Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

<ul>
<li>Given S-Fuelcell's stronger sales growth and higher operating margin and ROE compared to the comps, one could argue that the company should trade at a premium to the comps, not at a discount. Our base case valuation of S-Fuelcell is 118.7 billion won in market cap or 20,658 won (base case), which assumes an estimated net profit of 5.5 billion won in 2019 and we have applied a P/E multiple of 21.7x (average P/E of the comps from 3Q17 to 2Q18). Our base case valuation of 20,658 won is 48% higher than the high end of the IPO price range (14,000 won). As such, we would take this IPO deal. 
</li>
<li>
In almost every single category such as sales growth, ROE, and operating margins, S-Fuelcell has better numbers compared to the three companies the bankers included in the comps valuation (CS Wind, SDN, EWK). For example, S-Fuelcell had a surging sales growth rate of 102.1% YoY in 2017 versus an average sales growth of 9.8% for these comps. S-Fuelcell also had an ROE of 30.8% and operating margin of 16.2% in 2017, which was better than the comps' average ROE of 7.5% and average operating margin of 9.2% in 2017. </li>
<li>In the building purpose fuel cell systems, the two major players in Korea include S-Fuelcell and Doosan Fuel Cell Co. S-Fuelcell's systems are favored among the non-apartments and homes whereas Doosan's 1kW products are mainly installed in homes. The three major players in Korea in the power generation fuel cell sector in Korea include Doosan Fuel Cell, S-Fuelcell, and POSCO Energy. 
</li>
<li>We like the fact that the barriers to entry in the fuel cell systems sector are relatively high mainly due to technology. This is a key edge for S-Fuelcell since this industry is difficult to penetrate. </li>
</ul>


Given S-Fuelcell's stronger sales growth and higher operating margin and ROE compared to the comps, one could argue that the company should trade at a premium to the comps, not at a discount. Our base case valuation of S-Fuelcell is 118.7 billion won in market cap or 20,658 won (base case), which assumes an estimated net profit of 5.5 billion won in 2019 and we have applied a P/E multiple of 21.7x (average P/E of the comps from 3Q17 to 2Q18). Our base case valuation of 20,658 won is 48% higher than the high end of the IPO price range (14,000 won). As such, we would take this IPO deal. 


In almost every single category such as sales growth, ROE, and operating margins, S-Fuelcell has better numbers compared to the three companies the bankers included in the comps valuation (CS Wind, SDN, EWK). For example, S-Fuelcell had a surging sales growth rate of 102.1% YoY in 2017 versus an average sales growth of 9.8% for these comps. S-Fuelcell also had an ROE of 30.8% and operating margin of 16.2% in 2017, which was better than the comps' average ROE of 7.5% and average operating margin of 9.2% in 2017. 
In the building purpose fuel cell systems, the two major players in Korea include S-Fuelcell and Doosan Fuel Cell Co. S-Fuelcell's systems are favored among the non-apartments and homes whereas Doosan's 1kW products are mainly installed in homes. The three major players in Korea in the power generation fuel cell sector in Korea include Doosan Fuel Cell, S-Fuelcell, and POSCO Energy. 

We like the fact that the barriers to entry in the fuel cell systems sector are relatively high mainly due to technology. This is a key edge for S-Fuelcell since this industry is difficult to penetrate. 


S-Fuelcell Co IPO Preview (Part 2) - Valuation Analysis & Korean Fuel Cell Industry Dynamics

<ul>
<li>
Established in 2014, <a href="https://www.smartkarma.com/entities/27423" target="_blank" data-smartkarma-citation="entities:27423:1">S-Fuelcell (SFUEL KS)</a> is a leading company in Korea that mainly provides fuel cell systems and services. S-Fuelcell IPO is expected to be completed in September 2018. The bankers' IPO price band is from 10,600 won to 14,000 won. The IPO base deal size is from US$18 million to US$24 million. Korea Investment &amp; Securities is the lead banker on this IPO deal. The institutional investors book building starts on September 18th, 2018. </li>
<li>
<a href="https://www.smartkarma.com/entities/17159" target="_blank" data-smartkarma-citation="entities:17159:1">S Energy Co Ltd (095910 KS)</a> is the largest owner of S-Fuelcell Co with a 67.7% stake as of August 27th, 2018.</li>
<li>The bankers used three companies, including <a href="https://www.smartkarma.com/entities/4883" target="_blank" data-smartkarma-citation="entities:4883:1">Cs Wind Corp (112610 KS)</a>, <a href="https://www.smartkarma.com/entities/9506" target="_blank" data-smartkarma-citation="entities:9506:1">Sdn Co Ltd (099220 KS)</a>, and <a href="https://www.smartkarma.com/entities/24385" target="_blank" data-smartkarma-citation="entities:24385:1">EWK Inc. (258610 KS)</a> as comparable companies to S-Fuelcell. They used the annualized net profit from 3Q17 to 2Q18. The comps' average P/E was 21.7x. The bankers then took the annualized net profit of S-Fuelcell from 3Q17 to 2Q18 (3.98 billion won) and applied the average P/E of 21.7x, resulting in a market cap (pre-IPO discount) of 86.4 billion won or 15,044 won. Post the IPO discount of 6.94% to 29.54%, this results in an implied value per share of 10,600 won to 14,000 won. </li>
<li>The company's sales jumped from 5.1 billion won in 2015 to 20.3 billion won in 2017, representing a CAGR of 99.7% during this period. It also generated sales of 14.9 billion won in 1H18, representing 74% of total sales in 2017. The company generated operating margin of 16.2% in 2017 and 14.6% in 1H18. </li>
</ul>



Established in 2014, S-Fuelcell (SFUEL KS) is a leading company in Korea that mainly provides fuel cell systems and services. S-Fuelcell IPO is expected to be completed in September 2018. The bankers' IPO price band is from 10,600 won to 14,000 won. The IPO base deal size is from US$18 million to US$24 million. Korea Investment &amp; Securities is the lead banker on this IPO deal. The institutional investors book building starts on September 18th, 2018. 

S Energy Co Ltd (095910 KS) is the largest owner of S-Fuelcell Co with a 67.7% stake as of August 27th, 2018.
The bankers used three companies, including Cs Wind Corp (112610 KS), Sdn Co Ltd (099220 KS), and EWK Inc. (258610 KS) as comparable companies to S-Fuelcell. They used the annualized net profit from 3Q17 to 2Q18. The comps' average P/E was 21.7x. The bankers then took the annualized net profit of S-Fuelcell from 3Q17 to 2Q18 (3.98 billion won) and applied the average P/E of 21.7x, resulting in a market cap (pre-IPO discount) of 86.4 billion won or 15,044 won. Post the IPO discount of 6.94% to 29.54%, this results in an implied value per share of 10,600 won to 14,000 won. 
The company's sales jumped from 5.1 billion won in 2015 to 20.3 billion won in 2017, representing a CAGR of 99.7% during this period. It also generated sales of 14.9 billion won in 1H18, representing 74% of total sales in 2017. The company generated operating margin of 16.2% in 2017 and 14.6% in 1H18. 


S-Fuelcell Co IPO Preview (Part 1) - A Leading Provider of Fuel Cell Systems in Korea

South Korea

EWK Inc. manufactures geothermal energy equipment. The Company manufactures hydrothermal vaporizers, condensers, pipelines, and other geothermal energy equipment. EWK manufactures chemical plant facilities.

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EWK Inc. (258610 KS)

S-Fuelcell Co IPO Preview (Part 2) - Valuation Analysis & Korean Fuel Cell Industry Dynamics

Given S-Fuelcell's stronger sales growth and higher operating margin and ROE compared to the comps, one could argue that the company should trade...

Douglas Kim

S-Fuelcell Co IPO Preview (Part 1) - A Leading Provider of Fuel Cell Systems in Korea

Established in 2014, S-Fuelcell (SFUEL KS) is a leading company in Korea that mainly provides fuel cell systems and services. S-Fuelcell IPO is...

Douglas Kim

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