Sep 28, 2012
Outstanding profit margins continue to be seen at
synthetic fiber chain plays
CP (’12/09/27) W12,000
Strong earnings backed by rising portion of differential product, LM fiber
Thomas Bae – Possessing the largest short fiber production capacity in Korea, Huvis manufactures
822)768-7248,firstname.lastname@example.org polyester short fiber (400,000 tpa), filament yarn (100,000 tpa), and polyester chips
(140,000 tpa). Moreover, the company’s portion of differential products—such as
822)768-7605, email@example.com low melting point (LM) fiber—is steadily expanding.
– As it melts at low temperatures, LM fiber can be used without the need to add toxic
chemical glues. Key applications include automotive textiles, sofas, and bedding.
With Huvis currently holding a 40% share of the global market, it faces only three
competitors. Thanks to its niche market characteristic, LM fiber is not as cyclical in
nature as regular polyester fiber products; moreover, it exhibits higher margins.
Stable margins being maintained via help of eased supply-demand
conditions for raw materials (PTA, MEG)
– As raw material costs account for 75~80% of its COGS, Huvis’s earnings are highly
sensitive to raw material price fluctuation. In the past, the firm’s earnings have
plunged during PTA and MEG price surges.
– However, with China’s domestic PTA self-sufficiency ratio having increased, the PTA
market has now been transformed from a seller’s market into buyer’s market.
Looking ahead, we believe that PTA prices will remain weak, drawing attention to a
number of planned capacity expansion projects in China. Moreover, given the
historical-high inventory levels being seen at present, MEG prices are unlikely to
surge any time soon.
Offers attractive valuations and stable earnings
– Displaying a stable earnings trend, Huvis recorded outstanding profit margins in
Kospi 1,988.70 1H12. Considering the company’s healthy dividend yield of 2.5~3%, we view its
shares (currently trading at a 2012 P/E of 7.4x) as being attractively valued.
Market cap (common) US$371.6mn
Outstanding shares (common) 34.5mn – Of note, Huvis’s shares are now trading at a 2012 P/B of 1.1x versus our target P/B of
52W high (‘12/03/06) W12,300 1.6x (2012 ROE of 15.5%, sustainable growth rate of 3.1%, retention rate of 20%).
low (‘11/04/25) W7,700
Dividend yield (2011) 0.00% Earnings forecasts (Units: Wbn, won, x, %)
Foreign ownership 10.5%
2008 2009 2010 2011 2012E
Sales 942.4 952.5 1,125.3 1,386.7 1,319.8
Huvis Adj operating profit 2.6 22.3 41.5 62.9 66.5
150 Adj operating margin 0.3 2.3 3.7 4.5 5.0
130 EBITDA 44.2 63.9 81.7 89.9 90.5
110 Net profit -26.9 3.6 24.0 62.4 56.0
90 P/E N/A N/A N/A N/A 7.4
70 P/B N/A N/A N/A N/A 1.1
50 EV/EBITDA 4.8 2.0 1.7 0.6 4.0
'12.2 '12.4 '12.6 '12.8 ROE -16.0 2.2 13.0 26.3 15.5
Note: K-IFRS non-consolidated (separate) basis
Source: Woori I&S Research Center estimates
Manufacturer of Possessing the largest short fiber production capacity in Korea, Huvis manufactures polyester
polyester short fiber, short fiber (400,000 tpa), filament yarn (100,000 tpa), and polyester chips (140,000 tpa).
filament yarn, and Accounting for 56% of its total sales, the company’s short fiber products include LM fiber,
polyester chips low melting point olefin (OLM) fiber, conju, and cotton spinning. We note that Huvis is a
global leader in the LM fiber (including OLM) market.
As it melts at low temperatures (110 Celsius) and boasts strong adhesive force, LM fiber is
used as an adhesive for non-woven fabrics. In line with continuous efforts to reduce the usage
of toxic chemical glues, the key applications for LM fiber have been expanded to include
represent key to
automotive textiles, sofas, and bedding. Of note, there exist only four companies (Huvis,
Woongjin Chem, Taiwan-based Nanya Plastic and Far Eastern) that are capable of producing
LM Fiber—Huvis currently holds a 40% share of the global market, with Woongjin Chem
possessing a 20% share.
LM fiber is less The LM fiber market (500,000 tons pa) is a niche market representing only 1.7% of the global
cyclical in nature polyester market (29mn tons pa). Thanks to expanding applications and rising automobile
than regular textile-related demand, LM fiber is not as cyclical in nature as regular polyester fiber
polyester fiber products. We note that major LM fiber players finished their LM fiber capacity expansion
products plans in 2011, and there are no known major expansion in place for 2012~2013. At present,
Woongjin Chem has a LM fiber capacity expansion project (30,000 tons pa) slated to take
place over 2013~2014; however, given rising group-related risk, it is uncertain at this juncture
LM fiber players whether this expansion effort will be carried out as initially planned. Looking at Taiwan-
have no major based Far Eastern, we note that its capacity expansion project (30,000 tons) has been put off
expansion plans in until after 2015 due to technical issues.
place for 2012~2013
Huvis’s product mix In order to produce more LM fibers, Huvis has been converting its regular fiber production
to improve on rising lines to LM fiber lines. The company additionally expanded its LM fiber lines by 30,000 tons
sales contribution in 2H11, and doubled its OLM fiber production capacity (18,000 tons pa → 36,000 tons pa)
from LM fiber in 2H12 via line conversion. Going forward, the rising sales contribution from LM fiber
products should lead to an improved product mix, ultimately improving margins.
Sales breakdown, by product Huvis’s short fiber production breakdown
Chip Others ’09~’11 Regular products
19% 1% 7,841
Short fiber (50.6%)
Filament yarn 3,724
24% 2,476 (48.3%)
2009 2010 2011 1H12
Source: Huvis, Woori I&S Research Center Source: Huvis, Woori I&S Research Center
Huvis enjoying Thanks to its differentiated products, Huvis enjoys higher margins than other polyester yarn
higher margins than players, who recorded operating margins below 3%-level in 2H11 amidst the European fiscal
peers via crisis and Chinese economic recession. While Huvis’s margins on its filament yarn shrank
differentiated over this same period, its margin on short fiber rose to the 5%-level in wake of the company’s
products LM product-related capacity expansion efforts.
Quarterly earnings Looking at 2H12, we believe that Huvis’s quarterly earnings will remain stable thanks to its
to remain stable in greater reliance on differentiated products. We forecast that operating profit this quarter will
2H12 dip 10% q-q to W15.2bn due to a reduced number of operating days during the summer;
however, operating profit should rise to W17.1bn in 4Q12 on OLM capacity expansion and
an improved product mix.
Quarterly operating margin
-6 TK Chem
Daehan Synthetic Fiber
(%) 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12
Note: Earnings at the fiber unit only reflected for Hyosung
Source: Company data, Woori I&S Research Center
Quarterly earnings (IFRS non-consolidated (separate)) (Units: Wbn, %)
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12E 4Q12F
Sales 381.0 329.7 341.7 333.3 336.5 323.4 325.4 334.5
Short fiber 217.7 177.7 195.0 193.6 190.3 186.7 188.3 191.4
Filament yarn 74.3 65.0 60.4 60.1 59.5 58.5 60.4 63.4
Chip/other 85.6 83.4 82.0 75.8 78.4 70.8 76.7 79.7
Adj operating profit 17.9 18.9 14.0 16.7 17.4 16.8 15.2 17.1
Short fiber 8.5 8.5 8.1 11.5 8.9 13.9 12.1 13.1
9.4 10.4 5.9 5.1 8.5 3.0 3.1 4.3
Adj operating margin 4.7 5.7 4.1 5.0 5.2 5.2 4.7 5.1
Short fiber 3.9 4.8 4.2 5.9 4.7 7.4 6.4 6.8
5.8 6.8 4.0 3.7 5.8 2.2 2.3 3.0
Source: Huvis, Woori I&S Research Center estimates
Polyester yarn’s key Huvis’s major raw materials include PTA and MEG—of note, one unit of polyester yarn
materials include requires PTA (0.88) and MEG (0.33). As raw material costs account for 75~80% of its
PTA and MEG COGS, Huvis’s earnings are highly sensitive to raw material price fluctuations. In the past,
the firm’s earnings have plunged during PTA and MEG price surges.
Indeed, PTA and MEG were seller’s markets until 2~3 years ago; as such, higher prices
following supply disruptions used to weigh on earnings at buyers. However, with China’s
Both PTA and MEG domestic PTA self-sufficiency ratio having increased, the PTA market has now been
shift from supplier’s transformed from a seller’s market into buyer’s market. Looking ahead, we believe that
market to buyer’s PTA prices will remain weak, drawing attention to a number of planned capacity expansion
market projects in China.
As for MEG, inventory remains at a high level due to continued inflow amid rising utilization
rate in the Middle East, defying the expectations for tight supply that had existed in early
2012. In fact, the Middle East now accounts for more than 60% of China’s MEG imports.
Accordingly, rapid increases in MEG prices (similar to those seen in the past) are unlikely to
be experienced any time soon.
Raw material breakdown PET chip grade, PTA and MEG prices
($/ton) PET Chip grade MEG PTA
'10.10 '11.1 '11.4 '11.7 '11.10 '12.1 '12.4 '12.7
Source: Huvis, Woori I&S Research Center Source: Platts, Woori I&S Research Center
PTA supply/demand China’s MEG import
('000 tons) Demand (LHS) Output (LHS) (%) (ton) Import (LHS)
60,000 110 700,000 70%
Demand/output (RHS) Middle East (RHS)
30,000 100 50%
0 90 0 30%
'08 '09 '10 '11 '12E '13F '14F '15F 09.03 09.08 10.01 10.06 10.11 11.04 11.09 12.02 12.07
Source: Industry data, Woori I&S Research Center Source: Platts, Woori I&S Research Center
View 2012 P/E of Given stable earnings and a payout ratio of around 20%, we estimate that Huvis’s 2012 DPS
7.4x as being will be in the W300~350 range (dividend yield of 2.5-3% based on current price). Currently
attractive given trading at a 2012 EPS of 7.4x, we view Huvis’s shares as being attractively valued, believing
dividend yield of that the company is undervalued compared to competing domestic and global synthetic fiber
2.5~3% and material producers.
Undervalued at 2012 Using our target P/B, we estimate Huvis’s fair P/B at 1.6x. Of note, we reflected 2012 ROE of
P/B of 1.1x vs target 15.5x and stable reinvestment (negative correlation with payout ratio). Reflecting uncertain
P/B of 1.6x macro conditions, we consider our ROE estimate to be conservative. Trading at a 2012 P/B of
only 1.1x, the firm’s shares are appealingly valued in our opinion.
Global peer analysis—valuations
Company Huvis Capro KP Chem Woongjing Chem Far Eastern Nanya Plastics
2011 N/A 5.3 4.6 106.7 15.6 20.4
P/E (x) 2012E 7.4 21.7 13.0 9.3 15.1 31.3
2013F 6.9 14.8 8.6 6.6 15.5 17.1
2011 N/A 1.6 1.1 0.1 1.5 1.8
P/B (x) 2012E 1.2 1.3 0.9 0.7 N/A 1.7
2013F 1.0 1.2 0.9 0.7 N/A 1.7
2011 N/A 2.8 1.5 3.6 9.0 11.2
EV/EBITDA (x) 2012E 4.0 7.4 3.6 5.5 N/A 28.8
2013F 3.5 5.5 2.0 4.7 N/A 26.7
2011 29.5 35.5 25.3 1.3 10.6 8.5
ROE (%) 2012E 20.0 6.1 7.0 5.2 11.2 4.0
2013F 15.6 8.6 10.1 7.3 N/A 6.9
2011 10.1 20.1 15.4 0.6 3.6 5.0
ROA (%) 2012E 8.3 3.5 4.0 6.8 N/A N/A
2013F 7.4 5.1 6.6 8.5 N/A N/A
2011 N/A 4.8 1.8 0.0 4.8 3.5
Div. Yield (%) 2012E 2.5 1.8 1.8 N/A 5.0 2.5
2013F 3.3 2.3 1.8 N/A 5.2 4.1
Source: Bloomberg, Woori I&S Research Center estimates
Fair value using target (=justified) P/B
2012 ROE estimate 15.5%
Retention rate 20.0%
Sustainable growth 3.1%
Cost of equity 11.0%
Target P/B 1.6
2012 BPS 10,452
Fair value using P/B W16,406
Source: Woori I&S Research Center estimates
l Woori I&S does not have a stake greater than or equal to 1% in Huvis as of the preparation date.
l Woori I&S has not provided this material to any institutional investor or other third party in advance. The Korean version of this material was distributed on Sep 27, 2012.
l The analyst and his/her spouse do not own any securities of Huvis as of the preparation date.
l Huvis is not under coverage at Woori I&S. Thus, Woori I&S does not present a rating and target price on the counter.
l This report correctly reflects the analyst’s opinion and was written without any external influence or intervention.
The research is based on current public information that Woori I&S considers reliable, but Woori I&S does not represent it as accurate or complete and it should not be relied on as such.
Furthermore, the research does not take into account particular investment objectives, financial situations or individual client needs, and Woori I&S is in no way legally responsible for future
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