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We maintain BUY and TP of KRW67,000 for Hyundai Steel. Our TP is based on the P/B-ROE model (8.90% COE; 4.21% sustainable ROE; 0.48% TGR); sustainable ROE was lowered (4.82%→4.21%) with the absorption of a higher-than-expected rise in input costs, but COE was in line because of a decline in beta. As such, our TP is unchanged (5.3x 12m fwd implied P/E, 0.44x 12m fwd implied P/B) with upside of 62.4%.
2Q22 forecast: consolidated OP of KRW785.5bn (+44.1% YoY), input costs to be passed through
We forecast 2Q22 consolidated revenue at KRW7.8tn (+37.9% YoY, +11.1% QoQ), OP at KRW785.5bn (+44.1% YoY, +12.6% QoQ) and NPM (to controlling int.) at KRW518.5bn (+54.7% YoY, +8.9% QoQ). Strong downstream demand should raise steel product sales 3.1% YoY. 1H22 price increases for steel plates for automobiles (~KRW150,000/mt) and heavy plates for shipbuilding (~KRW100,000/mt), as well as higher rebar distribution prices (+7.2% QoQ), should raise overall ASP 35.7%, offsetting most of the cost increase.
Focus on pace of recovery in demand for steel products in China
Close attention should be paid to how fast Chinese steel demand recovers. Steel product prices in China have been low because of COVID lockdowns in major cities. However, there is growing sentiment that demand will recover following recent easing measures and bolstered government support. Despite falling iron ore prices, coking coal prices have risen on the back of the Russia-Ukraine war, putting upward pressure on input costs. A recovery in Chinese demand should have a positive impact on 2H22 steel product prices.
Risk factors: Continual rise in input costs, delay in COVID recovery in China, more Chinese steel production
Main risk factors are: 1) continual rise in input costs; 2) delay in COVID recovery in China and tepid demand for steel products due to global financial retrenchment; and 3) deteriorating supply-demand balance due to increase in Chinese crude steel production.