cement eng 0224 - file.truefriend.com

Uprise by a fading segment Cement segment to enjoy better P and Q in 2014 After turning around on lower “C” (costs) in 2013, the cement segment will likely achieve full-bore earnings growth in 2014 thanks to rising “P” (prices) and growing “Q” (quantity or shipments). 1) Cement prices should go up 7-10%. 2) Shipments would increase 2% YoY as home pre-sales pick up. 3) Bituminous coal prices (30% of manufacturing costs) should stabilize as China burns less coal. The irrational price cuts and excessive capacity additions since 2004 have come to an end. P’s return to normal from its current standing of 60% of that in Japan and Europe should offset the long-term limit for Q growth. For every 1% price rise, Hanil Cement’s 2014F OP would gain 2.3%.

Cement segment to consolidate In Japan, the cement industry raised prices after consolidating and restructuring in the 1990s. The market leader Sumitomo Osaka Cement maintained stable profits during the lengthy recession in the 2000s and its PB discount to the market has narrowed to 15%. At present, Korea’s cement segment is similar to Japan’s 20 years ago when restructuring was over. The game of chicken triggered by Lafarge Halla Cement in 2003 has led to solid cooperation in pricing and an oligarchy. Among the top seven firms, only Hanil Cement, Sungshin Cement, Ssangyong Cement Industrial, Asia Cement and Hyundai Cement can operate as before.

BUY Hanil; Efficiency matters when P potential outweighs Q It is time to focus on a turnaround by a waning segment. Although PB fell all the way to 0.2x for the cement industry that once neared its demise, the valuation should return to normal in 2014 along with better earnings thanks to realistic prices, stable cost factors and greater shipments. Over the long-term, P rather than Q should drive the earnings improvement. We favor 1) companies with no overblown capacity addition, high utilization and small fixed costs and 2) firms that can lift profitability through vertical integration of secondary products such as ready-mix concrete (remicon) and mortar. We initiate coverage of Hanil Cement that features the abovementioned qualities with a TP of W155,000. Assuming a 7.7% price hike, the 2014F OP should expand 26% YoY. Cement prices and top seven’s OPM

45,000

55,000

65,000

75,000

85,000

2H03 2H04 2H05 2H06 2H07 2H08 2H09 2H10 2H11 2H12 2H13F

-5%

0%

5%

10%

15%

20%

25%

Total OPM of 7 major companies (R)

Cement price (L)

Cement prices to be lif ted 7-10%(KRW/tonne)

Source: Company data, Korea Cement Association

Sector Report / Construction- Cement

Construction– Cement February 24, 2014

Overweight (Maintain)

Company Rating TP (KRW)

Hanil Cement BUY (Initiate) 155,000

Sungshin Cement Not rated -

Sector performance (12M)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Feb-13 May-13 Aug-13 Nov-13 Feb-14

0

10

20

30

40

50

60

70

80Rel.to KOSPI (%p, RHS)

Construction Materials sector index (p, LHS )

(p) (%p)

Source: WICS provided by WISEfn

Kyungja Lee 822-3276-6155 [email protected] Hyungjun Ahn 822-3276-4460 [email protected]

Sector report focus

What is the report about?

• Anticipate a turnaround by the fading cement segment; Analyze

an industry that has been less than fully investigated before

• A drop in Q should be offset by higher P and lower C

• Analyze synergy among secondary products such as remicon,

mortar, etc.

Key assumptions and valuation

• P: Unreasonable price cuts ongoing since 2004 should end;

Anticipate 7-10% price rises in 2014 (the last time prices went

up was in 2012)

• Q: Despite the downturn for infrastructure budget, home pre-

sales should swell 6.9% YoY in 2014 as the housing market

regains warmth after five years; As a result, cement shipments

should add 2.4%

• C: Although logistics costs have increased 8% and the

industrial electricity rate went up 6.4%, bituminous coal prices,

the main cost factor, should stabilize lower; We assumed

2014F bituminous coal prices at USD85/tonne, a level similar

to 2013 (USD81/tonne as of January 2014).

Sensitivity & scenario analysis

• Hanil Cement to lift prices by 7.7%; Assuming implementation

on June 1 instead of the company’s planned date of April 1,

the 2014F OP should jump 26% YoY

• For every 1% rise in cement prices, Hanil’s OP expands 2.3%

• For every 10% rise in bituminous coal prices, Hanil’s 2014F

OP shrinks 7%

Hanil Cement OP sensitivity analysis (W bn)

Price hike % Bituminous coal price (W10,000/tonne) 5.7% 6.7% 7.7% 8.7% 9.7%

110.1 142 146 149 153 156

100.1 155 158 162 166 170

91.0 168 172 176 180 184

81.9 182 186 190 195 199

73.7 196 201 206 210 215

Note: Assumes all prices are lifted on June 1 Source: Korea Investment & Securities

Risks/opportunities

• Another round of price cuts by Lafarge Halla Cement that

forces a game of chicken would damage the industry’s pricing

cooperation and erode margins as well

• If housing market conditions again turn bearish, home pre-

sales would shrink in 2014 and cement shipments in turn

inevitably dwindle

Sector highlights

1) Process industry that rarely allows newcomers

• New players are unlikely since the industry is fading and

requires ~W1tn capex due to the nature of a process industry

• Since cement prices in Korea are the lowest in the world,

imports from China, Japan, etc., should have a negligible impact

• With a heavy weighting of fixed costs, typical for a process

industry, gaining market share is the second-most important

earnings factor next to ASP; Since the segment is being

consolidated, a few companies with healthy financials should

gain market share

2) Better margins likely at firms that widened product base

• Some players expanded their secondary product businesses

such as remicon and mortar, thereby securing an in-house

consumer and developed resilience to market conditions

• Better margins with wider product range; Since the peak

seasons differ for remicon and mortar, profits can be evenly

generated through a construction period

• With half the sales coming from remicon and mortar, Hanil’s

OPM is overwhelmingly superior to peers

Changes to top seven’s utilization – Firms that operate in secondaries and that avoided excessive investment fare well

-3%

-2%

-1%

0%

1%

2%

3%

Dongyang Ssangyong Hanil Hyundai Asia Sungshin Lafarge

M/S change from 2006 to 2012

Market share grew for companies with widened product basesand that avoided excessive capex

(p)

Source: Individual company business reports

Peer comparison

• Japan’s cement industry restructured 20 years ahead of

Korea; After prices returned to a realistic level in the 1990s,

the industry maintained stable profits even during the market

downturn in the 2000s

• Japanese market leader Sumitomo Osaka Cement’s PB

discount to the market has narrowed to 15%

• Hanil’s 2014F PB stands at a 0.5x despite the likelihood of better

profitability supported by a stable financial structure and light

fixed cost burden. Sungshin also trades at 0.5x 2014F PB.

I. Investment summary......................................................................................................................................................................2

1. Valuation: Turnaround by a fading industry

2. Earnings forecast

II. Cement on the way back to power............................................................................................................................6

1. P: Began return to a realistic level

2. Q: Growth to be limited but market should consolidate

3. Japan’s cement industry restructuring

4. C: Changes in China, the world’s largest coal user

5. Self-driven management innovation

III. Vertical industry integration ............................................................................................................................................. 16

Expansion into cement secondaries: 1) Remicon

Expansion into cement secondaries: 2) Dry mortar

Appendix.............................................................................................................................................................................................................21

How cement is made

Cement distribution – As remicon and mortar

Apartment housing construction and cement

Companies .......................................................................................................................................... 24

Hanil Cement (003300)

Sungshin Cement (004980)

Contents

Construction - Cement

2

I. Investment summary

1. Valuation: Turnaround by a fading industry

The cement industry that was thought to be dying is turning around. As the industry is moving toward an oligopoly, some players are gaining share in the stagnant market. They appear more attractive than companies in fast-growing industries that are struggling to defend a shrinking market share. Changes to the internal competitive structure must be closely monitored especially when the macroeconomic outlook is uncertain as at present. The combined OP of five players – Ssangyong Cement, Tongyang Cement & Energy, Sungshin Cement, Hanil Cement and Hyundai Cement – increased 795% YoY in 2012 and reported a 56% gain through 3Q13. As the industry is planning a 7-10% price increase in 2014 following the 9% rise in 2012, we expect earnings will get back to normal for the first time in 10 years. After enjoying a boom in 2003, cement companies got wrapped up in fierce competition to gain market share, excessive facility expansion and price cuts, which drove some into large losses, debt and a heavy depreciation burden. As a result, the combined 2014F PB of the five major players stands at only 0.5x. With 1) efforts to raise cement prices to a reasonable level, 2) an internal cleanup and restructuring drive and 3) the stabilization of cost variables, several players have overcome the risk of BPS erosion. The industry, finally emerging from a life-or-death situation, is undervalued. For reference, major Japanese cement firms that experienced an economic slump, restructuring and prices returning to normal ahead of Korean peers, currently trade at 1x PB with the discount narrowed to 15%.

It is time to focus on the cement industry’s turnaround. Over the long-term, a main determining factor for the industry’s profit structure would be P (price) rather than Q (quantity). As such, we prefer 1) companies that have sound financials and are insulated from business fluctuations, 2) those that are not engaged in excessive facility expansion and have high utilization and light fixed costs, and 3) firms that consume cement internally to produce remicon or dry mortar and can bolster profitability. We believe Hanil Cement (Hanil) meets the criteria and initiate our coverage with BUY and a SotP-based TP of W155,000 at 0.8x 2014F PB and 9x PE.

Cement industry moving toward an oligopoly; Cement

makers plan a 7-10% price increase in 2014

With no book value erosion risks, the

industry is undervalued at 0.5x PB

Figure 1. Korea top five cement firms’ PB band

0.3x

0.4x

0.5x

0.6x

0.7x

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Dec-04 Jan-06 Feb-07 Mar-08 Apr-09 May -10 Jun-11 Jul-12 Aug-13

(W bn)

Price increase

Low-price competition

Coal price increased

Ov ersupply period

Note: Five firms are Ssangyong Cement, Tongyang Cement & Energy, Sungshin Cement, Hanil Cement and Hyundai Cement Source: Bloomberg, company data, Korea Investment & Securities

Focus on the cement industry’s turnaround;

Recommend BUY on Hanil

Construction – Cement

3

Table 1. Hanil TP calculation (W bn)

Amount Note

1. Operating value 1,177

EBITDA 214 As of 2014

EBITDA multiple 5.5

2. Available-for-sale securities 142 30% discount to book value

3. Non-operating purpose real estate 100 Book value of a remicon plant in Gaebong-dong

4. Net debt 255 As of end-2014

EV (1+2+3-4) 1,164

Shares (‘000) 7,545 Incl. 532,000 treasury shares

TP (KRW) 155,000

Source: Company data, Korea Investment & Securities

Table 2. Financial status of five major cement companies (W bn)

2011 Sales COGS-to-sales OP OPM EBTEBT

margin Operating cash flow

Debt ratio

Tongyang 585 92.2% (21) -3.6% (87) -14.9% (3) 192.7%

Hanil 868 84.2% 30 3.4% 25 2.9% (10) 64.9%

Hyundai 414 90.0% (3) -0.6% (31) -7.5% 30 913.0%

Ssangyong 1,855 87.2% 67 3.6% (24) -1.3% 117 179.4%

Sungshin 486 92.1% (43) -8.9% (40) -8.3% (7) 243.2%

Total 4,207 88.1% 29 0.7% (157) -3.7% 127 164.1%

2012 Sales COGS-to-sales OP OPM EBTEBT


Debt ratio

Tongyang 635 83.3% 30 4.8% (66) -10.5% 74 219.4%

Hanil 995 81.0% 72 7.2% (87) -8.7% 32 66.1%

Hyundai 419 86.2% (0) 0.0% (58) -13.9% 51 1637.8%

Ssangyong 1,991 83.5% 144 7.2% 47 2.4% 205 174.5%

Sungshin 547 82.9% 16 2.9% 9 1.7% 12 241.4%

Total 4,587 83.1% 262 5.7% (155) -3.4% 374 166.4%

3Q12 Sales COGS-to-sales OP OPM EBTEBT


Debt ratio

Tongyang 476 83.8% 24 5.0% (19) -4.0% (3) 170.6%

Hanil 830 81.7% 50 6.0% 23 2.8% (10) 67.4%

Hyundai 213 82.4% 12 5.7% (4) -1.8% 30 471.2%

Ssangyong 1,427 85.2% 81 5.7% 11 0.8% 117 182.5%

Sungshin 397 85.4% 0 0.1% (28) -7.1% (7) 300.5%

Total 3,342 84.0% 167 5.0% (16) -0.5% 127 157.1%

3Q13 Sales COGS-to-sales OP OPM EBTEBT


Debt ratio

Tongyang 468 83.9% 15 3.3% (192) -41.1% (3) 367.9%

Hanil 915 77.8% 102 11.1% 74 8.0% (10) 69.6%

Hyundai 236 74.5% 33 13.8% (26) -11.1% 30 888.1%

Ssangyong 1,467 84.6% 87 6.0% 19 1.3% 117 163.6%

Sungshin 442 78.6% 24 5.4% (8) -1.7% (7) 249.8%

Total 3,528 81.3% 261 7.4% (134) -3.8% 127 165.6%

Source: Company data

Table 3. Global peer valuation Company Sumitomo Osaka Taiheiyo TOSOH Hanil Sungshin SsangyongCountry Japan Japan Japan Korea Korea KoreaTicker 5232 JP 5233 JP 4042 JP 003300 004980 003410Market cap. (USD mn, W bn) 1,648 4,577 2,400 762 219 679 PE (x) 2012 192.6 40.9 14.4 NM 26.1 16.5 2013 14.0 19.4 8.9 7.2 39.5 NA 2014 12.7 15.2 9.5 6.1 9.4 NAPB (x) 2012 1.1 2.4 1.3 0.3 0.3 0.5 2013 1.1 2.2 1.1 0.5 0.6 NA 2014 1.0 1.9 1.0 0.5 0.5 NAROE (%) 2012 5.5 6.3 9.4 -5.8 1.0 3.5 2013 7.8 11.9 13.4 6.5 1.5 NA 2014 8.0 14.3 12.3 8.3 9.8 NAEPS growth (%) 2012 104.7 44.4 79.8 NM NM NM 2013 57.1 113.3 59.5 NM 66.3 NA 2014 10.6 28.7 (4.3) 41.8 939.5 NAOPM (%) 2012 6.4 5.4 3.7 7.2 2.9 7.2 2013 9.0 8.1 5.5 11.0 7.7 NA 2014 9.7 8.6 5.8 12.9 11.3 NA

Note: Sungshin data are consensus Source: Bloomberg, FnGuide


4

2. Earnings forecast

Following the cost reduction-backed turnaround in 2013, the cement industry should deliver earnings growth in 2014 thanks to the long-awaited simultaneous increase in P and Q. 1) Cement prices would rise 7-10% depending on each company. 2) The price for bituminous coal, which accounts for 30% of cement production cost, should stabilize lower over the long-term. 3) Cement shipments should increase 2.4% YoY on the housing market upturn and new pre-sale volume growth. In Korea, cement sells for ~40% cheaper than in Europe or Japan and the threat of imports is low at present. Moreover, the requirement of substantial capex as a process industry will continue to pose an entry barrier. Restructuring that will likely hold for a considerable time should help the industry normalize profitability. Hanil, ranking 3rd-4th domestically, should report 2014F OP of W176bn, up 26.3% YoY. Our major assumptions for the forecast include a 7.7% rise in cement prices starting June 1, a 2.8% YoY fall in the bituminous coal input price (denominated in KRW) and a cost increase of 8.0% for railway logistics and 6.4% for industrial-use electricity from a year earlier. Net debt should shrink W105bn YoY to W255bn at end-2014F. The company has a stable financial structure and its book value of available-for-sale assets is as much as W482.6bn. Given the stable financials, OP earned can be entirely used to pay down debt and bolster the fastest BPS rise among peers. This would ultimately lead to greater dividend-paying ability and more new business opportunities.

Table 4. Hanil earnings forecasts (W bn)

1Q13 2Q13 3Q13 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2012 2013F 2014F 2015F 2016F 2017F

Sales 249 356 309 352 277 380 336 368 995 1,267 1,361 1,377 1,406 1,427

OP 16 52 34 37 34 61 45 35 72 139 176 194 179 173

OPM 6.3% 14.5% 11.1% 10.6% 12.3% 16.1% 13.5% 9.6% 7.2% 11.0% 12.9% 14.1% 12.7% 12.1%

EBT (7) 50 31 37 28 56 40 30 (87) 111 155 165 156 153

NP (7) 38 24 28 21 43 30 23 (72) 83 117 125 118 116

1) Cement 80 123 101 152 95 123 110 154 371 455 482 540 552 556Ex-factory price (KRW/tonne)

70,856 64,676 68,654 69,352 70,856 67,166 73,940 74,692 64,829 68,607 71,386 73,332 75,532 75,532

OP 10 22 16 22 17 23 21 16 38 70 77 92 92 86

OPM 12.9% 18.1% 15.7% 14.6% 18.3% 19.0% 18.6% 10.3% 10.3% 15.5% 16.0% 17.1% 16.7% 15.4%

2) Remicon 69 103 87 105 68 108 92 104 321 365 372 375 382 385

OP 1 11 5 9 3 13 5 7 11 25 27 27 31 30

OPM 0.7% 10.6% 5.8% 8.3% 4.4% 12.1% 5.3% 6.3% 3.5% 6.9% 7.4% 7.1% 8.0% 7.9%

3) Remitar 49 72 67 54 59 84 78 67 211 242 289 289 299 302

OP 2 11 9 4 6 13 8 11 14 26 38 35 36 37

OPM 4.9% 15.2% 12.9% 8.3% 9.8% 15.4% 10.0% 16.3% 6.8% 10.9% 13.0% 12.0% 12.0% 12.2%

Note: Assumes prices will be lifted 7.7% from June 2014 and then 3.0% in 2016 Source: Company data, Korea Investment & Securities

Sungshin Cement (Sungshin), with a similar domestic market ranking as Hanil, should also see 2014F OP grow 97.8% YoY based on a 9.4% price increase from April and the same conditions for all cost assumptions. Due to the heavy interest burden from large net debt, EPS growth should reach 1,554%. Given its shaky financial structure, the effects of a price hike on improving its financial status would be the most pronounced among peers. The major investment point for Sungshin is its breakaway from liquidity risks and the shift toward sustainability. Even if prices are not lifted in 2014, OP should grow 3.0% at Hanil and 11.9% at Sungshin. Despite higher electricity and logistics costs, nationwide cement shipments should increase 2.4% YoY on home pre-sale volume growth. In addition, cement manufacturing costs should drop on bituminous coal prices stabilizing lower and a strong KRW. We assume a selling price rise in the earnings forecasts

2014 earnings to grow on higher cement prices,

stable costs and housing market upturn

Hanil’s 2014F OP should grow 26% YoY

Sungshin should also see 2014F OP rise 98%

YoY

With no price rise, Hanil’s 2014F OP

should rise 3%


5

for all cement makers but take a conservative approach to the timing (June for Hanil and May for Sungshin, two months behind schedule). If price hikes fall short of our assumptions by 1%p, OP would be 2.3% less than our estimate for Hanil and 7.2% for Sungshin. We assume the 2014 average input price for bituminous coal for Hanil at W910,000/tonne (-2.8% YoY). We estimate the average price for bituminous coal procured from Newcastle, Australia, at USD85/tonne (-0.1% YoY) with an FX rate of W1,065/USD (W1,094.8/USD in 2013). Every 10% rise in the KRW-denominated price would trim Hanil’s 2014F OP by 7.4%. Table 5. Hanil 2014F OP sensitivity analysis (W bn)

Cement price hike/ bituminous coal input price (W10,000/tonne)

5.7% 6.7% 7.7% 8.7% 9.7%

110.1 142 146 149 153 156

100.1 155 158 162 166 170

91.0 168 172 176 180 184

81.9 182 186 190 195 199

73.7 196 201 206 210 215

Note: Price rise date set at June 1 Source: Korea Investment & Securities

Table 6. Sungshin earnings forecasts (W bn)

2008 2009 2010 2011 2012 2013P 2014F 2015F

Sales 582 626 522 486 547 609 675 697

Ex-factory price (KRW/tonne) 54,302 61,767 58,386 64,324 69,082 69,082 75,299 75,299

COGS-to-sales 87.9% 80.8% 93.1% 92.0% 82.9% 78.3% 72.7% 73.2%

OP (38) 14 (67) (43) 16 45 88 90

OPM -6.6% 2.2% -12.8% -8.9% 2.9% 7.3% 13.1% 12.9%

Non-operating income (40) 2 (44) 3 (7) (41) (34) (31)

(Interest income) 3 20 3 2 2 2 2 2

(Interest costs) 52 51 48 50 48 41 36 33

EBT (79) 16 (101) (40) 9 3 54 59

Tax 0 (7) (3) 6 0 0 0

NP (79) 16 (94) (37) 3 3 54 59

Note: Assumes prices will be lifted 9.4% as of May 1 Source: Company data, Korea Investment & Securities


6

II. Cement on the way back to power

1. P: Began return to a realistic level

For the cement players’ earnings, the most critical factor is selling price. In 2012, cement prices were lifted 9% (W67,500/tonne W73,600) but it was less than the pursued rate of 12.6%. In 2014, cement makers plan to raise prices 7-10%, including the 3.6%p that was not carried through in 2012. On December 20, 2013, Lafarge Halla Cement informed remicon companies of a 10% rise for cement ASP (W73,600/tonne W81,000) starting February 17, 2014. With that as a starting signal, most cement companies announced price rises from March, including Sungshin by 9.4% and Ssangyong by 8.8%. The market’s interest then concentrated on whether Hanil and Asia Cement, both of which remained profitable despite the slow market, would follow suit. Finally in the second week of February, Hanil announced a 7.7% price increase. After the price increase in 2012, the cement industry attempted to lift the ASP by W10,000/tonne in 2013. The effort failed due to the inauguration of the new administration, chilling construction market conditions and a backlash from the remicon companies. But this time we believe cement makers will be able to lift prices for a few reasons. 1) Factors for higher prices have mounted such as a 6.4% rise in the electricity rate and 8.1% in rail freight charges. 2) Cement prices in Korea are a mere ~60% of those in Japan and Europe. As such, the world’s lowest prices should become more realistic. 3) For every 10% increase in cement prices, the home building cost goes up 0.29% and transportation infrastructure building cost 0.49%. Since the impact on actual building costs will not be very critical, higher cement prices will likely be accepted.

The recent history of the cement industry can be summarized as a game of chicken started by Lafarge Halla Cement. Formed through France-based Lafarge Group’s acquisition of Halla Cement in 2000, Lafarge Halla enjoyed a market rebound until 2003. However, when shipments shrank amid the construction recession in 2004, the company began to grow market share by slashing prices. By lowering the price by more than 30% from W64,000/tonne, Lafarge Halla jumped from no. 6 to no. 2 in terms of market share. However, cement prices kept falling until 2006 and Lafarge Halla suffered losses for seven straight years since 2005. In 2012, the loss peaked at W28.8bn. Although the company gave up the cheap

Prices to be lifted 7-10% by company

High electricity and rail freight rates; Price hike

factors have mounted

Figure 2. Cement ASP and OPM

45,000

55,000

65,000

75,000

85,000

2H03 2H04 2H05 2H06 2H07 2H08 2H09 2H10 2H11 2H12 2H13F

-5%

0%

5%

10%

15%

20%

25%Total OPM of 7 major companies (R)

Cement price (L)

Cement prices to be lif ted 7-10%(KRW/tonne)

Source: Korea Cement Association, company data, Korea Investment & Securities

Price drops continued until 2011; Excessive capacity addition and

cut-throat competition to end


7

strategy and lifted prices ahead of others in February 2007, they slid again as price competition and excessive capacity addition continued until 2011. That is when the cement industry’s financials deteriorated the most. Since most of the top seven firms are affiliated with conglomerates, their financials worsened without major restructuring efforts such as closing down the business. The top seven firms’ combined debt-to-equity ballooned from 87.8% in 2006 to 121.4% in 2012. After lifting prices in 2012, Lafarge Halla announced a price rise ahead of others at end-2013. After failing to expand market share in Korea, the Lafarge Group appears to have decided to sell Lafarge Halla and withdraw from the country. At present, Lafarge Halla’s market share has shrunk 2.1%p since 2006, and its strategy focus has turned to profitability to sell the firm at a good price. Amid Lafarge Halla’s decision to raise prices, most firms are struggling even to cover their interest costs. Thus, the industry will likely continue to cooperate on pricing for a while. Table 7. Bulk cement prices in major consumers (USD/tonne)

Brazil US Japan Indonesia Korea Egypt Turkey China

2011 171.0 100.6 103.6 96.4 64.3 64.8 60.2 64.6

2012 148.6 104.3 103.6 103.2 70.1 70.0 61.0 58.8

Chg. -13.1% 3.7% 0.0% 7.1% 9.0% 8.0% 1.3% -9.0%

Note: Assumed USD1 = W1,050 Source: Korea Cement Association

Figure 3. Changes to top seven’s market share

– 2006 vs. 2012 Figure 4. Cement market share breakdown in 2012

-3%

-2%

-1%

0%

1%

2%

3%



Market share grew for companies with widened productbases and that avoided excessive capex

(p)

Ssangyong24%

Hanil12%

Hyundai10%

Asia6%

Sungshin13%

Lafarge12%

Hankuk3% Dongyang

16%

Korea3%

Daehan1%

Source: Korea Cement Association Source: Korea Cement Association

2. Q: Growth to be limited but market should consolidate

Cement gets its demand from home building, non-home building and building repairs, in that order. The relationship between construction indicators and cement consumption are much influenced by the construction starts area and construction investment. Construction indicators and cement consumption followed similar trajectories until 2003 and then began to go their own way afterward for the following reasons. 1) While the reinforced concrete-based home construction starts area continued to shrink, the steel-frame non-home construction starts area increased. 2) While construction projects steadily dwindled, more civil engineering projects that require a smaller portion of cement (e.g., the four major rivers restoration, roads, ports, etc.) went ahead. 3) Thanks to advances in building technology, the volume of input materials per unit area has shrunk. Thus, apartment pre-sales should have the biggest impact on cement demand.

Pricing cooperation to continue to normalize

prices

Most important factor for cement demand is

apartment pre-sales


8

Table 8. Construction indicators vs. cement consumption

Correlation coefficient

Building approvals Construction orders Construction starts Construction

completed

1981-2000 0.427 0.437 0.663 0.637

2001-2010 0.312 0.253 0.645 0.414

1981-2010 0.337 0.199 0.664 0.215

Source: Korea Cement Association, Korea Investment & Securities

Cement shipments increase with about a one-year lag after the apartment pre-sale is arranged. In 2012, apartment pre-sales reached 260,000 units, up 1.1% YoY. With 6.8% YoY more homes available for pre-sale in 2013, cement shipments in the same year are estimated to have risen 5% YoY to 46.14mn tonnes. Since homes available for pre-sale should grow 6.9% YoY in 2014, cement shipments in the year could add 2.4% YoY to 47.24mn tonnes despite a cut to the infrastructure budget. In particular, since the housing market is warming up after a five-year chill, builders are preparing to break ground on long-idled project finance construction, which in turn should augment the home pre-sale volume. The use of cement begins with ground breaking for apartment construction starts. Thus, the peak season for cement is 2Q when pre-sales are most brisk and construction projects are on track for completion.

Figure 5. Pre-sale market and cement production volume

Figure 6. Construction starts area and cement production volume

Figure 7. Order amount and cement production volume

50

100

150

200

250

300

350

400

1999 2002 2005 2008 2011

30

35

40

45

50

55

60

Presales (L)

Cement production (R)

('000 tonnes)('000 homes)

50

60

70

80

90

100

110

120

1999 2002 2005 2008 2011

30

35

40

45

50

55

60

Construction starts area (L)


('000 ton)(m² mn)

20

40

60

80

100

120

1999 2002 2005 2008 2011

30

35

40

45

50

55

60Domestic orders (L)


('000 ton)(W tn)

Gap between orders and

cement production widened;

Apartment pre-sale price is key

Source: r114, Korea Cement Association

Source: Ministry of Land, Infrastructure & Transport, Korea Cement Association

Source: Ministry of Land, Infrastructure & Transport, Korea Cement Association

Considering Korea’s cement production capacity, supply far surpasses demand. Although cement companies try to raise utilization via exports, the volume going abroad amounts to ~1% of domestic shipments. Moreover, export deals including shipping costs do not appeal in price and thus do not help address the glut. Therefore, utilization matters most after selling price for cement earnings because the industry’s profitability is maximized by growing shipments which reduces fixed costs. Due to the nature of the process industry, the cement’s profit structure reaches stability at a minimum utilization of 70%. Since the industry has featured surplus capacity since 2007, the profit structure at a number of firms has been eroded by heavy fixed costs and poor utilization. Among Korea’s top seven cement firms, utilization is the highest at Hanil, which explains the most favorable margins there.

In 2014, homes for pre-sale to swell 7% YoY

and cement shipments to add 2.4% YoY

Highest utilization at Hanil; Explains

favorable profitability


9

Over the long-term, we cannot deny limited Q growth for the cement industry. The new housing market will likely grow in 2014 given its recovery after a five-year slump. However, it is difficult to expect housing construction and cement shipments similar to the early 2000s as housing penetration stands at 102%. Still, we pay attention to cement in 2014 because the normalization of P that long remained at unreasonable levels should offset low growth by Q. Being classified as fading, the industry suffered fierce price competition. And in that process, it became quite an oligarchy. After Eugene Corp.’s sale of the cement division2, Lafarge Halla that operated most aggressively is now up for sale. As such, a full-bore restructuring of the industry is ongoing. Surviving players have adopted reasonable prices as an operating strategy. Korea’s cement firms are grouped as coastline-based and inland. The coastal are Ssangyong Cement Industrial (Donghae), Tongyang Cement & Energy (Samcheok and Donghae) and Lafarge Halla (Okgye). Inland firms include Hyundai Cement (Yeongwol and Danyang), Ssangyong (Yeongwol), Asia Cement (Jecheon), Sungshin (Dangyang) and Hanil (Danyang). The industry is currently dominated by the above seven. For cement firms, it is important to own a lime mine. Due to huge fixed costs, a start-up must invest more than ~W1tn. Since the industry is categorized as in decline, new players are unlikely to appear. During the lengthy recession, market shares changed even for the top seven. The positions dwindled for most players except Hanil and Asia that experienced no major blow thanks to stable financials. Although Tongyang will likely graduate from court receivership early, it would be difficult to get back to the past level of utilization for a while. The same is true for Hyundai Cement that has been in a debt workout program since 2010. Their recent market share contractions seem to have benefited some players such as Hanil and Sungshin where utilization is improving. Meanwhile, Tongyang Cement filed for court receivership after the Tongyang Group’s liquidity crisis triggered interest in its sale. Since the top seven occupy a similar market share, whichever firm takes over Tongyang can step up to the no. 1 slot. Although market share expansion may accelerate industry restructuring, it is unlikely for an existing cement firm to acquire Tongyang based on reasonable assumptions. 1) Debt-to-equity is enormous at most firms except Hanil and Asia 2 In November 2012, Eugene Corp. sold assets, debt and goodwill of the slag cement plant in Gwangyang, South Jeolla province,

to DH Cement Network for W855.5bn. By doing so, Eugene gave up the cement business after 12 years in operation. In July 2012, Eugene sold the Jangseong plant that manufactures Portland cement to Gangdong Corp. for W16bn. Although Eugene was the first remicon firm to acquire a cement plant (established a cement division in Incheon in 2001 and bought Korea Cement in 2003), the company decided to only focus on the remicon business due to harsh market conditions.

Figure 8. Top seven cement firms’ capacity and utilization

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Sungshin Ssangy ong Tongy ang Hanil Laf arge

Halla

Hy undai Asia

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0Capacity (L) Utilization rate (R)('000 ton) (%)

Source: Top seven firms’ 3Q13 business reports

Cement industry restructuring to offset Q

growth limits

New players unlikely in the fading process

industry

Market share shrank at most players except

Hanil and Asia

Sale of Tongyang unlikely to trigger a

seismic shift


10

due to persistent losses. 2) Given the recent rises in electricity and transportation rates, cement firms must address the pending issues to stabilize profitability, such as lifting selling prices to a realistic level. Thus, there is little chance in the short-term for a restructuring event that would change the industry’s landscape.

Figure 9. Top seven’s plants and operating regions

Inland companies Coastal companies

Ssangyong (Yeongwol)

Lafarge (Okgye)

Lafarge (Shingi)

Lafarge (Pohang)

Ssangyong (Donghae)

Dongyang,Ssangyong, Lafarge,Korea, Daehan(Gwangyang)

Hankuk (Pohang)

Hyundai (Danyang)

Dongyang (Samchuk)

Korea (Jangseong)

Hanil (Danyang)

Sungshin (Danyang)

Asia (Jeacheon)

Hyundai (Yeongwol)

Source: Korea Cement Association


11

3. Japan’s cement industry restructuring

When forecasting the long-term trend for Korea’s cement industry, we must take a hint from Japan that more than a decade before Korea experienced a construction market downturn and a supply-demand imbalance. Japan saw a drop in infrastructure demand due to the maturing economy and fewer public projects due to worsening fiscal conditions. Accordingly, Japan’s cement demand started shrinking after peaking at 86.3mn tonnes in 1990 while supply has also been on a downturn since reaching 99.3mn tonnes in 1996. But thanks to industry restructuring and facility shutdowns, product capacity has now fallen to 40mn tonnes. This opened the door for companies that survived restructuring to offer prices at a reasonable level. Japan’s cement utilization stood at 65% in 1987 but industry restructuring helped raise it to the 90% level in just five years. Since then, Osaka Cement and Sumitomo Cement merged into Sumitomo Osaka Cement in 1994 while Chichibu Onda Cement merged with Nihon Cement to become Taiheiyo Cement in 1999. Of note, Taiheiyo Cement was able to expand its market share to as much as 40%. This is a meaningful level as it allows companies to exercise pricing power. Accordingly, the major companies that survived restructuring carried out price rises starting in the regions where prices were low. Japan’s cement price currently stands at W116,790/tonne, ~59% dearer than Korea’s W73,600. With Japan’s construction market slipping into a prolonged downturn in the 2000s, cement shipments fell sharply and utilization sank to as low as 50%. This is when Japan’s cement industry started to cut costs, carry out restructuring and seek diversification, including expansion into raw material waste recycling. Japanese cement makers also developed environmentally friendly and energy efficient technologies that are recognized as the world’s most advanced. All these efforts are helping Japanese players gain a sharper competitive edge that leads to steady profits.

Japan already experienced

construction market downturn and cement industry restructuring

Implemented price hikes after M&As and

restructuring in the 1990s

Developed eco-friendly cement; Continues to

generate steady profits thanks to cost cuts and

restructuring

Figure 10. Sumitomo Osaka Cement share price

0

50

100

150

200

250

300

350

87/01 91/01 95/01 99/01 03/01 07/01 11/01

Sumitomo Osaka Cement

Nikkei 225 Stock Price Index

(Jan 2, 1987=100)

Utilization went upas industryrestructured

65%→90%

Market share grew via M&A amongcement firms; Prices rose

Altough utilization fell to 50% amidpersistently stagnant market, stableearnings were maintained thanks to costcuts and energy savings

Source: Company data, Bloomberg


12

Figure 12. Japan cement production capacity and

utilization Figure 13. Japan fossil fuel and renewable energy use

for cement production

50

60

70

80

90

100

110

120

1988 1991 1994 1997 2000 2003 2006 200950

55

60

65

70

75

80

85

90

95

100Kiln capacity (L) Utilization rate (R)(%)(mn tonnes)

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Excl. renewable energy

Incl. renewable energy

MJ/t-cement

Source: Japan Cement Association Source: Japan Cement Association

Figure 11. Sumitomo Osaka Cement PB band and price rise timing

0.4x

0.6x

0.8x

1.0x

1.2x

0

100

200

300

400

500

600

700

Feb-94 Feb-97 Feb-00 Feb-03 Feb-06 Feb-09 Feb-12

(JPY)

Price hikes

Prices edged upfirst time in 9 years

Raw material pricessurged; Prices lifted

Coal price jumped and pushed upcement prices by~JPY1,000/tonne

JPY500/tonne rise againdepite sharp increase ayear ago

Source: Company data, Bloomberg


13

4. C: Changes in China, the world’s largest coal user

Cement manufacturing costs mainly comprise 30% bituminous coal, 19% electricity and 14% logistics. The manufacturing process involves mining, grinding and heating. Bituminous coal that is consumed the most during the heating process is a key cost variable. Given that bituminous coal is entirely sourced from overseas, FX rates and import prices are very important. Even though cement prices that remained constant during the past decade were lifted by only ~9% in 2012, the cement industry was able to turn around in 2013. This is because bituminous coal prices started falling from 2011. The following is our outlook for the key cost variables. ▶ Bituminous coal costs: Bituminous coal prices are very likely to stabilize lower over the long-term due mostly to changes in China, the world’s largest consumer of coal. At end-2013, the Chinese government announced the Action Plan on Prevention and Control of Air Pollution that includes setting limits on coal burning and taking old, high-polluting vehicles off the road. The government said it would reduce particulate matter 2.5 (PM2.5, fine particles with diameter of 2.5 micrometers or less) levels in metropolitan regions (Beijing, Tianjin, Hebei, etc.) and the Yangtze River Delta and the Pearl River Delta areas by about 25%, 20% and 15%, respectively.

Figure 14. China’s air pollution prevention plan: Reduce fine particle levels through 2017

Figure 15. China and global coal consumption: China burns as much coal as the rest of the world combined

Beijing-Tianjin-Hebei area 25%

Yangtze River Delta 20%

Pearl River Delta 20%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2000 2002 2004 2006 2008 2010 2012

Global (excl. China) China(bn tonnes)

Source: News reports Source: International Energy Agency

To achieve its goal, the government decided to remove all small coal-fired steam boilers (less than 10 tonnes) from major cities through 2017 and prohibit the new installation of coal-fired steam boilers (more than 20 tonnes). With these measures in place, it was found that China’s coal consumption would shrink more than 40%. The government also plans to reduce the proportion of coal in the energy consumption mix from the current 67% to less than 65% through 2017 by replacing coal with natural gas to generate electricity. The action plan is the most detailed and comprehensive policy among the air quality improvement programs that China has ever introduced. This suggests the country is taking the air pollution problem very seriously. Considering that burning bituminous coal harms the environment, China has no choice but to reduce consumption.

Cement manufacturing costs are affected by

bituminous coal prices, electricity rates and

logistics costs

Bituminous coal prices to stabilize lower over

the long-term due to China’s environmental

policies

Reduce use of bituminous coal, the

main culprit behind air pollution


14

While coal consumption is decreasing, supply is unlikely to drop much. Coal supply is not flexible according to prices. We forecast coal output will actually increase YoY in 2014. Although cement makers use different contract types to purchase bituminous coal, the price drop should have a favorable effect with a time lag. Hanil buys all bituminous coal at spot prices and Sungshin fixed. In 2013, bituminous coal prices (shipped from Newcastle, Australia) fell 11.6% YoY. At present, the free on board Newcastle coal price stands at USD81.6/tonne compared to the 2013 average of USD85.1. We first assumed the bituminous coal price for 2014 would be the same as the 2013 average. But we now believe the KRW-denominated coal input price will drop 2.8% YoY due to the strong KRW. The government said it might impose an individual consumption tax on bituminous coal (~W30 per 1kg). The tax should take effect from 2015 at the latest. Of note, a 10% rise in coal input price would erode Hanil’s 2014F OP by 7.8%. Sungshin, with an annual supply contract at a fixed price, should see its coal input price fall 4.8% YoY to USD100/tonne. Accordingly, the company’s bituminous coal cost would shrink ~W5bn YoY in 2014F. ▶ Electricity costs: The state-run Korea Electric Power Corp. lifted industrial-use electricity rates by 6.4% in November 2013 and 18% over the past two years. Given the higher electricity rates, Hanil’s 2014F cost burden should increase W10.3bn and Sungshin’s W5bn. ▶ Transportation costs: The state-run Korea Railroad Corp. lifted rail freight rates by 8% in October 2013. Rail freight accounts for ~70% of the transportation cost for cement. Given the higher rail freight rates, Hanil’s 2014F cost burden should increase W7.1bn and Sungshin’s W3bn.

Figure 16. Cement manufacturing cost breakdown Figure 17. Bituminous coal prices

Others 11%

Labor 14%

Depreciation14%

Transportation14%

Electricity 18%

Bituminous coal29%

0

50

100

150

200

250

Jan-

06

Jul-

06

Jan-

07

Jul-

07

Jan-

08

Jul-

08

Jan-

09

Jul-

09

Jan-

10

Jul-

10

Jan-

11

Jul-

11

Jan-

12

Jul-

12

Jan-

13

Jul-

13

Jan-

14

FOB Newcastle 6,300kcal/kgFOB Qinhuanqdao 6,200kcal/kgCIF Korea 6,080kcal/kg

(USD/tonne)

Source: Company business report Source: Korea Resources Corp.

Hanil buys bituminous coal at spot prices;

Input price fell 12% in 2013

10% rise in coal input price would erode

Hanil’s 2014F OP by 7.4%

2014F cost burden to increase W5bn-10bn

due to higher electricity rates

2014F cost burden to increase W3bn-7bn on

higher transportation costs


15

5. Self-driven management innovation

A prolonged industry downturn has led cement makers to extensively innovate their management practices. Accordingly, companies have made the following efforts to cut costs and maximize profitability. 1) Efficient manufacturing process: Cement makers are focusing on improving their manufacturing process and production efficiency while refraining from adding capacity given the market oversupply. Most companies have completed manufacturing automation. 2) Internal cement consumption via vertical integration: Hanil uses 20% of the cement it produces to make remicon and Sungshin 15%. Hanil is also expanding the Remitar lineup, its brand of dry mortar products. Such stable internal consumption of cement can reduce profit volatility. We will take a closer look at the vertically integrated businesses run by cement makers in the next chapter.

Industry downturn pushed firms to

innovate management

Adopt efficient manufacturing and

avoid capacity addition

Expand portfolio of secondary products


16

III. Vertical industry integration

Cement makers have become more resilient to economic changes by advancing into cement secondary products, which creates captive demand for their own cement. For example, Hanil and Sungshin use 20% and 15% of their cement production, respectively, to produce remicon. Hanil has expanded its dry mortar business as well. As buildings become more sophisticated in their design and function, there is a greater need for specialty remicon with better insulation properties or greater strength. The cement secondary products will help shore up profitability at cement makers. Hanil, Sungshin and Asia Cement boast relatively higher profitability and utilization in the industry thanks to stable profit generation from remicon and dry mortar. Table 9. Cement utilization rate by company (%)

Company 2007 2008 2009 2010 2011 2012 3Q13 3Q13-2007

Ssangyong 71.9 70.7 67.8 63.0 63.3 67.7 58.8 (13.1)

Hanil 71.3 69.8 70.6 77.6 73.3 82.0 88.7 17.4

Tongyang 63.2 62.1 63.8 58.4 65.1 78.1 61.7 (1.5)

Sungshin 51.3 53.0 52.0 47.3 43.5 49.6 56.7 5.4

Asia 54.9 71.7 75.0 66.4 62.9 62.1 59.5 4.6

Hyundai 69.0 71.8 66.0 59.4 57.7 60.1 58.3 (10.7)

Lafarge Halla 69.5 64.1 67.8 60.4 67.3 66.8 60.0 (9.5)

Avg. 65.1 65.4 65.1 60.8 61.3 68.5 63.4 (1.7)


Expansion into cement secondaries: 1) Remicon

Remicon is a mixture of cement, sand and stone. In the past, cement was mixed with water and an aggregate at the construction site to make concrete. But today, a concrete mix with an exact water-cement ratio is made at a concrete batching plant. The concrete mix is conveyed in a mixing truck for deposit at the construction site. The density of remicon is determined by the mixing ratio and admixtures, which feature differences in technology levels among companies.

As cement accounts for ~35% of remicon manufacturing costs, they go up when cement prices increase. Except a handful of mid to large-size firms such as Eugene Concrete, Sampyo and Aju Industry, most small and midsize remicon producers used to have less bargaining power against the big cement firms that

Secondary products help profitability and reduce sensitivity to industry conditions

Figure 18. Major cement companies’ OPM (2012 vs. 3Q13)

4.8%

7.2%

0.0%

7.2%

2.9%3.3%

11.1%

13.8%

6.0%5.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Dongy ang Hanil Hy undai Ssangy ong Sungshin

2012 3Q13


Remicon density is a gauge of technical skill

Remicon makers banded together to lift

prices when cement costs rose


17

formed an oligopoly. The remicon prices were lifted but to a lesser extent than for cement through 2011, but since 2012, remicon makers have banded together in the form of an all-out operational suspension and using other measures, and have achieved a reasonable price increase. In 2012, cement prices were lifted 9%, which translates into a 3% cost increase for remicon manufacture. But of note, the remicon selling prices were raised by a larger degree of 10% in 2012. Whereas higher cement prices used to undermine the remicon makers’ profitability, the prices for remicon reflected the raised cement costs starting in 2012. Given major remicon producers will likely enjoy better profitability in 2014, we believe profitability growth will be significant, particularly at large cement firms with a remicon unit such as Hanil and Sungshin. In our earnings estimates, we assumed a remicon price rise of 3.9% for Hanil and 4.4% for Sungshin, equaling nearly half the cement price increases. Remicon companies have their own distribution channels and in general, they cover the area within a 20km radius of the plants. Sungshin and Hanil could enjoy the benefits of the Sejong city project as they have cement and remicon plants nearby. In 2013, the apartment pre-sale volume grew substantially in metropolitan Seoul and in South Chungcheong province and that should lead the two companies to have bigger shipments in 2014.

Cement makers with a remicon unit, such as

Hanil and Sungshin, likely to enjoy

profitability growth

Running remicon plants near Sejong and

metropolitan Seoul, Hanil and Sungshin

benefit from greater pre-sale volume

Figure 19. Remicon supply coverage by company

Seongnam - 570㎥/hr

Hwaseong - 420㎥/hr

Cheongju - 420㎥/hr

Daejeon - 390㎥/hr

Daegu (Dalsung-gu) - 330㎥/hrDaegu (Dong-gu) - 420㎥/hr

Gimhae - 420㎥/hr

Busan - 390㎥/hr

Paju - 570㎥/hr Guri - 840㎥/hr

Yongin - 420㎥/hr

Daejeon - 420㎥/hr

Youngdeungpo - 570㎥/hrWest Incheon - 420㎥/hr

Bucheon - 630㎥/hr



18

Figure 21. Remicon quality test before pouring Figure 22. Remicon mixing trucks

Source: Google Source: Google

Figure 20. Apartment pre-sales in 2013-2014: Stronger in Chungcheong province and metropolitan Seoul

Korea

282 299

2013 2014

'000Metropolitan

12

4

16

6

2013 2014

Seoul

40 54

2013 2014

Gyeonggi

73

10

2

2013 2014

Incheon

11 10

2013 2014

Gangwon4

2

2013 2014

Busan

1222

2013 2014

NorthGyeongsang18

8

2013 2014

7

2013 2014

10

NorthJeolla9

5

2013 2014South Jeolla

1013

2013 2014

2216

2013 2014

SouthChungcheong

2013 2014

13

25

Daejeon

53

2013 2014

Gwangju

5 5

2013 2014

Jeju3

1

2013 2014

Ulsan

10

2

2013 2014

Sejong

13 14

2013 2014

NorthChungcheong

South

Gyeongsang

Source: r114


19

Expansion into cement secondaries: 2) Dry mortar

Dry mortar is an advanced building material formed by a mixture of cement, sand and durability-improving admixtures. The dry mortar compound is mixed with water shortly before use, which saves much time and labor compared to 20 years ago when workers had to mix cement and sand in an accurate ratio and add water to the mixture on site. Dry mortar has been widely used as an adhesive for bricks and concrete blocks, interior/exterior finishing and repairing plaster, environmentally-friendly finishing material and so on. As the product’s application has expanded, the dry mortar market exploded in the 2000s. The business is very lucrative and the domestic market size reaches ~W300bn p.a.

Korea has a limited number of players engaged in dry mortar. Hanil commands an unrivaled position with 80% market share for its Remitar brand. The remaining 20% of the market is shared by Asia Cement and several small companies. While Sampyo, Korea’s biggest remicon maker which exploits sand as well, recently built a plant in Gyeonggi province to start a mortar business, there will likely be no additional entrants. Hanil stood out by creating the dry mortar market in 1991. Hanil is known for its longest history of investment in new product development among peers and its industry-only nationwide distribution network that covers the metropolitan Seoul (Incheon and Bucheon), Chungcheong and Gangwon provinces (Gongju), Gyeongsang province (Gaya and Haman) and the Jeolla-Jeju regions (Mokpo). In 2011, Hanil gained further market share by acquiring Sungshin’s dry mortar/remicon plant in Bucheon for W107bn (or W50bn book value). The terms of the deal specified that Sungshin would not expand its dry mortar capacity in metropolitan Seoul for the next 10 years. As such, the market’s oligopoly led by Hanil will remain in place for the time being.

Figure 23. Remitar % of Hanil total sales Figure 24. Dry mortar market share breakdown

0

50

100

150

200

250

300

350

1997 2000 2003 2006 2009 20120%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%Remitar sales (L) Weighting (R)(W bn) Others

13%

Asia Cement7%

Hanil Cement80%

Source: Company data Source: Company data

A cement maker with a dry mortar business is less susceptible to changing economic conditions. As dry mortar is used mainly as finishing plaster in apartment construction, a cement maker that produces dry mortar as well can achieve a constant sales flow (i.e.. cement, remicon and dry mortar) across the entire construction process. Hanil’s sales and profitability are less volatile than peers, which owes much to its diversified operations.

Dry mortar: An advanced building material with rapid

market expansion in the 2000s

Hanil opened the dry mortar market and now

commands 80%

As dry mortar is a finishing material for apartments, it helps

reduce the economic sensitivity of a cement

maker


20

Figure 25. A cement maker with dry mortar business earns profits across the entire apartment construction process

Source: Korea Investment & Securities


21

Appendix

1. How cement is made

Cement production starts at a quarry where limestone, 95% of the raw material, is extracted. Large blocks of limestone are put through a crusher three times and blended with clay and oxidized steel in a constant feeding machine. The mixed materials go through a dry process of fine grinding. The dry materials are stored in a blending silo. Burning the dry mix is the key process of cement making. To ensure better efficiency and productivity, the blended material is heated to 900 Celsius in a pre-heater and then fed into a kiln. The mixture is burnt at temperatures up to 1,500 Celsius to form clinker. After burning, hot clinker is cooled to below 100 Celsius and stored in clinker silos. The cooled clinker is mixed with gypsum plaster, an additive, and ground to the fineness of cement. The final product is directed to a shipping station or customers by rail, tanker trucks or ships. The types and purposes of cement vary depending on the different grinding, burning and cooling processes. Type I ordinary Portland cement is the most generally used.

Quarried limestone is fed into a crusher to

make cement

Mixture is burnt to form clinker, then ground to the fineness of cement

Figure 26. Cement manufacturing flow

Mine Manufacture raw

Burn

Produce cement and ship

Source: Asia Cement


22

2. Cement distribution – As remicon and mortar

Now cement is shipped to remicon factories around the country by rail (70%) and road (30%). Road transport costs W4,000/tonne more than rail. Upon receiving orders, remicon makers remove cement from storage and mix it with aggregate and admixture to make concrete, and then transport the mix to a construction site in a mixer truck within an hour.

After shipment, cement is used to make

remicon or Remitar

Figure 27. Average time for remicon production and shipment

Source: Korea Investment & Securities

Figure 28. Remicon production process

Measure

Mix

Transport

Store materials

Source: Asia Cement


23

3. Apartment housing construction and cement

When building an apartment complex, cement is mostly used in the early phase that includes land leveling/grading and pouring a foundation to support the weight of the building. During the reinforced concrete work, builders improve the building’s durability and resistance to fire and earthquake using rebars. To form concrete in the desired shape, they assemble a formwork (a wooden frame), pour in concrete and then remove the formwork once the material hardens. Building apartments generally requires ~1.97 bags of cement per 3.3m2 and 1.94m3 of remicon. Since one bag of cement contains 40kg of the mix, ~78.8kg of cement is used per 3.3m2. Table 10. Input amount of major materials per 3.3m2 of apartment housing

Structural material Input amount Finishing materials Input amount

Rebars 185kg Linoleum floor covering 2.24m²

Remicon 1.94m³ Tiles 1.64m²

Formwork 16.33m² Cement 1.97bags

Piles 0.11 bone Glass 0.9m²


Once the early phase is finished, the full-bore vertical construction kicks in followed by plaster, brick and tile works and ceiling. This is where mortar comes into play. Remitar is a dry mortar developed by Hanil for the first time in Korea in 1991. The pre-mix includes all necessary materials such as cement, sand and special additives, and can be used by simply adding water. Thus, the product saves time and costs such as labor.

Glossary

Remicon: Abbreviation for ready-mix concrete; Unhardened concrete made from a mixture of cement, aggregates and admixtures at a batching plant; Remicon is delivered to a work site by special concrete transport/mixer trucks

Dry mortar: Workable paste made from a mixture of cement, lime, sand and water; Used to bind construction blocks (i.e., bricks, blocks, stones and tiles) together

Kiln: A thermally insulated chamber used to manufacture clinker, an intermediate product, by heating cement raw mixtures to more than 1,000 Celsius

Clinker: A key raw material used to manufacture cement; Limestone, clay and other materials are baked in a kiln to form this dark-green paste

Cement (remicon) input is greatest during

apartment foundation work, Remitar is used

during finish work

Hanil Cement (003300) ..................................................................................................................................................................25

Sungshin Cement (004980) .....................................................................................................................................................29

Company


25

Hanil Cement (003300) BUY (Initiate), TP W155,000

Player that should outlast the rest

TP W155,000: We recommend BUY on Hanil Cement with a SotP-derived TP of W155,000. Operating value is based on a target multiple 5.5x 2014F EBITDA. For the TP calculation, we also considered the value of major property investment and expected net debt of W255bn. The TP equals 0.8x 2014F PB. Although Hanil shares had slid to 0.2x PB due to risks at subsidiary Hanil E&C, the risks faded after it entered court receivership in 2012. After writing off W120bn through 1Q13, there is little chance for the issue to incur any additional cost. Hanil’s stake in the subsidiary has shrunk from 55% in 2012 to 2.2% and the builder is no longer affiliated with Hanil as of July 2013. It is now time to focus on the following investment points. 1) Better mid/long-term earnings along with bigger market share during the industry consolidation. 2) Wider product range and better profitability via vertical integration. 3) Stable financials and healthy assets. Table 11. TP calculation (W bn)

Category Value Note

1. Operating value 1,177

EBITDA 214 As of 2014

EBITDA multiple (x) 5.5 Kospi avg. EV/EBITDA

2. Tradable equity investment 142 30% discount to BV

3. Non-operating purpose real estate 100 BV of remicon plant in Gaebong-dong

4. Net debt 255 As of end-2014

EV (1+2+3-4) 1,164

Outstanding shares (‘000 shares) 7,545 Incl. 532,000 treasury shares

TP (KRW) 155,000


2014F OP to rise 38% YoY; Efficiency is key when P is rising instead of Q: Most cement makers have already announced higher prices. Hanil said it would lift prices 7.7% as of April 1. With a price increase less than peers, the company hopes to gain market share while the industry is restructured. Considering the process industry faces a heavy fixed-cost burden, a bigger market share has a stronger impact on profitability for cement makers. We peg Hanil’s 2014F OP at W176bn (+26.3% YoY). Our estimate has the following assumptions. Without a price rise, 2014F OP should still swell 3.0% YoY. 1) Cement shipments to grow 2.4% YoY as housing pre-sale volume added 6.8% YoY in 2013 and is expected to go up 6.9% YoY in 2014 2) Bituminous coal input price to fall 2.8% YoY to W910,000/tonne (avg. Newcastle coal price at USD85/tonne, down 0.1% YoY; W1,065/USD) and electricity and rail freight rates to go up 6.4% and 8.0%, respectively 3) The 7.7% price increase set for April is delayed to June

Yr to Sales OP EBT NP EPS % chg EBITDA PE EV/EBITDA PB ROE

Dec (W bn) (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%)

2011A 868 30 25 17 2,449 27.7 63 16.5 10.8 0.2 1.3

2012A 995 72 (87) (72) (10,159) 0.0 110 NM 6.8 0.3 (5.8)

2013F 1,267 139 111 83 11,732 0.0 178 7.2 5.4 0.5 6.5

2014F 1,361 176 155 117 16,637 41.8 214 6.1 4.7 0.5 8.3

Stock price (Feb 20, KRW) 101,000

Market cap (USD mn) 711

Shares outstanding (mn) 8

52W High/Low (KRW) 103,500/49,350

6M avg. daily turnover (USD mn) 1.0

Free float (%) 45.3

Foreign ownership (%) 7.9

2015F 1,377 194 165 124 17,740 6.6 232 5.7 4.3 0.5 8.0

Performance

1M 6M 12M

Absolute (%) 13.6 82.0 79.7

Rel. to Kospi (%p) 14.8 79.7 84.4

12MF PB trend

0.0

0.1

0.2

0.3

0.4

0.5

0.6

Mar-09 Sep-10 Mar-12 Sep-13

0

20

40

60

80

100

120

12MF PBR (LHS)

price (RHS)

(X) (W' 000)

Kyungja Lee 822-3276-6155 [email protected] Hyungjoon Ahn 822-3276-4460 [email protected]


26

As Hanil held back from excessive capacity addition compared to peers when the market was booming, it faces a lighter depreciation and fixed cost burden. If the assumed price increase is lowered by 1%p, it would erode 2014F OP by 2.3%, while a 10% rise in coal input price would erode OP by 8.0%. Expansion into cement secondaries: Hanil internally uses more than 20% of the cement it produces to make secondary products such as remicon and dry mortar (sales contribution 59%). This gives it an overwhelmingly sharp edge in utilization and OPM compared to peers. Hanil’s utilization reached 88.7% in 3Q13. The rate has risen 17.4%p since 2007 while others mostly experienced declines over the period. Hanil surprised the market in 1991 with the development of dry mortar products for the first time. It not only created the dry mortar market but has made constant investment for technology and now claims nearly 80% share. It enjoys a near-monopoly after acquiring Sungshin’s dry mortar business in 2011. Typically, there is big demand for cement and remicon in the early stages of construction and dry mortar is intensively used as a finishing plaster about six months before construction ends. As Hanil earns a constant sales flow (cement, remicon and dry mortar) across the construction process, its earnings are less susceptible to construction market conditions than peers. Quality assets: Assessed by book value, Hanil has 1) available-for-sale securities worth W317.2bn in SK Chemicals, Korea Electric Terminal and Green Cross Holdings, 2) a W100bn remicon plant site in Gaebong-dong and 3) headquarters valued at W180bn near Gangnam station. Of note, the plant site is near an area approved for a 45-storey residential-commercial complex. The Seoul metropolitan government approved the development in November 2013. If the plan goes ahead, development of the nearby sites owned by Paik Kwang Industrial or Hanil would gather momentum and offer a chance of earning fat capital gains. We reflect the book value of Hanil’s Gaebong-dong site in the valuation. Assets are being undervalued since only the headquarters in the Gangnam area were re-evaluated in 2011 and the value of others are recognized at pretty much the same as their purchase prices.

Table 12. Earnings forecasts (W bn)

1Q13 2Q13 3Q13 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2012 2013F 2014F 2015F 2016F 2017F

Sales 249 356 309 352 277 380 336 368 995 1,267 1,361 1,377 1,406 1,427

OP 16 52 34 37 34 61 45 35 72 139 176 194 179 173

OPM 6.3% 14.5% 11.1% 10.6% 12.3% 16.1% 13.5% 9.6% 7.2% 11.0% 12.9% 14.1% 12.7% 12.1%

EBT (7) 50 31 37 28 56 40 30 (87) 111 155 165 156 153

NP (7) 38 24 28 21 43 30 23 (72) 83 118 125 118 116

1) Cement 80 123 101 152 95 123 110 154 371 455 482 540 552 556Ex-factory price (KRW/tonne)

70,856 64,676 68,654 69,352 70,856 67,166 73,940 74,692 64,829 68,607 71,386 73,332 75,532 75,532

OP 10 22 16 22 17 23 21 16 38 70 77 92 92 86

OPM 12.9% 18.1% 15.7% 14.6% 18.3% 19.0% 18.6% 10.3% 10.3% 15.5% 16.0% 17.1% 16.7% 15.4%

2) Remicon 69 103 87 105 68 108 92 104 321 365 372 375 382 385

OP 1 11 5 9 3 13 5 7 11 25 27 27 31 30

OPM 0.7% 10.6% 5.8% 8.3% 4.4% 12.1% 5.3% 6.3% 3.5% 6.9% 7.4% 7.1% 8.0% 7.9%

3) Remitar 49 72 67 54 59 84 78 67 211 242 289 289 299 302

OP 2 11 9 4 6 13 8 11 14 26 38 35 36 37

OPM 4.9% 15.2% 12.9% 8.3% 9.8% 15.4% 10.0% 16.3% 6.8% 10.9% 13.0% 12.0% 12.0% 12.2%

Note: Assumes prices will be lifted 7.7% from June and 3.0% from 2016 Source: Company data, Korea Investment & Securities


27

Table 13. 2014F OP sensitivity analysis (W bn)

Cement price hike Bituminous coal input price (W10,000/MT)

5.7% 6.7% 7.7% 8.7% 9.7%

110.1 142 146 149 153 156

100.1 155 158 162 166 170

91.0 168 172 176 180 184

81.9 182 186 190 195 199

73.7 196 201 206 210 215

Note: Price rise date set at June 1 Source: Korea Investment & Securities

Figure 29. PB band

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Dec-04 Jan-06 Feb-07 Mar-08 Apr-09 May -10 Jun-11 Jul-12 Aug-13

(KRW)

0.6x

0.5x

0.4x

0.3x

0.2x

Hanil E&C risks f aded as

they builder entered court


Figure 30. Sites available for development in Gocheok-dong and Gaebong-dong

Hanil Cementremicon plant

To be redeveloped asresidential/commercial complex

Paik KwangIndustrial's

development landConcentrated with

reconstruction/redevelopment projects

Gaebong station

Project Site area (m²)

Residential-commercial 105,087

Paik Kwang Industrial 65,967

Hanil’s remicon plant 39,669

Government development plan near Gaebong station

134,212

Source: News reports


28

Balance Sheet (W bn)

Fiscal year ending Dec. 2011A 2012A 2013F 2014F 2015F

Current assets 484 522 628 698 781

Cash & cash equivalents 85 123 127 136 138

Accounts & other receivable 280 268 362 412 492

Inventory 73 88 84 91 92

Non-current assets 1,611 1,521 1,655 1,725 1,748

Investments 316 227 289 310 314

Tangible assets 1,066 1,078 1,107 1,137 1,167

Intangible assets 38 34 43 46 47

Total assets 2,095 2,043 2,283 2,424 2,529

Current liabilities 348 316 433 472 417

Accounts payable 175 136 162 170 172

ST debt & bonds 68 85 55 50 45

Current portion of LT debt 74 65 57 49 40

Non-current liabilities 477 497 505 458 462

Debentures 90 139 139 169 169

LT debt & financial liabilities 284 275 260 175 178

Total liabilities 825 813 938 931 880

Controlling interest 1,260 1,219 1,333 1,481 1,636

Capital stock 38 38 38 38 38

Capital surplus 29 29 29 29 29

Capital adjustments (29) (29) (29) (29) (29)

Retained earnings 1,232 1,151 1,227 1,336 1,454

Minority interest 11 10 11 12 13

Shareholders’ equity 1,271 1,230 1,344 1,493 1,650

Income Statement (W bn) )


Sales 868 995 1,267 1,361 1,377

COGS 731 806 860 892 900

Gross profit 137 189 407 469 477

SG&A expenses 107 117 268 293 283

Operating profit 30 72 139 176 194

Financial income 6 6 5 6 6

Interest income 5 5 5 6 6

Financial expenses 20 28 27 28 24

Interest expenses 20 28 27 28 24

Other non-operating profit 9 (137) (7) 0 (12)

Gains (Losses) in associates, subsidiaries and JV

1 1 1 1 1

Earnings before tax 25 (87) 111 155 165

Income taxes 8 (15) 28 37 40

Net profit 18 (72) 83 118 125

Net profit of controlling interest

17 (72) 83 117 124

Other comprehensive profit (54) 38 38 38 38

Total comprehensive profit (37) (34) 122 156 163

Total comprehensive profit of controlling interest

(38) (33) 121 155 162

EBITDA 63 110 178 214 232

Key Financial Data (W bn)


Per-share data (KRW)

EPS 2,449 (10,159) 11,732 16,637 17,740

BPS 170,759 165,417 180,495 200,071 220,672

DPS 1,000 1,000 1,000 1,000 1,000

Growth (%)

Sales growth 5.6 14.6 27.3 7.5 1.2

OP growth 45.8 140.7 93.3 26.3 10.4

NP growth 27.8 0.0 0.0 41.0 6.6

EPS growth 27.7 0.0 0.0 41.8 6.6

EBITDA growth 38.0 75.3 61.1 20.4 8.2

Profitability (%)

OP margin 3.4 7.2 11.0 12.9 14.1

NP margin 2.0 (7.2) 6.5 8.6 9.0

EBITDA margin 7.3 11.1 14.0 15.7 16.8

ROA 0.9 (3.5) 3.8 5.0 5.1

ROE 1.3 (5.8) 6.5 8.3 8.0

Dividend yield 2.5 2.1 1.2 1.0 1.0

Stability

Net debt (W bn) 391 404 337 255 242

Debt/equity ratio (%) 40.6 46.0 38.1 29.7 26.3

Valuation (x)

PE 16.5 NM 7.2 6.1 5.7

PB 0.2 0.3 0.5 0.5 0.5

PS 0.4 0.4 0.5 0.6 0.6

EV/EBITDA 10.8 6.8 5.4 4.7 4.3

Cash Flow (W bn)


C/F from operations (10) 32 208 158 41

Net profits 18 (72) 83 117 125

Depreciation 31 37 38 37 36

Amortization 2 1 1 1 1

Net incr. in W/C (59) (67) 81 1 (121)

Others (2) 133 5 2 0

C/F from investing (271) (19) (144) (74) (22)

Capex (205) (58) (67) (67) (66)

Decr. In fixed assets 7 7 0 0 0

Net incr. in current assets (75) 26 (23) 18 35

Net incr. in intangible assets (1) (0) (10) (5) (2)

Others 3 6 (44) (20) 11

C/F from financing 177 25 (61) (75) (17)

Incr. in equity 0 0 0 0 0

Incr. in debt 184 32 (53) (68) (10)

Dividends (7) (7) (7) (7) (7)

Others 0 0 (1) 0 0

C/F from others (0) 0 0 0 0

Increase in cash (104) 38 4 9 2

Note: K-GAAP (non-consolidated)


29

Sungshin Cement (004980) Not rated

Liquidity risks to ease in 2014

To start regaining market share: Sungshin Cement (Sungshin) had a 15% market share in the early 2000s but it fell to as low as 11% in 2011 when competition was at its peak. Sungshin lost its market share mostly to Lafarge Halla Cement (Lafarge) and handed over its third slot to the company. But with Lafarge accumulating losses in 2012, Sungshin was able to regain share to as much as 13%. We believe aggressive unit cost cuts implemented by Lafarge eventually paved the way for industry restructuring. Of note, Sungshin was the biggest loser from Lafarge’s pricing strategy as its operational areas were located near Lafarge’s. But Sungshin is now regaining market share at the fastest pace. As Sungshin’s plant in Bugang-myeon is located within Sejong Special Autonomous City, the company has been enjoying greater shipments since 2013 thanks to the development of Korea’s new administrative center and it should continue to benefit in 2014. With utilization seemingly hovering ~60%, the company has ample potential to boost its presence. An attempt to raise cement prices 9.4% and benefit from lower bituminous coal input price: Sungshin already told remicon makers that it would lift its cement prices 8.8% from March 1. If we assume the increase takes effect on May 1, two months behind the planned schedule, Sungshin’s 2014F OP would reach W88bn, up 97.8% YoY. If its attempt to raise prices is foiled, OP would end up at W50bn in 2014F, up 11.9% YoY. Backed by price rises in 2012 and lower bituminous coal prices in 2013, most cement makers have turned around. The timing and term of contracts to purchase bituminous coal differ by company. Sungshin usually signs a contract for a six-month to one-year span. As such, it gained only a marginal benefit from the lower bituminous coal price in 2013 compared to peers. But it is positioned to enjoy lower material costs in earnest in 2014. The input price as of November 2013 is down 4.8% YoY at USD100/tonne and the company will likely make a better deal in March this year. We forecast its bituminous coal purchase amount in 2014 to fall W5bn YoY, which could partially offset the YoY rise for electricity and transportation costs by W5bn and W3bn, respectively, this year.

Yr to Sales OP EBT NP EPS % chg EBITDA PE EV/EBITDA PB ROE

Dec (W bn) (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%)

2008A 582 (38) (79) (79) (4,209) NM 30 NM 23.3 0.2 (19.6)

2009A 626 14 16 15 786 NM 82 12.3 8.8 0.5 3.8

2010A 522 (67) (101) (94) (4,992) NM (6) NM NM 0.2 (24.6)

2011A 486 (43) (40) (37) (1,993) NM 11 NM 60.5 0.1 (10.4)

Stock price (Feb 20, KRW) 9,290

Market cap (USD mn) 209

Shares outstanding (mn) 24

52W High/Low (KRW) 9,290/4,855

6M avg. daily turnover (USD mn) 0.7

Free float (%) 69.2

Foreign ownership (%) 4.3

2012A 547 16 9 3 180 NM 69 26.1 9.6 0.3 1.0

Performance

1M 6M 12M

Absolute (%) (2.1) 29.1 77.0

Rel. to Kospi (%p) (0.5) 21.9 77.8

Kyungja Lee 822-3276-6155 [email protected] Hyungjoon Ahn 822-3276-4460 [email protected]


30

Time for book growth: Before the Asian financial crisis, Sungshin invested W400bn to build its no. 6 kiln with 3mn tonnes capacity, the world’s biggest for a single unit. Accordingly, Sungshin’s capacity expanded to 7mn tonnes but its utilization plunged amid the crisis. The company’s financial structure was considerably undermined with net debt reaching W920bn in 1998. But it should reduce net debt by more than W50bn YoY to W430bn in 2014F given its restructuring efforts such as the sale of entire affiliates. Accordingly, Sungshin’s interest expenses should drop more than W5bn YoY in 2014F. It appears the company has gained confidence from the financial community after its aggressive restructuring drives to fight off the crisis. Sungshin’s BPS was stagnant as W41bn out of W45bn OP were booked as interest expenses in 2013. But in 2014, Sungshin should see its book grow markedly thanks to a significant OP boost and gradual drop in interest expenses. It is time to expect dramatic growth after a lengthy slumber. Taking into account BW-related share dilution, we set the 2014F PB at 0.5x and PE at 4.0x.

Table 14. Earnings forecast (W bn)

2008 2009 2010 2011 2012 2013P 2014F 2015F

Sales 568 595 518 486 547 609 675 697

Ex-factory price (KRW/tonne) 54,302 61,767 58,386 64,324 69,082 69,082 75,299 75,299

COGS-to-sales 88.3% 81.5% 93.8% 89.3% 82.9% 78.3% 72.7% 73.2%

OP (38) 11 (63) (45) 16 45 88 90

OPM -6.7% 1.8% -12.2% -9.3% 2.9% 7.3% 13.1% 12.9%

EBITDA 27 124 (1) 61 108 135 178 180

Non-operating income (40) 4 (42) 5 (7) (41) (34) (31)

(Interest income) 3 20 2 2 2 2 2 2

(Interest costs) 51 50 48 49 48 41 36 33

EBT (79) 15 (103) (40) 9 3 54 59

Tax 0 0 (7) (3) 6 0 0 0

NP (79) 15 (96) (37) 3 3 54 59

Note: Assumed prices to be lifted 9.4% from May 1, 2014 Source: Company data, Korea Investment & Securities

Figure 31. Top seven market share changes – Lafarge Halla shrank, Sungshin regained

Figure 32. PB band

-3%

-2%

-1%

0%

1%

2%

3%



Market share grew for companies with widened productbases and that avoided excessive capex

(p)

0.2x

0.4x

0.6x

0.8x

1.0x

0

5,000

10,000

15,000

20,000

25,000

30,000

Dec-04 Jun-06 Dec-07 Jun-09 Dec-10 Jun-12 Dec-13

(KRW)

Source: Korea Cement Association Source: Korea Cement Association


31

Balance Sheet

Fiscal year ending Dec. (W bn) 2008A 2009A 2010A 2011A 2012A

Current assets 235 295 307 265 307

Cash & cash equivalents 4 12 3 2 4

Accounts & other receivable 154 203 223 200 224

Inventory 72 71 57 52 63

Non-current assets 1,044 864 942 886 815

Investments 108 38 38 22 10

Tangible assets 893 771 812 773 684

Intangible assets 37 31 37 36 34

Total assets 1,279 1,158 1,248 1,151 1,122

Current liabilities 424 518 493 583 506

Accounts payable 130 126 100 99 107

ST debt & bonds 54 72 215 195 295

Current portion of LT debt 230 317 172 284 85

Non-current liabilities 448 251 378 233 288

Debentures 235 90 130 65 105

LT debt & financial liabilities 100 62 152 83 87

Total liabilities 872 768 871 816 794

Controlling interest 402 383 378 337 329

Capital stock 104 104 104 104 104

Capital surplus 221 142 23 24 24

Capital adjustments (1) (1) (1) (1) (3)

Retained earnings (79) 15 256 223 224

Minority interest 6 7 0 (2) (0)

Shareholders’ equity 408 390 378 335 329

Income Statement )


Sales 582 626 522 486 547

COGS 511 505 486 447 453

Gross profit 71 120 36 39 94

SG&A expenses 109 106 103 82 78

Operating profit (38) 14 (67) (43) 16

Financial income 3 20 3 2 2

Interest income 2 2 3 2 2

Financial expenses 52 51 48 50 48

Interest expenses 43 46 48 50 47

Other non-operating profit 9 33 6 51 39

Gains (Losses) in associates, subsidiaries and JV

(0) (0) 0 0 0

Earnings before tax (79) 16 (101) (40) 9

Income taxes 0 0 (7) (3) 6

Net profit (79) 16 (94) (37) 3

Net profit of controlling interest

(79) 15 (94) (37) 3

Other comprehensive profit 0 0 (8) (4) (10)

Total comprehensive profit (79) 16 (102) (42) (7)

Total comprehensive profit of controlling interest

(79) 15 (102) (42) (6)

EBITDA 30 82 (6) 11 69

Key Financial Data

Fiscal year ending Dec. 2008A 2009A 2010A 2011A 2012A

Per-share data (KRW)

EPS (4,209) 786 (4,992) (1,993) 180

BPS 19,709 18,785 18,560 16,571 16,161

DPS 0 0 0 0 0

Growth (%)

Sales growth NM 7.5 (16.6) (6.9) 12.5

OP growth NM NM NM NM NM

NP growth NM NM NM NM NM

EPS growth NM NM NM NM NM

EBITDA growth NM 175.1 NM NM 529.1

Profitability (%)

OP margin (6.6) 2.2 (12.8) (8.9) 2.9

NP margin (13.5) 2.4 (17.9) (7.7) 0.6

EBITDA margin 5.1 13.1 (1.2) 2.3 12.7

ROA (6.1) 1.3 (7.8) (3.1) 0.3

ROE (19.6) 3.8 (24.6) (10.4) 1.0

Dividend yield 0.0 0.0 0.0 0.0 0.0

Stability

Net debt (W bn) 615 526 654 621 565

Debt/equity ratio (%) 151.9 138.8 177.1 186.7 173.9

Valuation (x)

PE NM 12.3 NM NM 26.1

PB 0.2 0.5 0.2 0.1 0.3

PS 0.1 0.3 0.2 0.1 0.2

EV/EBITDA 23.3 8.8 NM 60.5 9.6

Cash Flow


C/F from operations 19 17 (45) (7) 12

Net profits (79) 16 (94) (37) 3

Depreciation 65 66 53 52 51

Amortization 3 2 2 2 2

Net incr. in W/C 13 (38) (8) 16 (23)

Others 17 (29) 2 (40) (21)

C/F from investing (18) 70 (29) 55 48

Capex (11) (16) (32) (41) (46)

Decr. In fixed assets 1 80 2 58 116

Net incr. in current assets (9) 22 (1) 15 11

Net incr. in intangible assets (1) 0 0 1 (0)

Others 2 (16) 2 22 (33)

C/F from financing (0) (79) 71 (49) (58)

Incr. in equity 0 0 0 0 0

Incr. in debt 0 (79) 72 (48) (57)

Dividends 0 0 0 0 0

Others 0 0 (1) (1) (1)

C/F from others 2 0 0 (0) (0)

Increase in cash 3 8 (4) (2) 2

Note: K-GAAP (non-consolidated)


32

Changes to recommendation and price target

Company (Code) Date Recommendation Price target Company (Code) Date Recommendation Price target

Hanil Cement (003300) 02-21-14 BUY W155,000Sung Shin Cement (004980)

02-21-14 NA -

Hanil Cement(003300) Sung Shin Cement(004980)

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14

0

2,000

4,000

6,000

8,000

10,000

12,000

Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13

■ Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance

BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and +15% Underweight: Expected to give a return of -15% or less Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings.

■ Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months

Overweight: Recommend increasing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization.

Neutral: Recommend maintaining the sector’s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market

capitalization.

■ Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report.

■ Important Disclosures

As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of the companies mentioned in this report.

There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance. Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for the companies mentioned in this report in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from the companies mentioned in this report in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment banking services from the companies mentioned in this report in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in securities of the companies mentioned in this report at the time that the research report was published.

Korea Investment & Securities Co., Ltd. does not own over 1% of Hanil Cement,Sung Shin Cement shares as of February 24, 2014. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analysts covering these companies nor their associates own any shares of as of February 24, 2014. Prepared by: Kyungja Lee

This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client’s judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions.

HEAD OFFICE CHUN SOO LIM, Executive Vice President, Head of Global Institutional Group ([email protected] +822 3276 5800)

PAUL CHUNG, Sales Trading ([email protected] +822 3276 5843)

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Toll free: US 1 866 258 2552 HK 800 964 464 SG 800 8211 320

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New York, NY 10019

Fax: 1 201 592 1409

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Korea Investment & Securities Asia, Ltd.

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Fax: 852-2530-1516

SINGAPORE SUNG NAMGOONG, Managing Director, Head of Singapore Sales ([email protected] +65 6501 5601)

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Korea Investment & Securities Singapore Pte Ltd

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Singapore 048616

Fax: 65 6501 5617

LONDON JJ MOON, Managing Director ([email protected] +44 207 065 2765)

Korea Investment & Securities Europe, Ltd.

2nd Floor, 35-39 Moorgate

London EC2R 6AR

Fax: 44-207-236-4811

Telex: 8812237 This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. This report is provided solely for the information of professional investors who are expected to make their own investment decisions without undue reliance on this report and the company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is not intended for the use of private investors. 2014. All rights reserved. No part of this report may be reproduced or distributed in any manner without permission of Korea Investment & Securities Co.,Ltd.

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