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					Huvis (079980.KS)
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Sep 28, 2012




                                                 Outstanding profit margins continue to be seen at
            Not rated
                                                 synthetic fiber chain plays
CP (’12/09/27)                        W12,000

                                                 Strong earnings backed by rising portion of differential product, LM fiber
  Analyst
  Thomas Bae                                     – Possessing the largest short fiber production capacity in Korea, Huvis manufactures
  822)768-7248,thomas.bae@wooriwm.com              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
  Anthony Kim
  822)768-7605, anthony.kim@wooriwm.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
Sector                                Chemical
                                                 – 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
Kosdaq                           518.29
                                                   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
Price trend
                                                 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
                      KOSPI
 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



www.wooriwm.com
 Huvis                                                                                                                             www.wooriwm.com




 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
 Differentiated short
                                           used as an adhesive for non-woven fabrics. In line with continuous efforts to reduce the usage
 fiber products
                                           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,
 competitiveness
                                           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

                                                                                                                                   Differentiated products
                       Chip      Others                                                      ’09~’11                               Regular products
                                                                                           CAGR 25.1%
                       19%        1%                                                                                     7,841

                                                                                                         6,206

                                                                                          5,012

                                                                                                                          4,117               3,770
                                                                                                          3,209          (52.5%)
                                                                                          2,536          (51.7%)
                                                         Short fiber                     (50.6%)
                                                                                                                                              2,117
                                                            56%                                                                              (56.1%)
       Filament yarn                                                                                                      3,724
                                                                                                          2,997          (47.5%)
           24%                                                                            2,476          (48.3%)
                                                                                         (49.4%)                                              1,653
                                                                                                                                             (43.9%)


                                                                                          2009            2010            2011                1H12


Source: Huvis, Woori I&S Research Center                                      Source: Huvis, Woori I&S Research Center




                                                                                                                                                             2
Huvis                                                                                                                  www.wooriwm.com




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

                         10
                          8
                          6
                          4
                          2
                          0
                          -2                  Huvis
                                              Hyosung
                          -4
                                              Woongjin Chem
                          -6                  TK Chem
                                              Daehan Synthetic Fiber
                          -8
                         (%)          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
                        Filament
                                                       9.4          10.4              5.9     5.1        8.5     3.0        3.1         4.3
                      yarn/chip/other
                      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
                        Filament
                                                       5.8           6.8              4.0     3.7        5.8     2.2        2.3         3.0
                      yarn/chip/other
                      Source: Huvis, Woori I&S Research Center estimates




                                                                                                                                              3
 Huvis                                                                                                                                  www.wooriwm.com




 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
                        Others                                                  2,000
                            13%
                                                                                1,800

                                                                                1,600

                                                                                1,400
                MEG
                25%                                                             1,200
                                                             PTA
                                                                                1,000
                                                            62%
                                                                                  800
                                                                                      '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)
                                                                                600,000
  50,000
                                                                       105                                                                                 60%
                                                                                500,000
  40,000
                                                                                400,000
  30,000                                                               100                                                                                 50%
                                                                                300,000
  20,000
                                                                                200,000
                                                                       95                                                                                  40%
  10,000                                                                        100,000

        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




                                                                                                                                                                 4
 Huvis                                                                                                              www.wooriwm.com




 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
                                      Calculation                                                                                 Details
                                      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




                                                                                                                                            5
 Huvis                                                                                                                                                                               www.wooriwm.com




Compliance notice
  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.



Disclosures
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
returns or loss of original capital. All materials in this report are the intellectual property of Woori I&S. Copying, distributing, transmitting, transforming or lending of this material without Woori
I&S' consent is prohibited.




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