The author is an analyst of NH Investment & Securities. He can be reached at firstname.lastname@example.org. — Ed.
Korea Zinc achieved record-high quarterly OP in 2Q22, topping consensus. In 3Q22, earnings decline is likely due to falling zinc prices. Investments in renewable energy and hydrogen, rechargeable battery materials, and resource recycling are all positive for the firm’s long-term EV growth.
Impacts from metal price decline are inevitable; strengthening of resource recycling business to drive future growth
– We maintain a Buy rating and TP of W580,000 for Korea Zinc (010130.KS). Our TP equates to a 2022E P/E of 12.5x and P/B of 1.35x (ROE of 11.2%). Affected by metal price decrease amid fears of recession, the firm’s share price has trended down as of late. However, China’s economic stimulus is expected in 2H22, and the company’s growth strategy focusing on its ‘Troika Drive’ (renewable energy and hydrogen, rechargeable battery materials, and resource recycling businesses) should drive a long-term expansion in EV.
– Having fallen from an average of US$3,729/ton in 1Q22 and US$3,932/ton in 2Q22 to US$3,148/ton on Jul 27, LME zinc price downtrend is likely to have a negative impact on Korea Zinc’s 2H22 earnings. However, China’s economic stimulus and high electricity costs should help to support zinc prices.
– On Jul 11, Korea Zinc acquired a 73.2% stake in Igneo Holdings, a US electronic waste recycling company. We view this move as representing a strengthening of Korea Zinc’s resource recycling business, one of the main pillars of its Troika Drive.
2Q22 review: OP of W381.4bn tops consensus by 7.8%
– On a provisional basis, Korea Zinc reported consolidated 2Q22 sales of W2.85tn (+20.0% y-y, +7.1% q-q), OP of W381.4bn (+39.7% y-y, +34.0% q-q), and NP (excluding minority interests) of W290.9bn (+50.2% y-y, +84.3% q-q), with sales missing consensus by 6.3% but OP and NP outstripping the market projections by 7.8% and 16.9%, respectively.
– In 2Q22, OP reached a quarterly record high for the firm, helped by: 1) zinc metal price expansion; 2) the full reflection of zinc concentrate treatment charge (TC) increase; and 3) US dollar appreciation against the won. Non-operating income included approximately W76bn in derivatives-related gains from Sorin Corporation and Zinc Oxide Corporation.
– We forecast Korea Zinc’s 3Q22 OP at W263.5bn (-0.8% y-y, -30.9% q-q). Amid falling metal prices, sales volume recovery is expected to be a key variable.