WHAT’S THE STORY?

2Q review: KCC’s comprehensive 2H results, released after the market close Aug 14,revealed a strong performance by the construction-materials division and a return to toplinegrowth and improving margin in the paint business in 2Q. We expect both units tokeep improving in the quarters ahead. In its preliminary release on Aug 4, KCC posted a2Q operating profit of KRW92b that missed the consensus by 5.2% and a net profit ofKRW70b that beat by 8.6% thanks to lower-than-expected currency swap valuation losseson and forex losses.

Construction materials thrive, 2H outlook even brighter: The constructionmaterialsdivision achieved double-digit growth in 2Q for a second straight quarter, itssales increasing 12.6% y-y to KRW405.1b. Operating margin was decent at 15.2%, helpedby a gradual rise in move-in volume since end-2016 following hikes in presales volumeover 2015-2016. We believe results will keep improving through 2H, as nationwide moveinvolume is likely to increase 53% from 150,000 units in 1H to 230,000 in 2H and thecompany’s high-margin plaster board capacity has risen 40% with a capacity expansionthat was completed in June and went operational in July.

Paint unit returns to growth, margin improves: The paint business delivered itsfirst y-y growth in nine quarters, its sales climbing 0.4% y-y in 2Q17 to KRW400.7b.Operating margin hit 7.1%, having steadily risen from a 4Q16 bottom of 1.2%, as ASPs forall products except domestic architecture/automotive paint rose q-q, while prices of rawmaterials soda ash, xylene, and toluene fell a respective 1.2%, 4.1%, and 5.1% q-q. UnlessASPs drop, profitability keep improving in 3Q on lower raw material input prices.

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