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1、InitiatingcoverageSteelKorea/SteelStructuraldownturn22October2012NEUTRALWeinitiatecoverageoftheKoreansteelsectorwithaNEUTRALweighting.Weareconservativeonthesectoruntil2H13,giventhat:1)ourtarget12-monthforwardP/Bof0.89xofferslimitedupsidefromcurrentpricelevels(0.85x);2)earning
2、svisibilityremainslow,duetothequarterlyrawmaterialpricenegotiations,amiduncertaintyovertheglobaleconomy;and3)steelmakers’2013operatingprofitsarehighlylikelytofallshortofmarketconsensus,duetosluggishdemandandasubsequentfallinsteelprices.Werecommendinvestingin:1)POSCO,whichshou
3、ldseethesector’s-steadiestprofitgrowthStocksundercoverageinthemidtolongterm;and2)HyundaiHysco,whichshouldenjoystrongCompanyRatingPriceTargetpricePOSCO(005490KS)BUY357,000480,000earningsonglobalmarketsharegainsbyHyundaiMotorandKiaMotors.HyundaiHysco(010520KS)BUY45,40055,000Hyu
4、ndaiSteel(004020KS)HOLD83,0090,000DongkukSteel(001230KS)HOLD14,65014,000LimitedupsideNote:PricesareinKRW;pricecloseasof19October2012Thesteelsectorvaluationsareunattractive,asoursectortarget12MforwardP/Bof0.89x,basedonasustainableROEof8.8%,issimilartothecurrentP/Bof0.85x.Inter
5、msofrelativeP/B,theKoreansteelsector’svaluationdiscountIronoreandsteelpricetrendsversustheKOSPIremainsatitspast10-yearaveragelevelsof20%;Ironoreprice(LHS)unattractive,asthesteelmarketslumpislikelytopersistinto1H13.(US$/t)(US$/t)2101,000Domestic(RHS)190900Quarterlyrawmaterialp
6、ricenegotiationstolimitmargin170800150700improvement130600Duetotheswitchtothequarterlyrawmaterialpricenegotiationsin2010and110China(RHS)500weaksteelproductpricesamidsluggishdemand,steelproductpriceshave90400shownhighersensitivitytorawmaterialprices.ThequarterlyrawmaterialJan1
7、0Jul10Jan11Jul11Jan12Jul12pricenegotiationschemehasincreasedearningsvolatilityintheshorttermSource:MiraeAssetResearch,Bloomberg,Steeldailyandshouldleadtolimitedmarginimprovementinthelongterm.Duetothegrowingvolatilityinrawmaterialpricessince2H11,amidtheglobaleconomicSteelinven
8、torycycleindextrendsslump,therehasbeenalargediscrepancybetweensteelm
