The authors are analysts from Shinhan Investment Corp. They can be contacted at [email protected] and [email protected] respectively. — Ed.
Consolidated and autonomous POs will disappoint in 3Q22
Korea Zinc is expected to have generated consolidated sales of KRW 2.55 tr (+5.5% YoY) and operating profit of KRW 263.3 billion (-0.9% YoY) for 3Q22 , missing consensus estimates of KRW 2.69 tr for sales and KRW 285.2 billion for operations. profit. On a standalone basis, we expect sales of KRW 1.87 tr (+9.8% YoY) and operating profit of KRW 247.1bn (+12.9% YoY), both below consensus (sales of KRW 1.93 tr, operating profit of KRW 263.4 bn).
The weak earnings were mainly caused by disappointing sales volume growth. In a context of quarterly declines in the prices of the main metals (zinc -16.6%, lead -10.5%, gold -7.8%, silver -15.5%), the volume of sales had not increased strongly compared to the previous quarter due to the economic slowdown. The year-on-year decline in consolidated operating profit is attributed to weak profits at Sun Metals Corporation, an Australian subsidiary of Korea Zinc. Along with large zinc refineries in Europe, its subsidiary also faces production disruptions triggered by rising electricity costs, which are bound to lead to reduced production.
Limited zinc supply due to global power shortages versus low demand
The global energy crisis has led to the suspension of production at the main zinc refineries. With prices of energy resources (LNG, coal, etc.) typically rising in winter, the growing possibility of cold spells has raised concerns about prolonged energy shortages in some regions. Despite a tight supply in the spot market, zinc prices are expected to remain in the low to mid range of USD 3,000 per tonne through the end of the year given the rate hikes by the US Fed and the sluggish growth of the Chinese economy.
If global power shortages continue in 4Q22, production disruptions from the Australian subsidiary could weigh on earnings, similar to 3Q22. We need to monitor the situation closely. For 4Q22, we expect sales at KRW 2.86 tr (-4.2% YoY) and operating profit at KRW 337.9 billion (+17.6% YoY) assuming the company recorded double-digit quarter-on-quarter sales volume growth as well as a resumed partial decline in its subsidiary’s production volume.
Hold the BUY and lower the target price to 680,000 KRW
We are maintaining our BUY rating on Korea Zinc, but lowering our price target from KRW 700,000 to KRW 680,000 due to our revised earnings forecast. While we don’t expect any visible momentum for strong near-term earnings growth, we believe that accumulating Korea Zinc stock during the correction remains a valid investment strategy. The company should benefit from the rise in the USD/KRW exchange rate and has relatively stable earnings visibility in the steel/non-ferrous metals sector.
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