Steel:Rebar makers,Near~term outlook bright

Buy into 1Q weakness in anticipation of 2Q strength: Daehan Steel’sconsolidated sales and operating profit rose a respective 9.2% and 8.2% q-q in 1Q toKRW283.9b and KRW10.2b, while Korea Iron & Steel (Kisco) posted 1Q parent-basedsales and operating profit of KRW161.0b and KRW8.2b (down 11.3% and up 0.7% q-q).Profits for both firms missed consensus forecasts as spreads narrowed amid higher-thanexpectedscrap prices, but we believe investors should focus on the ability of bothcompanies to grow profits q-q by controlling SG&A costs. While Kisco’s sales volumecontracted q-q on seasonality, Daehan held steady q-q on increasing sales of processedrebar. Chinese rebar imports may bounce back (prices have fallen since late March) andinvestors may find the results disappointing relative to strong growth in domesticconstruction-starts, but we believe spreads will widen in 2Q as global scrap prices weaken.We advise buying into 1Q weakness in anticipation of strength in 2Q.

    Near-term outlook bright: Even if imports of Chinese rebar rebound, we believeDaehan and Kisco will see profits rise as spreads widen in 2Q, as: 1) rebar demand shouldremain strong on seasonality and an increase in domestic construction-starts area; 2) therebar base price for 2Q has risen KRW15,000/tonne q-q; and 3) steel scrap prices arestabilizing at lower levels thanks to a shutdown of small electric furnaces in China, fallingscrap prices in Japan, and higher-than-expected scrap inventories in Korea. Given thisoutlook, we maintain BUY on Daehan and Kisco with 12-month target prices ofKRW12,000and KRW45,000, respectively. We advise trading the stocks up to our targets,but would be cautious beyond this, growth in apartment presale volume andconstruction-starts area is likely to slow from 2H17or 2018.