[Click eStock] "Ssangyong C&E, Q3 Operating Profit Expected to Decline Due to Rising Manufacturing Costs"

Korea Investment & Securities Report

[Asia Economy Reporter Minji Lee] Korea Investment & Securities maintained its buy rating and target price of 10,000 KRW for Ssangyong C&E on the 7th. Although operating profit is expected to be sluggish in the third quarter due to increased manufacturing costs, the acquisition of a highly profitable subsidiary is expected to lead to improved performance in the future.

Ssangyong C&E is estimated to record sales of 366.8 billion KRW in the third quarter, a 9% increase compared to the same period last year. Operating profit is analyzed to decrease by 5.4% year-on-year to 51.1 billion KRW. While sales are expected to meet market expectations due to the reflection of agreed price increases and increased shipment volume, operating profit is estimated to fall short by about 21%.

Total cement shipments are expected to increase by 4.7% year-on-year to 3.23 million tons, of which domestic shipments are expected to rise by 3.6% to 2.45 million tons during the same period. Although construction indicators, which can gauge cement demand, were favorable, the increase in shipment volume was somewhat limited due to an increase in rainy days compared to the average last month and a decrease in working days at sites due to the Chuseok holiday.

The reason operating profit is expected to be sluggish is the increase in manufacturing costs due to rising thermal coal prices. The average thermal coal futures price in the third quarter was $164.9 per ton, up 220% year-on-year and 55% quarter-on-quarter. Due to the rise in thermal coal prices, the cost of goods sold in the third quarter is estimated to have increased by 17.2%.

Researcher Kyungtae Kang of Korea Investment & Securities explained, “Assuming a 35% substitution rate of recycled resources for thermal coal and a 60% exercise rate of stock purchase options, we calculated a 26% sensitivity of manufacturing costs to thermal coal prices and estimated the rate of change in manufacturing costs considering that thermal coal accounts for 30% of cement manufacturing costs. The absence of greenhouse gas emission rights sales in the third quarter is also a factor predicting a decrease in operating profit.”

Researcher Kang added, “If raw material prices rise further, there is a possibility of adjusting the discount rate compared to the agreed price to pass on the increased costs to the selling price, so future trends need to be monitored. The acquisition of an intermediate recycling resource processing company, currently underway through Green Eco Solution, is expected to be completed within the fourth quarter, and the acquisition of a highly profitable subsidiary and the establishment of a recycling resource processing ecosystem will further improve the company's profitability.”