Posco nov. 11, 2018

Posco is a Korean steel producer, the 5th biggest steel producer of the world with a production of > 40 mio. to steel/yr. and revenues of 54 bn$. Posco is focused on special steels as automotive steel to compete against the chinese manufacturer that mostly produce standard steel types.  

A motivation to buy POSCO is the low valuation PE of actually 7 - 8.

This is not a recommendation or proposal to do anything. It is my private personal opinion. I`m not independing as I own a position of Posco shares. 

Chances & Risks

The steel market is a very volatile market. The profits of POSCO did fluctuate in the last 5 years between 0.2 and 2.7 bn$ in average 1.2 bn$. The PE of 7 - 8 increases to 15 if the average profit of the last 5 years is applied.  

Posco announced a very ambitious investment plan. If it works well the company will produce more steel, battery materials and will be more profitable in a few years. The investment plan if fully realized could eat up the complete EBITDA or incease depth. Any downturn of the steel market will require POSCO to cut its investment programm.    

POSCO got unionized now. Korean unions are aggressiv and thus this might mean strikes and labor conflicts and hence might cut into the profits. 

Some Data & Information

2018/11/11

Q3 net profit rose 17 percent from a year earlier on shareholding gains from affiliates. In the third quarter that ended on September 30, net profit jumped to USD 931 million. Operating profit jumped 36 percent to 1.34 bn$. Sales climbed 9.1 percent to 14.4bn$. (2)

2018/09/29

...market assumption of POSCO's operating profit for this year stands at 5.5 trillion won. (1) about 4.9 bn$

Posco announced on Sept. 3 a 45 trillion won (40 bn$) investment that means 9 tn/yr! and 20,000-people hiring plan to upgrade its steel and battery capacities by 2023. (1) The 9 trillion won amount is even higher than the company's 2017 earnings before interest, tax, depreciation and amortization (EBITDA) of 7.9 trillion won. (1) POSCO will invest 26 trillion won to expand its steelmaking capacity, 10 trillion won for its battery materials businesses (Li hydroxide, Li carbonate) and 9 trillion won for energy businesses. 

Also, adding to investors' concerns is the recent organization of two labor unions at POSCO. The steelmaker has virtually been without a union for the past five decades. Though the union is in its early stage, industry officials point out that management-labor relations at POSCO will face a huge change, affecting the operation of the group. (1)

 

Revenues: 54 bn$/17

Net Income: 2.7 bn$/17

Liabilities: 28 bn$/17

Number of Shares: 77 mio. 

Share Price oct. 1, 18: 295000 Won =264 $

Net Income of the last 5 years:

2017           2016      2015        2014        2013      Average

2.7bn$       1.2 bn$    0.2 bn$   0.6 bn$   1.2 bn$   1.2 bn$

Worldwide steel production: about 1600 mio. to/yr. biggest manufacturer China about 800 mio. to/yr. 

Biggest steel manufacturing companies: Arcelor Mittal about 100 mio. to/yr., POSCO No. 5 about 41 mio. to (2016) 

ROK Location for Steel Manufacturing 

GM put the business location ROK shortly ago in question. High costs aggressive labor unions created a loss of 1.5 bn$ in the last 3 years. A major issue for the steel industry are the energy prices. Due to destructive left politics energy prices might become challenging. It seems that manufacturing in the ROK faces similar challenges as that of other saturated industrial countries. Germany faced similar challenges in the last decades of the last centuries. They outsourced non core activities, established lean structures with plenty of lower paid contractors and lease workers, aggessive purchasing putting more volume to lower cost countries. I hope the POSCO management already smells the napalm. 

Business Location ROK  

the ROK was one of the poorest countries after the war in 1953. With very hard work and discipline they managed to become a developed country with a similar standard of living as South European countries. For ex. the Samsung Electronics memory chip division passed its international competitors by working 6 - 7 days a week achieving a 1/2 year advantage vs. international competition. One specific point in the ROK were always the veery aggressive labor disputes. Now it seems as the ROK is very saturated like other established industrial nations. The left government elected 2017 seems to do a destructive politics in favor of unions, gender, climate hoax, against nuclear power. High energy prices are a major challenge for the steel industry. I hope that the government or at least the potential voters smell the napalm.  

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Some references

(2) 2018/11/09 https://steelguru.com/steel/posco-q3-net-rises-17pct-yoy/524235#tag

(1) http://www.koreatimes.co.kr/www/tech/2018/09/693_255765.html

2018/09 (2)  https://eu.detroitnews.com/story/business/autos/general-motors/2018/04/12/general-motors-south-korea/33770137/