Streamlined Focus on High Value-added Products
The authors are analysts of Shinhan Investment Corp. They can be reached at jinmyung.lee93@shinhan.com and cgh815@shinhan.com, respectively. -- Ed.
2Q22 OP falls short of consensus at KRW109.4bn (-18% QoQ)
SKC posted operating profit of KRW109.4bn (-18% QoQ) for 2Q22, missing market consensus of KRW121.4bn. Mobility materials generated operating profit of KRW29.6bn (+21% QoQ) and operating margin of 15% (+3.3%p QoQ). Despite a QoQ drop in sales caused by COVID-19 lockdowns in China, the division secured strong earnings on the decline in costs related to the sixth new plant, increase in ASP levels, and weakening of the KRW.
Operating profit from chemicals fell by 19% QoQ to KRW69.5bn, with propylene glycol (PG) spreads remaining solid but propylene oxide (PO) spreads narrowing by 10% QoQ due to supply disruptions. Semiconductor materials reported 29% QoQ growth in operating profit backed by improvement in profitability. The industrial materials division saw solid demand for high value-added products, but suffered a 46% QoQ drop in operating profit due to the growing cost burden.
3Q22 OP forecast at KRW94.9bn; copper foil growth to continue
For 3Q22, we forecast operating profit at KRW94.9bn (-13% QoQ). The mobility materials division is expected to report sales of KRW278.5bn (+40% QoQ) and operating profit of KRW36.5bn (+23% QoQ). Shipments should increase with the sixth plant running at full capacity and demand rising on removal of lockdowns in China. Shipment growth will likely reach near 50% HoH in 2H22 on the upturn in global OEM production and ramp-up of new facilities at major client companies (battery cell makers).
Operating profit from chemicals is projected at KRW46.9bn (-33% QoQ) with PO spreads to narrow further amid slowing client demand. However, we expect SKC to secure larger operating margin from chemicals vs. domestic peers at around 11% in 3Q22, thanks to brisk sales of high value-added PG in North America and Europe. Operating profit should continue upwards at the semiconductor materials division, but decline at the industrial materials division given weak demand from IT and other client industries.
Retain BUY and target price of KRW180,000
We retain our BUY rating and target price of KRW180,000 for SKC. Copper foil capacity is set to expand from 52,000 tons in 2022 to 250,000 tons by 2025, providing the basis for profit growth at a CAGR of 56% going forward. Timely shipments to clients from overseas bases in Malaysia, Poland and the US should help the company strengthen its global leadership even further. Continuing investment into new businesses (silicon anodes, glass substrates, etc.) and the reshuffle of existing businesses for a streamlined focus on high value-added products will likely lead to a re-rating of shares.