Expectations for EV Growth Remain Valid
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
Metal prices are adjusting on the US’s monetary stringency, China’s Covid-19 lockdowns, and the Russia-Ukraine war. For Korea Zinc, investment points center on activities that promise to boost EV, including stable profit creation, solid shareholder return, the entry into new growth businesses, and an expansion of eco-friendly energy use.
Expectations for EV growth remain valid despite metal price adjustment
While adhering to a Buy rating, we lower our TP on Korea Zinc (010130.KS) by 11.5% from W780,000 to W690,000. Our new TP corresponds to a 2022E P/E of 16.5x and P/B of 1.6x (ROE of 10.1%). Reflecting metal price adjustments unfolding in May, we trim our EPS forecasts for 2022 and 2023 by 8.6% and 13.0%, respectively. In calculating our TP, we take into account concerns over economic slowdown due to the prolonged impacts of China’s Covid-19 lockdowns and the US’s aggressive monetary tightening.
Although we lower our TP, we maintain our positive outlook for the company’s EV growth. Despite past shifts in the macro environment, Korea Zinc has continued to deliver stable earnings while remaining active in shareholder return through dividends (2022E DY of 3.6%). Following its anticipated production of EV copper foil from Oct 2022, the firm is set to pursue further growth through the entering of rechargeable battery precursor and waste battery recycling businesses. Korea Zinc’s conversion to eco-friendly energy use via renewable energy and hydrogen business also represents a solid long-term investment point.
Impacts of unfavorable macro environment and metal price decline to be limited; TC profits to rise
We cut back our metal price assumptions for the firm’s 2022E earnings by 5.0% for zinc, 6.1% for lead, and 4.5% for silver. Affected by: 1) the US Fed’s aggressive monetary policy (base rate hikes + quantitative tightening); 2) China’s Covid-19 lockdowns; and 3) the Russia-Ukraine war situation, market interest has spread from supply chain disruptions to concerns over economic recession, and metal prices have entered an adjustment phase. Increased financial market volatility is also weighing upon metal prices.
On Apr 19, the price of zinc climbed to US$4,563/ton, the highest level since Dec 2006. From May 3, it then fell below US$4,000/ton, and on May 18, the price stood at US$3,629/ton, having fallen 20.5% from the peak. Zinc price adjustment is expected to impact Korea Zinc’s 2Q22 and 3Q22 earnings. We note that zinc prices affect headquarters (produced 640,000 tons of zinc in 2021), Australian subsidiary SMC (210,000 tons), and Zinc Oxide Corporation (49,000 tons of crude zinc oxide (HZO)). For reference, a zinc price fluctuation of US$100/ton is likely to move overall annual OP by approximately W20bn.
Amid rising electricity costs stemming from an overall uptick in energy prices, the bottlenecks at zinc smelters in Europe and North America are likely to continue for some time. However, zinc metal production restrictions both support zinc prices and spur treatment charge (TC) income growth. On May 18, the spot TC of zinc concentrate increased to US$245/ton (vs US$83/ton at end-2021).