Clear Directionality
The author is an analyst of Shinhan Investment Corp. He can be reached at jinmyung.lee93@shinhan.com. — Ed.
Continued efforts for business model innovation
SKC shares recently soared to a new high, bouncing back from correction caused by the COVID-19 pandemic. We believe this is attributable to management’s clear commitment to business model innovation as well as improvement in investor sentiment towards the electric vehicle (EV) sector. SKC has been focusing on strengthening its business model through the acquisition of a copper foil business, establishment of a joint venture in chemicals, and disposal of its stake in SKC Kolon PI. The company is also negotiating terms for the sale of SK Bioland and recently decided to invest into a sixth copper foil plant. Such efforts should help to raise market expectations for further growth going forward.
Earnings to normalize with 2Q20 OP forecast at KRW48.4bn (+76% QoQ)
Operating profit will likely reach KRW48.4bn in 2Q20 with the removal of one-off losses to lead to both QoQ and YoY improvement in earnings. By business, operating profit from chemicals is projected at KRW19.2bn (+10% QoQ), industrial materials at KRW9.7bn (+14% QoQ), mobility materials at KRW15bn (+125% QoQ), and growth businesses at KRW4.4bn (positive swing QoQ). Despite sluggish earnings from propylene oxide (PO), the chemicals business should see improvement on rising demand for propylene glycol (PG) used in hygiene products. The industrial materials business is expected to enjoy growth in sales volume on strong seasonality and favorable raw material prices. Mobility materials earnings should mark sharp QoQ improvement on removal of labor strike impact and recovery in capacity utilization rates at the company’s fourth plant.
Retain BUY and raise target price by 20% to KRW72,000
We raise our target price for SKC by 20% to KRW72,000, reflecting the rise in peer valuations on improving sentiment towards the EV sector. SKC’s earnings should improve in earnest from 2Q20, driven by: 1) copper foil capacity additions; 2) strong growth of the EV market; and 3) rise in earnings contribution from semiconductor materials. Increasing its focus on high value added materials, the company is adding production capacity for copper foil and expanding investment into its semiconductor materials business. Operating earnings contribution from SK Nexilis is expected to increase from 34% in 2020 to 44% in 2022. Germany and France recently expanded their EV incentives to more than double the amount offered in China. As a result, we believe EV market growth will be led by Europe, where all domestic EV battery makers have operations. SKC also stands to benefit with the growth momentum of its copper foil business to strengthen going forward.