Deutsche Bank Markets Research Asia South Korea Resources Metals & Mining Industry Korea Steel Date 6 July 2016 Forecast Change Weaker-than-expected data reduces consensus estimates Range-bound sector performance expected ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Sanghi Han, CFA Research Analyst (+82) 2 316 8900 sanghi.han@db.com Dianna Kang Research Analyst (+82) 2 316 8901 dianna.kang@db.com Key Changes Company Target Price Rating 005490.KS 245,000.00 to 237,000.00(KRW) - 004020.KS 62,800.00 to 59,000.00(KRW) - Source: Deutsche Bank DBe vs. consensus OP Source: Deutsche Bank 2Q earnings release date Company Date POSCO Jul 21 Hyundai Steel Jul 22 Source: Deutsche Bank 2017E net profit revision Company Previous Current Diff. POSCO 1,783 1,770 -0.7% Hyundai Steel 808 770 -4.7% Source: Deutsche Bank estimates Related recent research Date Downside risks in 2H earnings; cut POSCO and Hyundai Steel to Hold Sanghi Han, CFA 30 Apr 2016 Source: Deutsche Bank Since the peak in April, Korea steel stocks and regional steel prices have fallen sharply over the past two months. We identify investors' interests to buy the sector with potential inventory pick-up in Q3 and expectations of a supply side restructuring in China, but we find no reason to change our neutral view on the sector. Due to the earlier and stronger downturn after the recovery in Jan-Apr, Q2 consensus has been revised downward, which is important to the long-term stock price outlook. Reflecting the industry’s past two months data, we cut price targets and earnings for POSCO and Hyundai Steel. We advise investors to stay on the sidelines; maintaining Hold for both stocks. Narrowing spread in May-June leads to ... With steel prices dropping more than those of steel-making materials over the past two months, Chinese steel spreads have plunged 26% (HRC) and 33% (rebar). We attribute this to: a) seasonal inventory correction and b) a retreat in speculation demand with tightening liquidity. Despite market expectations that inventory would rebound in the near term to cope with high seasonality in Q4, we have not seen an inventory uptrend in Q3 since 2010. Even in 2012-13 when Chinese steel demand grew at a mid- to high-single digit, HRC and rebar inventory fell 16% on average during Q3. Trending down Q2 consensus and downward pressure in H2 Compared with the figures at the end of April when we presented our initial Q2 estimates in the sector note and downgraded the two stocks, Bloomberg consensus has been revised downward by c.5%. This has been repeated since 2011, with high expectations at the beginning of year but more sluggish fundamentals such as not recovering demand/supply pulling down the street’s earnings estimates. We think this time is not different, due to: a) lack of constructive regional demand/supply even with the assumption of a supply side reform; and b) limited possibility of further domestic price hikes. Considering the anti-dumping efforts especially from developed countries against Chinese steel products, we expect China to dump more products to emerging countries including Korea. The gap between domestic and Chinese import prices is likely to widen, which could lead to unfavorable domestic demand/supply dynamics, in our view. POSCO: DB operating profit is 5% lower than consensus We maintain Hold on POSCO with a revised price target of W237,000. We lower our Q2 operating profit estimates to W715bn from W724bn to reflect the May-June data points. Our W715bn is 5% lower than consensus. Additionally, we forecast H2 figures to be 23% lower than consensus. Our target price is based on an SOTP valuation reflecting the lithium business (see details on valuation and risks on page 7). Hyundai Steel: DB operating profit is 5% lower than consensus We maintain Hold on Hyundai Steel with a new price target of W59,000. We lower our Q2 operating profit estimates to W384bn from W482bn to factor in reduced production from the #1 blast furnace at around a low double-digit run rate Our W384bn is 5% lower than consensus. Our target price is derived using the Gordon-based PBR methodology (see details on valuation and risks on page 9). Distributed on: 07/06/2016 04:04:33GMT 6 July 2016 Metals & Mining Korea Steel Page 2 D