Upbeat Outlook on 2H21 Earnings
The authors are analysts of Shinhan Investment Corp. They can be reached at hyunwook.kim@shinhan.com and yoongu@shinhan.com, respectively. – Ed.
2Q21 OP forecast revised up to KRW65bn (+242%YoY)
We now expect SeAH Besteel to report consolidated operating profit of KRW65bn (+242% YoY) on sales of KRW904.1bn (+60% YoY) for 2Q21, exceeding our previous estimate by 12%. Special steel sales volume likely reached 506,000 tons (+6% QoQ), passing the 500,000-ton mark for the first time in three years backed by brisk downstream demand. We also believe ASP continued upward on strong prices of raw materials including steel scrap. With product prices raised in April and once more in June, by around KRW120,000-KRW150,000 for each product category, we estimate the increase in special steel ASP at KRW104,000 (+11% QoQ) for 2Q21.
Upbeat outlook on 2H21 earnings
For full-year 2021, we forecast sales at KRW3.5tr (+38% YoY) and operating profit at KRW210.4bn (positive swing YoY) with the outlook upbeat for 2H21. Sales volume will likely dip QoQ in 3Q21 due to the decline in business days, but overall market conditions are expected to remain favorable for SeAH Besteel. First, demand for automotive steel plates should improve with chip supply shortages easing. Second, supply of steel plates to shipbuilders will likely improve from 4Q21. Third, steel scrap and nickel prices are projected to continue upward, providing support for further ASP hikes in 2H21.
Moreover, supply of Chinese steel products will become increasingly limited from 2H21. In addition to the reduction of value-added tax rebates on steel exports, the Chinese government is expected to impose export taxes going forward. Given that Chinese exports account for the lion’s share of special steel imports into Korea (market share of roughly 20%), we expect to see further ASP hikes in 2H21 amid tightening supply.
Retain BUY and raise target price to KRW40,000
We raise our target price for SeAH Besteel to KRW40,000, based on upward revision of earnings forecasts. Adding to the boom in downstream industries, the company stands to benefit from the decline of Chinese steel exports. Our revised target represents a 10% premium to the 2017 PBR high of 0.72x, recorded before the market entrance of a new competitor.