2Q review: Pan Ocean in 2Q saw sales and operating profit grow 42.8% and 18.6% y-y,respectively, to KRW632.5b and KRW48.8b (the latter in line with expectations) for amargin of 7.7% (down 1.6%pts y-y). Sales easily beat our forecast and consensus, mainlythanks to grain-trading revenue surging KRW81.7b q-q on a rise in volume. Yet the surgein such sales was not the source of operating profit improvement (as Pan Ocean onlyrecently entered that business). Rather, profit growth came courtesy of the bulk business,where a 7.3% q-q rise in the Baltic Dry Index led sales to rise 13% q-q and operating profitto climb 20% q-q—despite a decline in freight volume—for a margin of 9.3%, up 0.9%ptsq-q. That operating profit at the division grew more quickly than sales did speaks to theleverage effect from smaller losses on 34 high-cost vessels that lack consecutive voyagecharter contracts and break even when the BDI reaches 1,100. At the non-bulk business, a5% q-q decline in tanker sales was more than compensated for by containership salesjumping 17% q-q on higher freight rates, which led overall sales at the division to climb5% q-q. Pre-tax profit at Pan Ocean missed forecasts, which we attribute to one-off costsassociated with the court setting rehabilitation-related liabilities above the level PanOcean had provisioned for.    Raising target price and reiterating BUY: Though we merely fine-tune ourearnings estimates, we raise our target price 13% from KRW6,400 to KRW7,200, as weraise our target multiple from 1.3x 2017 P/B to 1.5x (the upper end of the global peeraverage seen during previous BDI uptrends ). We expect the BDI to average 1,030 in 2017,up 52% y-y—which would be the biggest annual increase outside of the 2003-2004 and2007-2008 industry booms—and this should amplify the leverage effect in 2H. Webelieve our new target multiple is justified by Pan Ocean boasting: 1) better earningsvisibility than its global peers—we put 2017 ROE at 6.3%; and 2) a stable financialstructure. We reiterate BUY on the stock.

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