Jump to content

PKX - POSCO

Liberty

By Liberty
in Investment Ideas

 Share

Recommended Posts

cpan Newbie

cpan

Posted
Posted

 

Alwaysinvert, thank you for posting all the useful info regarding POSCO.  I also brought in a little bit yesterday.  It does look very cheap (market cap of ~24B where the India plant is estimated cost $12B). However, I have some nagging doubt about this company:

 

1.  It feel somewhat like buying textile maker in the sense that all the money may end up in steel plants and they have to invest heavily to just run in place.  From their financials, it seems they are spending just as much on investments in the face of overcapacity in the industry. 

 

2.  I have no idea if they have any advantage in their other business E&C and trading.  I can see maybe building steel plants they may be better than others but its too hard to tell.

 

3.  I wonder what is the competition dynamics between POSCO and Hyundai steel is.  Any ideas?  This could really hurt their captive market in Korea.

 

The positive is that I can't imagine governments in China will keep financing unprofitable steel plants forever.  Also POSCO's ability to invest in R&D may actually be beneficial in a environment where everyone is losing money and therefore less incline to invest in R&D (but this is just a guess).

 

 

 

Link to comment
Share on other sites
  • Replies 473
  • Created
  • Last Reply

Top Posters In This Topic

Popular Days

Top Posters In This Topic

Popular Days

Posted Images

alwaysinvert Newbie

alwaysinvert

Posted
Posted

 

Alwaysinvert, thank you for posting all the useful info regarding POSCO.  I also brought in a little bit yesterday.  It does look very cheap (market cap of ~24B where the India plant is estimated cost $12B). However, I have some nagging doubt about this company:

 

1.  It feel somewhat like buying textile maker in the sense that all the money may end up in steel plants and they have to invest heavily to just run in place.  From their financials, it seems they are spending just as much on investments in the face of overcapacity in the industry. 

 

2.  I have no idea if they have any advantage in their other business E&C and trading.  I can see maybe building steel plants they may be better than others but its too hard to tell.

 

3.  I wonder what is the competition dynamics between POSCO and Hyundai steel is.  Any ideas?  This could really hurt their captive market in Korea.

 

The positive is that I can't imagine governments in China will keep financing unprofitable steel plants forever.  Also POSCO's ability to invest in R&D may actually be beneficial in a environment where everyone is losing money and therefore less incline to invest in R&D (but this is just a guess).

 

1. It's because it is a little bit like that! Commodity businesses will be commodity businesses. Difference is while the Berkshire mills were doomed from the get-go, Posco is cost-leader. Look at their revenue per employee figures. They are AMAZING. 4x better than Nucor, 10x better than ArcelorMittal and 5x NipponSteel. It's such a huge outlier that you can hardly believe it.

 

They can afford to spend more than their competitors and loads of the capex is for growth. This is like a coiled spring now, with much, much more capacity now than at the last peak - and more to come online. Of course, if you believe steel demand will decrease then this coiled spring will not uncoil for quite a while.

 

2. Me neither. But these businesses are inconsequential for the thesis. They may complement the steel business well or they may not and that will make a difference on the margin.

 

3. They have already lost market share in Korea as Hyundai has moved to vertical intregration in the last few years. This is not a big worry if the Korean market increases over time. In the more value-added areas they seem to be doing better than low-margin.

Link to comment
Share on other sites
alwaysinvert Newbie

alwaysinvert

Posted
Posted

Isn't today's price comparable to the price Buffett paid back in 2006? Anyone know if the Oracle would buy more at these prices? Seems like he has spoken highly of them in the past and the price has been cheap for years. Just seems odd he wouldn't be adding with his buildup of cash.

Yes, I believe it is. Although the company is much more levered now.

 

Posco dropped off the radar because Berkshire changed their disclosure rules in this year's report. If Berkshire added last year, it will only have been on the margin. For foreign holdings, they are not forced to report their actions to the SEC. However, there could be threshold rules in Korea that would force it out in the open. But I don't know how those are structured. Perhaps at 10% there will have to be an announcement? That would require a doubling of their stake from 2012. Otherwise, next year's annual report is the only way to know, if Posco would then qualify into the 15 largest positions.

 

The best window into Buffett's thinking on Posco would probably be DJCO since they now file quarterly with the SEC. If Munger buys more PKX in the future, we will know. However, if he buys over the Korean exchange we are once again in the dark.

Link to comment
Share on other sites
alwaysinvert Newbie

alwaysinvert

Posted
Posted

 

According to this (slide 44):

 

http://www.petracm.com/pdf/Value%20Investing%20Opportunities%20in%20Korea%20(Presentation%20by%20Petra).pdf

 

The ownership disclosure criteria in Korea is 5%.

Yes, but even more important is "► Any change of more than 1% with respect to the number of voting shares must be reported within 5 business (days)". This makes it nigh impossible for BRK to acquire more shares without moving the stock price. Average trading volume per day on the KRX is about $100m, which would make total volume before they had to report about $500m, of which they certainly couldn't buy 100%. It wouldn't move the needle.

 

Maybe they will buy anyway, because it's just so goddamn cheap, but it will be very hard to make significant buys for them at this point. A buyout is most probably not feasible because 1) it would be politically sensitive and 2) the stock price has been at 3x the current price and shareholders tend to be stingy in those cases.

 

Great find.

 

Link to comment
Share on other sites
  • 3 weeks later...
cpan Newbie

cpan

Posted
Posted

Good report.  One area you already talked about is the China scenario which was useful.  Do you have any idea how productive is the Chinese steel makers?  I think I have see reports that the current China steel makers are already very unprofitable and require state subsidization.  If thats the case and if China has a crisis, would the state be able to sustain its subsidization to steel companies?    Since its also a given that Korea would subsidize POSCO as well but to a much less extent if POSCO is the lowest cost producer, how long would China sustain this if it enters a crisis.    Also if China is in a crisis, no one really knows how much demand will shrink compared to the supply.  In such a situation, wouldn't the lowest cost producer be the most likely survivor (although this would mean a even better buying opportunity for POSCO than today).  Again I don't know the answers to these questions so I am just relying on that buying cheap will pay off.

 

 

Some things maybe worth of mentioning would be how the Indonesia and India plants actually are either in a captive market (indonesia) and given captive mines (india) thats shows very good management.  Toyota had a deal to buy from POSCO which showed there must been some major competitive advantage (which may have been the Yen exchange rate). 

 

 

 

Link to comment
Share on other sites
  • 2 weeks later...
alwaysinvert Newbie

alwaysinvert

Posted
Posted

New CEO says there are two to three rough years ahead. Plan to focus on core seems to be chugging along.

 

http://www.ft.com/intl/cms/s/0/e0438cfc-c3bd-11e3-a8e0-00144feabdc0.html?siteedition=intl#axzz2zWCkrVXp

 

There might be some element of overstating the current situation - will make him look better in an eventual turnaround and might save face if things worsen. 

Link to comment
Share on other sites
alwaysinvert Newbie

alwaysinvert

Posted
Posted

Q1 earnings presentation: http://www.posco.com/homepage/docs/eng3/dn/invest/archive/2014_1Q_Presentation_eng_final.pdf

 

Q&A: http://www.posco.com/homepage/docs/eng3/dn/invest/archive/2014_1Q_Presentation_Q&A.pdf

 

No timeline given on IPO's of subsidiaries, but I think it will be done sooner rather than later. Hopefully they can get some good money from the stock market for these hipper areas to shore up the balance sheet. Of course, ideally I'd rather see them divest completely at the right price, but that doesn't seem to be in the cards.

 

Net earnings are affected by extra taxes and problems in Krakatau, both of which I'd consider non-recurring. Some more pressure on domestic market share from Hyundai Steel, as well, but that's to be expected.

 

On iron ore prices:

 

There are some worries that the price could go below 100 USD, although it is unlikely to happen. As production cost of Chinese mines is above 100 USD, if spot price drops below 100 USD, the local miners will stop production. This will result the increase of iron ore import, eventually pushing the spot price up.

 

On capex:

 

Our new plan for 2014 consolidated capex is KRW 5.7~5.9 trillion and the downward trend of capex more than KRW 1 trillion each year will continue for the time being.

 

This may all be corporate speak, but I like the phrasing on the eventual acquisition from Dongbu Steel:

 

To decide the purchase, the following three factors must be considered : 1) merit, 2) price, and 3) impact on financial structure. Even if the value is high and the price is proper, the possibility of purchase would be low if there is a negative impact on our financial structure.

 

I may be hallucinating but I think the tone is quite different from the earlier reign here and has gone more in a value direction.

 

20-f for 2013 will probably be out in the next few days for those who are interested.

Link to comment
Share on other sites
alwaysinvert Newbie

alwaysinvert

Posted
Posted

I don't know if there's any significance to this, but:

 

The registrant is unable to file its Annual Report on Form 20-F for the year ended December 31, 2013 within the prescribed time period because the information required for an accurate and full completion of the report, including but not limited to the financial statements that form a part thereof, could not be provided within the prescribed time period without unreasonable effort or expense. The registrant expects to file its Annual Report on Form 20-F as soon as practicable, and in no event later than the fifteenth calendar day following the prescribed due date.
Link to comment
Share on other sites
  • 2 weeks later...
writser Newbie

writser

Posted
Posted

Not a very good article imo. How can you ever state a company has a 49.75% margin of safety, WACC is 9.11%, EPV is $144.71 and reproduction cost of assets is $129.35 / share? These numbers are way too precise: fake safety in numbers. A lot of assumptions and expectations are thrown out along the way: 'steel prices are expected to rise 2.2% per year' (again fake safety in numbers), 'Korea demand is expected to grow by 4%'  (is this relevant? How much revenue do they generate domestically?), 'the demand for steel is expected to grow', 'China has not completed its industrialization' (will they use Posco for that?), 'even if China CapEx slows down we still need steel for aircrafts and climate control' (you don't need much steel for both of them, also climate control sales should be largely correlated with the construction boom), 'management compensation is based on shareholder return' (is this really so unique?). 'The company has made advances in corporate governance" (if so, point them out), a new plant in India is project to generate 'a lot of revenue' (So what? How much did it cost? What is expected IRR?) etc. etc. All way too vague for my taste.

 

Posco actually looks interesting but the article doesn't make a very convincing case. I do think the comparisons to competitors and historical P/B levels are compelling.

Link to comment
Share on other sites
alwaysinvert Newbie

alwaysinvert

Posted
Posted
Creditors insisted that Dongbu hand over Dongbu Incheon Steel and Dongbu Power Dangjin Corporation to top steelmaker Posco immediately through a private contract, but Dongbu instead said it would separately sell the companies through competitive bidding.

 

While creditors are focusing on the pace of restructuring, Dongbu is determined to sell its affiliates at higher prices.

 

http://koreajoongangdaily.joins.com/news/article/article.aspx?aid=2989341&cloc=joongangdaily%7Chome%7Cnewslist1

 

Posco doing a bit of vulture investing :)

 

As a sidenote, there is likely only one other possible domestic acquirer: Hyundai Steel. I'm uncertain if they have the financial muscles to pull it off, however. I think there would be considerable hurdles for a foreign bidder, especially when speed is an issue.

Link to comment
Share on other sites
alwaysinvert Newbie

alwaysinvert

Posted
Posted

Investors' day presentation slides:

http://www.posco.com/homepage/docs/eng3/dn/invest/archive/2014_Investors%20Forum_Presentation_Eng_final.pdf

 

There doesn't seem to be much new in there and no specifics on what will be put up for sale or when.

 

Iron ore prices coming down further: http://www.smh.com.au/business/markets/iron-ore-price-set-to-drop-below-us100-20140519-38jl1.html

Link to comment
Share on other sites
  • 2 weeks later...
TwoCitiesCapital Newbie

TwoCitiesCapital

Posted
Posted

The market is largely fragmented and it seems that consolidation would help some by providing the steel makers a little more leverage in production and prices.

 

Has there been any real moves to consolidate the industry? Does PKX have the financial flexibility to do this?

 

I know nothing of the steel industry and am trying to determine if I should dig in now or start on something else.

 

 

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share
Go to topic listing


×
×
  • Create New...