sales (one-month lagging averages) narrowing 14.4%, 11.9%, and 12.4% q-q, respectively.
Turning to major consolidated subsidiaries, sluggish earnings likely sustained q-q at SMC (Australia) and ZincOx Corporation (Korea), impacted by deterioration in the price of zinc.
Amid Covid-19, pay attention to silver price growth and copper foil business
We downwardly adjust 2020E EPS by 10.8%, in reflection of concerns towards zinc and lead price declines due to demand slowdown and a sharp drop in China’s zinc concentrate TC (US$320/ton on Mar 13 → US$145/ton on Jun 24). Accordingly, we revise down our TP by 10% to W495,000. Our new TP equates to a P/B of 1.3x based on 2020E BPS (vs the five-year average P/B of 1.5x).
We note that: 1) despite Covid-19, Korea Zinc’s metal sales volume has seen minimal decline; 2) silver and gold prices are highly likely to rise for a considerable period going forward, backed by liquidity expansion and the ultra-low interest rate environment; and 3) the firm is entering into the electrolytic copper foil business, which boasts strong growth potential. In our view, such positives should drive future share price growth.