1) Investment highlights
- Korea Zinc reported a parent operating profit of KRW217.6bn for 2Q, in line with our estimate of KRW208bn and higher than the consensus of KRW193bn. This marks a third consecutive quarter that the company posted higher-than-expected operating profit.
- Investment points: 1) we expect to see renewed interest in the company’s technology and ability to generate earnings considering the strong 2Q results which came amid unfavorable metal prices and FX; 2) earnings visibility will likely improve in 2018 as the recent streamlining of the production process should help reduce power and processing costs; and 3) expectations are growing that next year’s treatment charge (T/C) contract will be better than this year’s as the tight zinc concentrate supply situation eases.
- We keep our target price intact at KRW600,000.
2) Major issues and earnings outlook
- For 2Q, Korea Zinc posted KRW1.39tn in parent sales, KRW217.6bn in operating profit, and KRW242.8bn in pretax profit. Parent operating profit increased 33% YoY and 4% QoQ while consolidated operating profit rose 37% YoY and 5% QoQ.
- There were several negative factors in 2Q: nonferrous metal prices dipped QoQ; the KRW strengthened slightly; and the T/C contract was backdated. Nevertheless, 2Q results came out solid thanks to higher zinc and lead sales as well as margin expansion stemming from the increased use of secondary materials. We estimate Korea Zinc sold 164,000 tonnes of zinc in 2Q (+19% QoQ) which beats our projection of 154,000 tonnes (+12% QoQ). Its Australian subsidiary SMC also did well.
- Global zinc supply, coupled with zinc concentrates, should be fairly tight this year with a shortage of about 600,000 tonnes of zinc. Since the beginning of the year, the LME zinc price has been fluctuating around the upper-USD2,000 level. Given the macro conditions, we do not believe it will rise sharply but do not believe it will plunge either.
- In light of the strong 2Q results, we raise our consolidated operating profit forecast for 2017 by 6%.
3) Share price outlook and valuation
- The stock once fell below the KRW400,000 mark but this year it has rebounded to the mid-KRW400,000 level on strong 1Q results and this year’s T/C contract.
- We expect shares to move upwards on the market’s restored confidence in the company’s earnings visibility in 2018 and robust earnings momentum (quarterly operating profit of more than KRW200bn).
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.