POSCO Holdings stands out against rival on expansion to battery business

POSCO Holdings headquarters [Photo by Lee Chung-woo]

POSCO Holdings Inc. has successfully transformed itself into a battery-focused company following its conversion into a holding company, has seen its stock prices rise due to improved corporate valuation, while its closest rival Hyundai Steel Co. still faces challenges from the downturn in the steel business.

According to the Korea Exchange, Hyundai Steel’s stock price closed at 33,700 on Wednesday, down by 1.03 percent from the previous session. While the stock has recorded a 10 percent rise year-to-date, it failed to match the 16.96 percent increase of the broader Kospi index. Hyundai Steel shares currently trade at a 46 percent decrease from its peak of 63,000 won in May 2021.

Unlike Hyundai Steel, POSCO Holdings has witnessed a 40 percent surge in its stock price this year. Notably, the trading volume has surpassed last year’s level, indicating a strong buying interest. Last month, POSCO Holdings’ stock price even surpassed its previous peak in 2021.

The divergence in stock price trends between the two companies can be attributed to POSCO Holdings’ timely move into the battery value chain. The investment frenzy in the electric vehicle battery stocks was ignited by the U.S. Inflation Reduction Act (IRA) and the mobility transition from internal combustion engines to EVs. POSCO Holdings, which is strengthening its raw materials business, such as lithium and nickel trading, has gained attention in the market for its high growth potential.

In contrast, Hyundai Steel is struggling to attract buying interest as steel demand in the global market remains weak due to concerns about a global economic slowdown. In the second quarter, hot-rolled coil prices in China dropped by about 20 percent to $524 per ton compared with a peak of $650 in the first quarter.

The sluggish market conditions lead to margin deterioration for steel companies due to a decline in average selling prices. Although the sales volume of automotive steel sheets is expected to increase by 17 percent from a year ago, the selling price fell by 155,000 won per ton.

The financial performance of Hyundai Steel is also deteriorating. According to financial information provider FnGuide, analysts from at least three securities firms predict that Hyundai Steel’s second-quarter revenue and operating profit will decline by 6.1 percent and 55.7 percent, respectively, compared with the same period last year. This follows a 52.1 percent drop in the steelmaker’s operating profit in the first quarter. The turnaround to profitability may occur in the fourth quarter of this year.

Cash flow has also worsened for Hyundai Steel. Operating cash flow, a key indicator of whether money is flowing into or out of a company, is estimated to be 532 billion won this year, more than halving compared to 2.18 trillion in 2022.

Net income of controlling shareholders is an important indicator for POSCO Holdings as a holding company. According to FnGuide, POSCO Holdings’ net profit to controlling shareholders this year is expected to reach 3.26 trillion won, up 3.8 percent from the previous year.

The financial investment industry previously labeled both POSCO Holdings and Hyundai Steel as undervalued blue-chip stocks. Numerous securities reports highlighted the investment appeal of these companies due to their historically low price-to-book ratio (PBR), which falls short of 1x and implies that their market capitalization significantly lags their book value.

A low PBR indicates a lack of upward momentum, resulting in a lack of attention from the market. Currently, Hyundai Steel’s PBR is at around 0.2x. While POSCO Holdings once had a similar PBR, it is currently valued at 0.5-0.6x in the market. “A PBR of 2.2x could be considered a short-term low point and there has been a continuous derating trend over the past 10 years since the onset of China’s steel supply glut in 2011,” said Jang Jae-hyeok, an analyst from Meritz Securities Co.