Sector Top Pick

The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.  

 

Ssangyong C&E is set to enjoy strong economic and social benefits from the replacement of bituminous coal with alternative fuels, thanks mainly to superior use of its old facilities. In addition, efforts by the largest shareholder to enhance the company’s EV should translate into valuation increase over the mid/long term.

Superior use of old facilities and mines to create new growth opportunities

Reiterating a Buy rating on Ssangyong C&E, we raise our TP from W9,500 to W10,000, as: 1) we now use 2021E~2022F weighted averages for our TP calculation; and 2) we hike our target EV/EBITDA from 11.2x to 11.5x in line with rising earnings contributions from its new environmental business. We note that the target multiple could be further hiked in the future on the adoption of additional environmental business.

As cement kilns can reach maximum temperatures of around 1,450 Celsius, they are capable of completely combusting most materials. Thanks to this strength, conventional kiln fuels (bituminous coal and petcoke) are now being gradually replaced with alternative fuels such as synthetic resin/vinyl waste. Assuming a 30% replacement rate for waste materials, we estimate that 70,000 tons or more of synthetic resin waste and 3,000 tons or more of synthetic rubber waste can be incinerated each month at Ssangyong C&E. In addition, as these alternative fuels are to be completed combusted in the kiln, there should be no emission of noxious materials. Assuming a 30% replacement rate for 10mn tons of cement production capacity, annual cost-savings should amount to W70bn or more.

We believe that Ssangyong C&E’s current investment in establishing a landfill for industrial waste in a closed limestone mine will set an example for other cement players. In addition, the landfill is expected to generate similar profits to other waste companies. Ssangyong C&E’s ongoing business expansion is also predicted to be driven by utilization of its existing facilities, including through establishment of a heat recovery steam generator (HRSG) facility at its Donghae plant.

Largest shareholder Hahn & Co excels in EV enhancement

Largest shareholder Hahn & Co is expected to dispose of its stake in Ssangyong C&E following maximization of the cement maker’s EV. The cement company plans to carry out active dividend policies and reduce its sales reliance on cement manufacturing while raising the environmental business’s sales portion. Expecting valuation re-rating, we continue to suggest Ssangyong C&E as our sector top pick.

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