The author is an analyst of Shinhan Investment Corp. He can be reached at hyunwook.kim@shinhan.com. -- Ed.

In the midst of internal changes

SeAH Besteel is Korea’s largest special steelmaker with domestic market share of over 40% as of 2019. The company is expanding nonferrous metal and special steel operations. First, it increased its stake in SeAH Changwon Integrated Special Steel to 100% in March 2020. Second, the wholly-owned subsidiary established CTC in 3Q19 to manufacture seamless stainless steel tubes for export to China. Third, SeAH Besteel acquired a 100% stake in Arconic Korea (renamed SeAH Aerospace and Defense) in March 2020, a manufacturer of aluminum-zinc alloy products for the aerospace and defense industries.

The entry of new competition into the special steel market had prompted SeAH Besteel to reduce the portion of automotive steel sales, and increase exports via overseas subsidiaries and supply of high valued-added products such as bearing steel.

2020 forecasts: Sales KRW2.7tr (-8% YoY), OP KRW44.9bn (+2% YoY)

For 2020, we forecast sales at KRW2.7tr (-8% YoY) and operating profit at KRW44.9bn (+2% YoY). Earnings slump at overseas subsidiaries will likely continue in 2Q. Iron ore prices are projected to rise due to the spread of COVID-19 pandemic in iron ore producing countries and growing demand in China. Iron scrap prices should also climb. Sales, however, are expected to rebound from 2H20 as domestic automakers recently resumed production at their overseas plants. SeAH Aerospace and Defense will be included in consolidated statements from 2Q. Despite lower sales volume, the newly acquired firm is forecast to make a visible contribution to consolidated earnings with its high profit margin.

Initiate coverage with BUY for a target price of KRW12,700