PKX - POSCO

[topofeaturellc]

I don't think Posco sees itself as a consolidator.  The next round of consolidation is likely to be in China and that's a closed game.  Besides consolidation w/o plant closures of just a waste of capital.

[kevin4u2]

PKX is by far the low cost producer.  Operating Margins are 2x that of US producers.  I can't speak for the Chinese companies, but since they can't really sell steel in the west they are now screwed as real estate is falling there.  So data:

 

Company - 2014 Op. Margin (all from valueline and haven't changed much over past decade)

PKX - 19.5% (nobody touches them on this metric)

STLD - 10%

AP - 8%

AKS - 4.5%

MT - 9%

NUE -9%

RS - 9%

X - 6.5%

 

Company - 2014 Net Margin (all from valueline and PKX was running ~10% until 2013)

PKX - 5.9%

STLD - 2.6%

AP - 1.8%

AKS - neg

MT - 0.9%

NUE - 3.1% (lowest cost US producer)

RS - 3.9% (Alum)

X - 0.8%

 

POSCO is frequently referred to as the lowest cost producer.

I believe this is a myth.

It is simply believed by most due to the fact that it is a common statement made by investors, especially "value" investors.

 

Please prove me wrong by supplying data.

[MrB]

China dumping and mainly in South Korea

http://www.business-standard.com/article/markets/chinese-steel-export-surge-hurting-other-producers-114111001473_1.html

[alwaysinvert]

 

Big shoutout to the board and specifically the Posco thread from Guy Spier at about 19:30.

[alwaysinvert]

I listened through the whole thing after posting and he discusses Posco a bit further 46 minutes in. Not very much but if anyone is interested, there you go.

[vinod1]

I listened through the whole thing after posting and he discusses Posco a bit further 46 minutes in. Not very much but if anyone is interested, there you go.

 

Thanks! You saved a lot of people lots of time.

 

Vinod

[alwaysinvert]

I listened through the whole thing after posting and he discusses Posco a bit further 46 minutes in. Not very much but if anyone is interested, there you go.

 

Thanks! You saved a lot of people lots of time.

 

Vinod

 

No problem, although I did actually enjoy the rest too.

[zenith]

Hyundai Mipo Dockyard to sell POSCO shares for W286 bln

 

 

http://english.yonhapnews.co.kr/news/2014/11/18/0200000000AEN20141118008300320.html

[Guest notorious546]

A common mistake people make when they look at 13g of other investors is the presumption that the percentage stated or calculated is right. Foreign assets are not included nor does cash, as far as i know. Understanding limitations of the tools you are using is necessary.

 

what are other constraints about reviewing 13-F's? any good articles on this?

[LC]

A common mistake people make when they look at 13g of other investors is the presumption that the percentage stated or calculated is right. Foreign assets are not included nor does cash, as far as i know. Understanding limitations of the tools you are using is necessary.

 

what are other constraints about reviewing 13-F's? any good articles on this?

 

short positions are not disclosed, so the "long" position may be part of some long/short or other strategy.

 

also sometimes the manager is given permission by the SEC to not disclose positions. so perhaps a fund manager is selling everything which, on the surface, may imply they believe stocks or the market is overrated. but it may be that they are reallocating funds to a new idea not being reported.

[indirect]

Seth Klarman will buy anything that is cheap including real estate in B cities, discounted loans, CLO etc. None of these show up in 13F.

 

[Guest notorious546]

i've found a good source and quick note i'd like to highlight on my question about 13-F's.

 

http://www.dataroma.com/m/inc/help_notes.php

 

At Dataroma we track investment activities of successful value oriented Super Investors by meticulously extracting data from financial filings. The data is consolidated, categorized and presented in an easily accessible form for our visitors. Many of the money managers we track are legendary value investors such as Warren Buffett, Seth Klarman, Bill Nygren, Wallace Weitz, Bruce Berkowitz, and the Tweedy Browne team. We believe our website is well designed and very intuitive to use. So, next time you are researching a stock, check if any renowned investors own it.

 

The information on this website can be an effective tool and a good starting point for finding investment opportunities in the stock market. However, it is important to bear in mind the following points:

 

The percentages reported only apply to the stock portions of portfolios. We do not include any cash or bond holdings.

 

The share count data is retroactively split-adjusted.

 

The portfolio holdings are usually reported mid-quarter and show the investment schedule at the end of the previous quarter. The reported transactions could have taken place at any time during the quarter. It is therefore advisable to examine the stock chart of a security for the last several months to get an approximate idea of the transaction price. Value oriented portfolio managers tend to use major dips in stock prices to buy or add to positions. It is possible that a purchased security has had a significant run-up in price since the time of the transaction and hence, no longer represents good value.

 

While a reported security purchase may be a good indicator of a manager's confidence in a stock, the opposite is not necessarily true with a stock sale. At times and especially during major market sell-offs, fund managers have to liquidate a portion of their portfolio to cater for fund holder redemptions. This is usually marked by an across-the-board reduction in their stock holdings. Or they may reluctantly reduce existing positions to fund purchasing of a security they feel offers more compelling value. As a general rule, buys are somewhat more significant than sells.

 

The money managers we follow tend to be long term investors with time horizons of at least 3 years. Some such as Warren Buffett, invest for the next decade and beyond. This, the so called time-horizon arbitrage, can be used as an advantage over the short term thinking, herd following 'investors' who constitute the stock market casino. It often takes years for true value to be realized. Frequent trading will very likely lead to underperformance.

 

Many of the investors we follow manage billions of dollars in their portfolios making small-cap investing impractical especially given their focused investing methodology. There is therefore a large-cap bias in the portfolios we track.

 

It is of utmost importance for users of this website to independently evaluate a security and not blindly follow the investment activities of the portfolio managers we track.

[AJB96]

A large steel mill in China (Haixin Steel) defaulted on its debt and has closed. It produced about 1% of China's steel. This is a step in the right direction in getting China's steel overcapacity problem fixed.

 

http://www.ft.com/intl/cms/s/0/1c39209e-aab1-11e3-9fd6-00144feab7de.html#axzz3JcefvKFU

 

http://www.steelfirst.com/Article/3319214/Chinas-Haixin-Steel-suspends-five-furnaces-amid-loan-default.html

 

http://www.bloomberg.com/news/print/2014-11-18/haixin-enters-bankruptcy-proceedings-amid-steel-industry-woes.html

[Liberty]

A large steel mill in China (Haixin Steel) defaulted on its debt and has closed. It produced about 1% of China's steel. This is a step in the right direction in getting China's steel overcapacity problem fixed.

 

http://www.ft.com/intl/cms/s/0/1c39209e-aab1-11e3-9fd6-00144feab7de.html#axzz3JcefvKFU

 

http://www.steelfirst.com/Article/3319214/Chinas-Haixin-Steel-suspends-five-furnaces-amid-loan-default.html

 

http://www.bloomberg.com/news/print/2014-11-18/haixin-enters-bankruptcy-proceedings-amid-steel-industry-woes.html

 

How many steel mills (that started planning and construction a year or two ago) are opening these days, though? There's always a lot of inertia in capital heavy industry, which is why most new supply always seems to comes online right after a big slump; the projects were approved when prices were still much higher.

 

I don't have the answer, but I think it's the right question to ask.

[moody202]

Good work Alex! Unless I missed it, I didn't see how you came up with a 3-4x from here. Also -- what are your views on Management's direction to grow into Fuel Cell/Clean Coal segment?

 

Management's views are spelled out in the investor presentation that was posted on this board some time back. I have to say the quality of presentation is pretty lame, I expected better from a $23B company. However, If I put my value investor hat on, I guess I shouldn't be judging people by their clothes!

 

Rishig,

 

Good questions.

 

It makes more sense to look at just parent company debt. Posco has ownership in many different companies and consolidating the debt together gives an unrealistic picture. I think in all or nearly all cases the debt is unencumbered to the parent. For example, Daewoo has over 3 trillion KRW in debt and this debt doesn't pierce Posco parent as they own a 60% interest in the company. They are trying to sell Daewoo anyway. The own over 50% in 6 businesses.

 

This is how I would look at it:

 

Posco market cap: 24.09 trillion KRW based on a closing price of 302,000

Parent debt: 8.663 trillion

Cash: 1.394 trillion

Securities: 6.48 trillion

Bonds: 3.03 trillion

 

EV: 21.5 trillion KRW

 

You can read my report which is attached to see how I'm valuing the company. I think it's a 3-4x from here!

 

They do break out the business by segment in the quarterly reports on their web site and annual report. The 20F is best. Also look at their audit reports on Posco's web site and their earnings release under IR Activities.

 

Alex

[rsmehta]

Anyone has any updates on what gross margins for Q4 for Posco??

 

    Coking coal, oil, and iron ore are all really low, with steel prices holding up relatively well.

 

    I can't imagine anything but a huge quarter.

[jawn619]

Here are the spot prices for iron ore in the last 7 months along with Posco's gross and operating margins for the past 2 quarters.

 

Oct. 31, 2014 81.00

 

For quarter ended 9/30/14

GM 11.43%

OM 2.03%

Sept. 30, 2014 82.38

Aug. 31, 2014 92.61

July 31, 2014 96.05

Average of 3 months 90.33

 

For quarter ended 6/30/14

GM 10.85%

OM 4.31%

June 30, 2014 92.74

May 31, 2014 100.56

April 30, 2014 114.58

Average of 3 months 102.62

 

[rsmehta]

Jawn619,

 

  Thank you so much for this information

 

    Any reason why the OM was so low last quarter with increasing GM??

 

    Was there are one time write-off on something??

------------------------

 

  PKX is currently trading @

P/B 0.58 vs. 1.2 historical avg

P/S 0.42 vs. 0.79 historical avg

P/E 17.8 vs. 9.88 historical avg

 

    It's really cheap on every metric except for P/E and an expansion on operating margins will pop this stock up in a big way!

-------------------------

 

    Does anyone know the breakup of costs for PKX Finex's steel making process:

 

Approx. what % of the cost is fine iron ore(I've read approx 20%)?? Current price of iron ore is below $80, around a 5 year low

 

Approx. what % of the cost is Non-coking coal?? Current price of coal is $53/st, around a 4 year low

 

Approx. what % of the cost is energy(price of oil)?? Current price of oil is below $70, around a 5 year low

 

The above three must account for at least 50% of the cost of steel on a operating basis??

---------------------------

 

      I've also attached prices of asian carbon steel prices and world composite steel prices.

 

 

      Steel prices have softened a bit, but not nearly as much as iron ore/oil/coal!

[alwaysinvert]

Jawn619,

 

  Thank you so much for this information

 

    Any reason why the OM was so low last quarter with increasing GM??

 

    Was there are one time write-off on something??

------------------------

 

  PKX is currently trading @

P/B 0.58 vs. 1.2 historical avg

P/S 0.42 vs. 0.79 historical avg

P/E 17.8 vs. 9.88 historical avg

 

    It's really cheap on every metric except for P/E and an expansion on operating margins will pop this stock up in a big way!

-------------------------

 

    Does anyone know the breakup of costs for PKX Finex's steel making process:

 

Approx. what % of the cost is fine iron ore(I've read approx 20%)?? Current price of iron ore is below $80, around a 5 year low

 

Approx. what % of the cost is Non-coking coal?? Current price of coal is $53/st, around a 4 year low

 

Approx. what % of the cost is energy(price of oil)?? Current price of oil is below $70, around a 5 year low

 

The above three must account for at least 50% of the cost of steel on a operating basis??

---------------------------

 

      I've also attached prices of asian carbon steel prices and world composite steel prices.

 

 

      Steel prices have softened a bit, but not nearly as much as iron ore/oil/coal!

 

During the nine-month period ended September 30, 2014, there was a significant decline in the fair value of shares of HYUNDAI Heavy Industries Co., Ltd. and others for a prolonged period, which was considered as objective evidence of impairment. As a result, impairment losses of ￦195,956 million was recognized in profit or loss during the nine-month period ended September 30, 2014.

 

Q. Among earnings before tax in 3Q, is there an impairment loss regarding

stockholding?

A. Due to a plunge in Hyundai Heavy Industries’ stock, we recognized the

impairment losses

[jawn619]

From the past quarterly report it looks like an unusually large charge in the finance charges.

after digging a little deeper, it seems like its coming from impairment loss on available-for-sale investments and loss on foreign currency transactions.

 

They have on page 18/19 of their 10-Q detailing the prices of inputs and their trends

 

http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=10334598-3425-763293&type=sect&TabIndex=2&companyid=6150&ppu=%252fdefault.aspx%253fcompanyid%253d6150

[rsmehta]

Thanks for this information Jawn and Alwaysinvert,

 

    I see the baseline they use each quarter on pg 18/29

------------------------------

 

    They don't mention the breakup percentage of iron ore, non-coking coal, oil per unit of steel(an estimate is fine)

 

    Does anyone have any idea of this??

 

    Jawn, what is your expectation of GM and OM for Q4??

 

    Do you think we can be at: GM: ~14% and OM: ~7% or is this too aggressive??

 

[topofeaturellc]

 

There is a standard ratio of iron ore:scrap:coking coal in a ton of steel. Something like 1.6:.14:.63

 

Secondly gm and om are pretty much useless metrics because its a conversion business and the absolute revunue number is driven by feedstock costs.  You need to put everything in per tonne metrics.  Also splitting out SG&a isn't useful.

 

Finally remember there is a lag in pricing.  For example I believe Posco buys 40% of their ore on a quarterly price equal to the rolling three months one month into the q i.e. q4 they pay the average of aug-oct.  I can't remember it exactly. Its in the 20f.

[topofeaturellc]

Also trying to play the quarter is dumb

[alwaysinvert]

The sale of Posco SS has now been completed: http://www.koreaherald.com/view.php?ud=20141204001205

[jawn619]

Thanks for this information Jawn and Alwaysinvert,

 

    I see the baseline they use each quarter on pg 18/29

------------------------------

 

    They don't mention the breakup percentage of iron ore, non-coking coal, oil per unit of steel(an estimate is fine)

 

    Does anyone have any idea of this??

 

    Jawn, what is your expectation of GM and OM for Q4??

 

    Do you think we can be at: GM: ~14% and OM: ~7% or is this too aggressive??

 

If you look on page 10 of the 10q, It has the sales/operating incomes of the four parts (Steel, Trading, E/C, and Other)

That helped me get a better sense of their core business in relation to it's other parts.

 

For the 9months ended,

Steel OM 7.5%

REV 23,936,693

Operating Income 1,809,730

 

Trading OM 1.2%

REV 15,672,300

Operating Income 191,332

 

E/C OM 3.8%

REV 5,886,613

Operating Income 228,140

 

Others(JVs) OM 7.5%

REV 2,917,939

Operating Income 219,875    

 

So it's already above 7% OM and for GM's if i had to guess i would say from 12-15% wouldn't be unreasonable for next quarter.

P.S. the OMs for steel are higher than almost any other steel producer i've seen. Nippon would would be only one that comes close and that's trading at 1x book compared to Posco's .6

So to summarize,

For .6 BV, you get either the best or the second best steel producer in the world plus the other parts E/C+Trading+Others for free.