PKX - POSCO Holdings: Sell Or Short The Stock A Bearish Trend Is On

2023-11-15 00:27:37 ET

Summary

• POSCO Holdings has experienced significant growth since converting to a holding company structure in 2022.
• PKX's shares have been dropping since hitting a 52-week high, indicating a potential bearish trajectory.
• The market has had mixed reactions to the company’s developments, and its over-ambitious plans may hurt its long-term growth.
• Based on my technical analysis, I recommend selling this stock or initiating short positions.

Investment Thesis

POSCO Holdings Inc. ( PKX ) assumed a solid upward trajectory since confirming its conversion to a holding company structure in 2022. Its share price soared from about $54.58 on January 28th, 2022, to its current 52-week high of $133.09, marking a remarkable growth of about 144%. I attribute this solid growth to this holding conversion, which came with a lot of ambitions and growth projections.

However, the company's shares have been dropping since hitting its 52-week high, and today, it trades at $85.89, 35.46% below its peak price. From a technical standpoint, the downward trend appears to be peaking momentum, pointing at a potential bearish trajectory. Looking at the company's current affairs, the market seems to have mixed responses to the company's developments or, rather, news.

However, based on my evaluation, although the company's development initiatives, which came along with its conversion to a holding company, may appear very promising, I believe the company may be overambitious, as I will demonstrate later in this analysis. Based on my technical analysis and what I may term a "hyped" conversion into a holding company, I recommend taking profits from this hype because a strong bearish trend could be on the horizon.

Current Affairs: Responses From The Market

This section covers PKX's current affairs and how the market reacted to the news. To begin with, it announced its conversion to a holding company structure, which its shareholders approved. The company said that this move would enhance its corporate governance, transparency, and efficiency and create more value for its shareholders and stakeholders. It also said that it would focus on its core steel business and expand its non-steel and overseas companies through its subsidiaries. The market reacted positively to this news, as the company's share price rose by about 4.7% on the announcement day.

Secondly, the company reported third-quarter 2023 results, highlighting weak financial performance. The company reported consolidated revenue of KRW18.961 trillion, a 5.8% decline from the previous quarter, and operating profit of KRW1.196 trillion, an 89.8% decrease from the last quarter. The company's revenues and profits generally fell in the fourth quarter, and the market reacted unfavorably. Its share price fell from $80.37 on October 30th, 2023, to $76.74 on November 1st, 2023, representing a 4.9% drop in about three days since the release of the Q3 results. I believe this reflected the company's weakening fundamentals, which could drive a bearish trend if they do not improve in the coming quarters.

POSCO launched Korea's first low-carbon brand Product on June 1st, 2023, as part of a sustainable future strategy. POSCO's "Greenate certified steel," which operates on a mass-balance concept, is one of its significant products. This product efficiently reduces carbon emissions by redistributing the emissions saved by implementing low-carbon manufacturing techniques and using low-carbon steel. While this marked the company's innovations and commitment to a safer and sustainable business, the market responded positively to this news. Its price rose from $68.15 opening price as of June 1st to a closing price of $73.46 a closing price as of June 2nd, marking a growth of about 7.8% a day after the news.

Based on these few examples, the market has had mixed reactions to the company's developments, which I believe explains its current share volatility. With this in mind, I believe the company's long-term share growth would be significantly impacted by its long-term growth plans and ambitions, considering how responsive the market has been in the past. With this in mind, I will cover the company's growth ambitions and my take on them in the following sections.

A Recap Of PKX Growth Plan

POSCO has seven main businesses that can contribute to future sustainability: steel, secondary battery materials, lithium/nickel, hydrogen, energy, construction/infrastructure, and agri-bio, all of which are part of their growth strategy.

Here are some of their projected growth initiatives:

Steel: The company aims to achieve net-zero carbon emissions in its steel production by 2030 by adopting innovative technologies, such as hydrogen reduction, carbon capture and utilization, and smart factories. It also plans to expand its market share and profitability in the premium steel segments, such as automotive, electrical, and stainless steel. For example, POSCO also intends to increase crude steel capacity from 5.1 million tons to 23.1 million tons by 2030 by investing KRW 12 trillion, raising the operational profit rate to 7%.

Secondary battery materials: PKX aims to increase its production capacity and market share in the secondary battery materials market by investing in research and development, expanding its global network, and forming strategic partnerships with battery manufacturers and automakers. The secondary battery material business aims to increase anode and cathode manufacturing capacity to 680,000 tons by 2030, up from around 115,000 tons now, and to leap into the worldwide top tier by obtaining leading technology.

Lithium/nickel : The company aims to secure a stable and competitive supply of lithium and nickel by optimizing its mining and processing operations, enhancing its environmental and social responsibility, and exploring new reserves and projects. For example, POSCO desires to become a global top producer by 2030, with a production capacity of 220,000 tons of lithium and 140,000 tons of nickel from mines/salt lakes and eco-friendly industrial methods.

Hydrogen : It plans to develop and commercialize various hydrogen-related businesses, such as hydrogen production, storage, transportation, and utilization, to lead the green hydrogen economy. This will diversify its revenue sources and create new growth opportunities in the emerging hydrogen market. POSCO plans to invest KRW 10 trillion by 2030 to reach annual sales of KRW 2.3 trillion and annual output of 500,000 tons. It wants to become a global top 10 hydrogen supplier by 2050 by constructing a 7 million tons-per-year hydrogen manufacturing plant.

Energy: The company plans to increase its renewable energy portfolio to achieve carbon neutrality and reduce its dependence on fossil fuels. This will improve its environmental performance and social responsibility and lower its energy costs. It plans to raise energy generation to 8.3GW, or almost 2.5 times the existing level, by 2030.

Construction/infrastructure : PKX plans to provide smart and eco-friendly solutions for construction and infrastructure projects, such as smart cities, smart factories, and smart grids, using its advanced technologies and expertise. I believe this will increase its customer satisfaction and loyalty, as well as create new business models and value propositions.

Agri-bio : POSCO plans to secure global food resources and enhance food security by investing in and developing agri-bio businesses, such as vertical farming, smart farming, and biotechnology. This will expand its presence and influence in the global food market and contribute to the social welfare and well-being of humanity. The POSCO Group projects a cumulative fund investment of KRW 800 billion by 2030, with a total investment and outside venture fund of more than KRW 4 trillion.

Judging from these growth plans, the future of PKX appears to be very bright because it's all about growth. However, setting a plan is one thing, and achieving it is another. For this reason, I find assessing how achievable these ambitions are is critical. In the following section, I will evaluate whether the management of PKX may be over-ambitious.

Is PKX Over-Ambitious?

To set the tone of this section is the company's announcement that it plans to spend $93 billion through 2030, which happens to be a significant year for most of its growth initiatives, as presented above. First off, dividing the $93 billion projected expenditure by seven years, you'll arrive at a figure of $13.3 billion, which is more than double its annual CapEx for 2021 or 2022. In my view, this casts doubt on the seamless execution of this plan.

Secondly, the company has a market cap of $25.78 billion and an enterprise value of $36.73 billion, which are much lower than its planned investment amount of $93 billion. This means that the company may have to rely heavily on external financing, such as debt or equity, to fund its growth projects, which may increase its financial risk and cost of capital.

Further, the company has negative earnings per share slope and a negative effective tax rate, which indicates declining profitability and poor financial performance.

In my view, this may reduce the company's internal cash flow generation, limit its ability to reinvest in its growth projects and affect its credit rating and access to capital markets.

Additionally, the company has a debt/equity ratio of about 3.3 and a debt/EBITDA ratio of 4.5, indicating a high level of leverage and debt burden. With its growth ambitions and current capital structure falling short of the projected CapEx, these ratios may increase significantly if the company takes on more debt to finance its growth projects, which may impair its financial flexibility and solvency and expose it to interest rate and currency fluctuations.

Based on this evaluation, I believe PKX could be over-ambitious in its growth plans. It may fail to achieve most of its goals pegged at 2030 because it falls short of its projected CapEx significantly, which calls for massive dilution to raise capital or heavy reliance on debt, which could be detrimental considering its leverage is already high. In both occasions, be it a dilutive action or a debt financing, both could significantly hurt the company shares in the long run, leading to a solid bearish trajectory, which I believe would take time to recover. In conclusion, I believe PKX could be over-ambitious in its growth plans by comparing its projected growth projects against its capital strength and availability and may need to revise its growth strategy and investment plan to make it more realistic, feasible, and sustainable.

Technical Analysis

Here is my technical analysis based on the indicators and overlays I have used. To begin with,

the OBV for PKX has been declining since August 2023, indicating that sellers have dominated the market. The OBV also diverged from the price in November 2023, when the price made a higher high, but the OBV made a lower high. This suggested that the uptrend was losing momentum, and a reversal was likely. The price reversed and entered a downtrend, confirmed by the OBV making lower lows and lower highs. The OBV has not shown any signs of recovery or divergence since then, implying that the selling pressure remains strong.

The MACD for PKX has been mostly below the zero line since October 2023, indicating that the 12-period EMA is below the 26-period EMA and the security is in a downtrend. Most of the time, the MACD line has also been below the signal line, generating bearish crossovers. Its histogram has been negative, reflecting the downward momentum. It has not shown any major bullish divergences or crossovers that could indicate a trend reversal or a bounce.

The RSI for PKX has been mostly below 50 since October 2023, indicating that the security is in bearish territory. It has also dipped below 30 several times, indicating that the security is oversold and may be due for a bounce. However, the RSI has not been able to sustain for long above 50 or form any bullish divergences, suggesting that the oversold conditions are not strong enough to reverse the downtrend. The RSI has also followed the price in making lower lows and lower highs, confirming the trend strength.

Based on these indicators, I recommend a sell or short position for PKX, as the security is in a strong downtrend with no signs of reversal or recovery. The indicators show that the sellers are more active than the buyers, the momentum is negative, and the trend is bearish. However, I would also advise using stop-loss orders and monitoring the price action closely, as the security may experience some bounces or fluctuations due to oversold conditions or other factors such as news the market has previously responded to, leading to volatility.

Conclusion

Based on this analysis, PKX is very responsive to any news that has caused a lot of volatility in the past. With this in mind, I am skeptical about its future share growth because what appears to be a growth plan for the company majorly pegged at 2030 to me seems to be very over-ambitious and a very unsustainable plan considering its hefty CapEx requirement, which could either result to a massive dilution or what would an unsustainable financial leverage. Considering this analysis and guided by the technical analysis, I recommend selling the stock and the current price or initiating short positions with strict stop-loss orders and capitalizing on the dynamics of the oversold conditions and any news that may arise.

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