POSCO

(005490 KS/Buy)

Fundamentals remain on track

Company Update
September 5, 2013 2H earnings likely to meet consensus
The market is currently forecasting POSCOs operating profit at W528.8bn (+19.8% QoQ, -35.5% YoY) for 3Q and W699.2bn (+32.2% QoQ, +58.4% YoY) for 4Q. It seems likely that POSCO will meet the consensus for 2H given the current market conditions. Particularly encouraging is that 4Q operating profit is expected to improve both QoQ and YoY. We forecast POSCOs sales volume to grow from 8.41mn tonnes in 2Q to 8.51mn tonnes in 3Q and 8.94mn tonnes in 4Q. We expect carbon steel roll margins to fall W20,000/tonne in 3Q, but regain W20,000/tonne in 4Q. This is because carbon steel ASP is forecast to fall W15,000/tonne in 3Q, but is likely to remain flat QoQ in 4Q, in line with the recent pickup in international steel prices. Production cost, on the other hand, is likely to drop W20,000/tonne in 4Q after inching up an estimated W5,000/tonne in 3Q.

Daewoo Securities Co., Ltd.

Steel/Non-ferrous Seung-hun Jeon
+822-768-2713 sh.jeon@dwsec.com

Aiden Lee
+822-768-3297 aiden.lee@dwsec.com

Indonesian crisis unlikely to spill over

PT Krakatau POSCO, a joint venture between POSCO (70% stake) and Indonesias largest steelmaker Krakatau Steel, is set to being operating its first blast furnace this December. Despite the crisis unfolding in Indonesia, we believe PT Krakatau POSCO will incur only a small operating loss in 2014. Out of the blast furnaces total production (1.8mn tonnes of slab and 1.2mn tonnes of plate), more than 1mn tonnes of slab will be supplied to Krakatau Steel, which currently can source only 500,000 tonnes of crude steel internally (vs. steel product capacity of 2.4mn tonnes) due to a lack of upstream facilities. We also believe the Indonesian blast furnace will be more cost competitive, as 30% of its iron ore needs and all of its limestone needs will be procured locally.

Maintain Buy and TP of W430,000

POSCOs stock has underperformed the KOSPI for three straight years (since 2010). The company has long suffered from margin pressures, crippled by a combination of structural overcapacity and raw material shortages (iron ore and coal). As a result, investors remain skeptical towards the stock even in the face of positive market signals. Back in 2010, the stocks P/B of 1x was widely perceived to be a bottom, but now many doubt whether the stock can break above that same level. 2010 was the beginning of a full-blown de-rating across the sector, but steel stocks did not yield easily at first, mainly because memories of the bullish years were still fresh in the minds of investors. Right now, the exact opposite is happening. It is important to recognize that many of the issues that triggered the sector de-rating are now fading away. Global steel capacity growth has sharply slowed to around 1%, while raw material shortages are improving.

FY (Dec.)
Revenue (Wbn) OP (Wbn) OP Margin (%) NP (Wbn) EPS (W) ROE (%) P/E (x) P/B (x)

12/10
32,582 4,785 14.7 3,784 43,405 11.3 11.2 1.1

12/11
39,172 4,330 11.1 3,189 36,575 8.7 10.4 0.8

12/12
35,665 2,790 7.8 2,500 28,669 6.5 12.2 0.7

12/13F
31,396 2,496 8.0 1,836 21,052 4.6 15.3 0.7

12/14F
34,893 3,481 10.0 2,985 34,235 7.2 9.4 0.6

12/15F
36,115 3,883 10.8 3,205 36,761 7.3 8.8 0.6

Notes: All figures are based on non-consolidated K-IFRS; NP refers to profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

September 5, 2013

POSCO

Figure 1. Carbon steel spread will pick up in 4Q

(W'000) 1,200 1,000 800 440 600 410 400 200 0 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13F 380 (W'000) 500

Figure 2. Although utilization is rising with increasing number of profitable steelmakers,

(%) 93 92 Percentage of steelmakers making profits (R) Utilization ratio (L) (%) 100

Carbon steel ASP (L) Spread (R)

Raw material price (L)

470
91 90 89 88 87

80

60

40

20 86

350

85 5/24 6/14 7/5 7/26 8/16

Source: KDB Daewoo Securities Research

Source: Mysteel.net, KDB Daewoo Securities Research

Figure 3. Chinese steel prices keep rising

(RMB/tonne) 8,000 Rebar HRC Plate CRC

Figure 4. Domestic steel prices also have begun to rebound

(W'000/tonne) 1,300 Domestic HRC spot price Imported HRC spot price 1,100

6,500

900

5,000
700

3,500
500

2,000 04 05 06 07 08 09 10 11 12 13

300 05 06 07 08 09 10 11 12 13

Source: Mysteel.net, KDB Daewoo Securities Research

Source: Steeldaily, KDB Daewoo Securities Research

Figure 5. Chinese traders steel inventories at four-year low

('000 tonnes) 21,000 2008 2010 2012 17,000 2009 2011 2013

Figure 6. Shares are trading at low P/B with low expected ROE
(x) 3.0 2.5 2.0 P/B (L) ROE (R) (%) 30 25 20 15 10 5 0 90 92 94 96 98 00 02 04 06 08 10 12

13,000

1.5 1.0

9,000
0.5

5,000 01 02 03 04 05 06 07 08 09 10 11 12 (mo.)

0.0

Source: Mysteel.net, KDB Daewoo Securities Research

Source: Thomson Reuters, KDB Daewoo Securities Research

KDB Daewoo Securities Research

September 5, 2013

POSCO

POSCO (005490 KS/Buy/TP: W430,000)

Comprehensive Income Statement (Summarized)
(Wbn) Revenue Cost of Sales Gross Profit SG&A Expenses Operating Profit (Adj) Operating Profit Non-Operating Profit Net Financial Income Net Gain from Inv in Associates Pretax Profit Income Tax Profit from Continuing Operations Profit from Discontinued Operations Net Profit Controlling Interests Non-Controlling Interests Total Comprehensive Profit Controlling Interests Non-Controlling Interests EBITDA FCF (Free Cash Flow) EBITDA Margin (%) Operating Profit Margin (%) Net Profit Margin (%) 12/12 12/13F 12/14F 12/15F 35,665 31,396 34,893 36,115 31,042 27,069 29,522 30,336 4,623 1,833 2,790 2,790 333 278 -10 3,122 623 2,500 0 2,500 2,500 0 2,300 2,300 0 4,671 3,330 13.1 7.8 7.0 4,328 1,831 2,496 2,496 -258 240 2 2,238 403 1,836 0 1,836 1,836 0 1,909 1,909 0 4,514 1,080 14.4 8.0 5.9 5,371 1,890 3,481 3,481 158 274 0 3,639 655 2,985 0 2,985 2,985 0 3,058 3,058 0 5,743 1,011 16.5 10.0 8.6 5,778 1,895 3,883 3,883 123 274 0 4,006 801 3,205 0 3,205 3,205 0 3,278 3,278 0 6,145 1,520 17.0 10.8 8.9

Statement of Financial Condition (Summarized)

(Wbn) Current Assets Cash and Cash Equivalents AR & Other Receivables Inventories Other Current Assets Non-Current Assets Investments in Associates Property, Plant and Equipment Intangible Assets Total Assets Current Liabilities AP & Other Payables Short-Term Financial Liabilities Other Current Liabilities Non-Current Liabilities Long-Term Financial Liabilities Other Non-Current Liabilities Total Liabilities Controlling Interests Capital Stock Capital Surplus Retained Earnings Non-Controlling Interests Stockholders' Equity 12/12 12/13F 12/14F 12/15F 12,610 1,753 4,468 5,404 55 39,711 1,937 22,167 294 52,320 4,544 1,805 2,135 604 8,612 7,566 906 13,156 39,165 482 1,228 39,843 0 39,165 12,064 1,197 3,999 5,408 98 41,934 2,222 23,749 347 53,998 6,028 1,803 3,373 852 7,515 6,356 915 13,542 40,455 482 1,228 40,987 0 40,455 12,679 1,197 4,257 5,757 105 43,741 2,222 25,084 343 56,420 6,199 1,919 3,373 907 7,518 6,356 918 13,717 42,703 482 1,228 43,161 0 42,703 13,322 1,486 4,406 5,959 108 45,511 2,222 26,420 340 58,833 6,298 1,986 3,373 939 7,519 6,356 919 13,817 45,016 482 1,228 45,400 0 45,016

Cash Flows (Summarized)

(Wbn) Cash Flows from Op Activities Net Profit Non-Cash Income and Expense Depreciation Amortization Others Chg in Working Capital Chg in AR & Other Receivables Chg in Inventories Chg in AP & Other Payables Income Tax Paid Cash Flows from Inv Activities Chg in PP&E Chg in Intangible Assets Chg in Financial Assets Others Cash Flows from Fin Activities Chg in Financial Liabilities Chg in Equity Dividends Paid Others Increase (Decrease) in Cash Beginning Balance Ending Balance 12/12 12/13F 12/14F 12/15F 5,777 2,500 2,168 1,841 40 353 1,420 83 1,741 -397 -311 -2,560 -2,466 -93 727 -729 -2,603 -1,426 0 -733 -444 615 1,138 1,753 4,379 1,836 2,674 1,965 53 -212 209 587 -5 -7 -339 -4,298 -3,591 -58 -458 -192 -637 -87 0 -772 -396 -556 1,753 1,197 4,646 2,985 2,758 2,200 62 -20 -443 -258 -350 117 -655 -3,444 -3,535 -58 0 149 -1,200 0 0 -811 -389 1 1,197 1,197 5,088 3,205 2,939 2,200 61 14 -255 -149 -202 67 -801 -3,444 -3,535 -58 0 149 -1,355 0 0 -966 -389 289 1,197 1,486

Forecasts/Valuations (Summarized)
12/12 12/13F 12/14F 12/15F P/E (x) P/CF (x) P/B (x) EV/EBITDA (x) EPS (W) CFPS (W) BPS (W) DPS (W) Payout ratio (%) Dividend Yield (%) Revenue Growth (%) EBITDA Growth (%) Operating Profit Growth (%) EPS Growth (%) Accounts Receivable Turnover (x) Inventory Turnover (x) Accounts Payable Turnover (x) ROA (%) ROE (%) ROIC (%) Liability to Equity Ratio (%) Current Ratio (%) Net Debt to Equity Ratio (%) Interest Coverage Ratio (x) 12.2 7.0 0.7 8.1 28,669 50,245 8,000 24.7 2.3 -9.0 -23.5 -35.6 -21.6 8.6 5.7 30.0 4.8 6.5 7.3 33.6 277.5 17.9 7.1 15.3 7.3 0.7 7.9 21,052 44,197 8,000 33.7 2.5 -12.0 -3.4 -10.5 -26.6 8.0 5.8 29.5 3.5 4.6 6.8 33.5 200.1 17.7 6.8 9.4 5.3 0.6 6.2 34,235 60,177 10,000 25.9 3.1 11.1 27.2 39.5 62.6 9.0 6.3 29.5 5.4 7.2 8.7 32.1 204.5 16.8 8.9 8.8 5.1 0.6 5.7 36,761 62,695 10,000 24.1 3.1 3.5 7.0 11.6 7.4 8.9 6.2 29.1 5.6 7.3 9.3 30.7 211.5 15.3 10.0

473,261 487,454 513,274 539,841

Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research

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POSCO

APPENDIX 1
Important Disclosures & Disclaimers
Disclosures As of the publication date, Daewoo Securities Co., Ltd. has been acting as a financial advisor to POSCO for its treasury stock trust, and other than this, Daewoo Securities has no other special interests in the companies covered in this report. As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with POSCO as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. Of the equity-linked warrants covered in this report, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of POSCO as underlying assets.
(W) 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 9/11 3/12 9/12 2/13 8/13 POSCO

Stock Ratings Buy Trading Buy Hold Sell Relative performance of 20% or greater Relative performance of 10% or greater, but with volatility Relative performance of -10% and 10% Relative performance of -10%

Industry Ratings Overweight Neutral Underweight Fundamentals are favorable or improving Fundamentals are steady without any material changes Fundamentals are unfavorable or worsening

* Ratings and Target Price History (Share price (----), Target price (----), Not covered (), Buy (), Trading Buy (), Hold (), Sell ()) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analysts estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Analyst Certification The research analysts who prepared this report (the Analysts) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analysts area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. (Daewoo), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.

KDB Daewoo Securities Research

September 5, 2013

POSCO

Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as Relevant Persons). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.

KDB Daewoo Securities International Network

Daewoo Securities Co. Ltd. (Seoul) Head Office 34-3 Yeouido-dong, Yeongdeungpo-gu Seoul 150-716 Korea Tel: 82-2-768-3026 Daewoo Securities (Europe) Ltd. Tower 42, Level 41 25 Old Broad Street London EC2N 1HQ United Kingdom Tel: 44-20-7982-8016 Beijing Representative Office Suite 2602, Twin Towers (East) B-12 Jianguomenwai Avenue Chaoyang District, Beijing 100022 China Tel: 86-10-6567-9699 Daewoo Securities (Hong Kong) Ltd. Two International Finance Centre Suites 2005-2012 8 Finance Street, Central Hong Kong Tel: 85-2-2514-1304 Daewoo Securities (Singapore) Pte. Ltd. 6 Battery Road, #11-01 Singapore, 049909 Daewoo Securities (America) Inc. 320 Park Avenue, 31st Fl. New York, NY 10022 United States Tel: 1-212-407-1000 Tokyo Representative Office 7th Floor, Yusen Building 2-3-2 Marunouchi, Chiyoda-ku Tokyo 100-0005 Japan Tel: 81-3- 3211-5511 Ho Chi Minh Representative Office Centec Tower 72-74 Nguyen Thi Minh Khai Street Ward 6, District 3, Ho Chi Minh City Vietnam Tel: 84-8-3910-6000

Tel: 65-6671-9845 Shanghai Representative Office Unit 13, 28th Floor, Hang Seng Bank Tower 1000 Lujiazui Ring Road Pudong New Area, Shanghai 200120 China Tel: 86-21-5013-6392

KDB Daewoo Securities Research