Korea Research

Initiating coverage E&C (047040 KS) Korea / Construction Little giant 13 June 2014 BUY We initiate coverage of constructor Daewoo E&C with a BUY rating and target Target price KRW9,500 price of KRW95,000 (17.9% upside from current levels). Our target price is Last price (12 June 2014) KRW8,060 based on a 2015E P/E of 12.3x, which suggests 23% premium to our target

Upside/downside (%) 17.9 P/E for the construction sector. We are positive on the company, given: 1) the KOSPI 2,011.65 strong top-line growth in its domestic housing business (despite the slow Mkt. cap (KRWbn/US$bn) 3,350/3.3 growth of the market as a whole); 2) qualitative and quantitative improvement 52-week range (KRW) 5,930 - 9,040 in its overseas orders; and 3) the recent increase in its single prime contracts Avg. trading value daily (KRWbn) 5.71 Foreign ownership (%) 7.1 from the Middle East, which underscores its strengthened technological capability and improved project performance. Source: Bloomberg

Forecast earnings & valuation Korean housing market leader

Fiscal year ending Dec-13 Dec-14 E Dec-15 E Dec-16 E Despite sluggish growth in Korea’s overall domestic housing market, Daewoo Revenue (KRWbn) 8,782 9,599 10,534 11,423 E&C has been enjoying strong top-line growth, backed by its ability to respond EBIT (KRWbn) (244.7) 454.7 524.2 588.3 proactively to changes in Korea’s domestic housing market conditions. We Net profit (KRWbn) (718.0) 258.2 319.8 372.5 Net profit(underlying) (717.8) 257.9 319.8 372.5 expect the housing division’s 2014 full-year revenue to grow by 19.9% YoY to EPS (KRW) (1,727) 621 769 896 KRW2.4tn and its gross profit to jump by 68.4% YoY to KRW295bn. While the EPS growth (%) TN TP 24.0 16.5 division’s gross margin declined to 5.7% in 2013, due to adjusted cost ratio in P/E (x) (4.3) 13.0 10.5 9.0 EV/EBITDA (x) N/A 10.7 9.3 8.3 4Q13, it jumped to 13.8% in 1Q14. We expect its 2014 full-year gross margin Dividend yield (%) 24.4 0.0 0.0 0.0 to reach 12.3%. The housing division should post a revenue CAGR of 10.7% P/B (x) 1.2 1.2 1.0 0.9 from end-2013 to 2016, thanks to continued growth in pre-sale volume since ROE (%) (27.6) 9.0 10.0 10.4 2011, which should drive growth of the company’s domestic business going Net debt/equity (%) 96.3 80.9 71.0 61.5 forward. Performance Qualitative and quantitative improvement in overseas business (KRW) Price (LHS) Rel. to KOSPI (RHS) (%) We expect Daewoo E&C’s overseas division to post 76% YoY growth in order 9,600 115 9,100 110 intake, to KRW7.4tn, and 21% YoY growth in revenue, to KRW3.5tn, in 2014. 8,600 105 While Africa had previously served as the main growth driver of the company’s 8,100 100 95 7,600 overseas business, the Middle East has emerged as the key growth driver 90 7,100 85 since 2008. We note the recent increase in the portion of single prime 6,600 80 contracts in the company’s total order intake, in line with its growing exposure 6,100 75 5,600 70 to the Middle East. While weak technological prowess had been cited as the Jun13 Sep13 Dec13 Mar14 main obstacle to Daewoo E&C’s entry into the Middle Eastern market, the

recent increase in its single prime contracts from the Middle East underscores Performance 1M 3M 12M its strengthened technological capability and improved project performance. Absolute (%) (4.4) 5.4 6.2 Absolute (US$, %) (3.8) 10.4 18.4 Relative to KOSPI (%) (6.8) 1.3 0.9 Coverage initiated with BUY and target price of KRW9,500 Our target price is based on a 2015E P/E of 12.3x, which suggests 23% Source: Bloomberg premium to our target P/E for the construction sector. The 23% premium was derived by applying a 30% discount to the average 32.8% premium (versus the sector) that its peer Hyundai E&C had received in 2005-2011, prior to its 2011 acquisition by Hyundai Motor Group. The 30% discount is due to skepticism over the likelihood of a strong bidder appearing, as in the case of Seongjin Byun, Analyst Hyundai E&C. 82 2 3774 1457 [email protected]

Eunsol Shim Risk factors 82 2 3774 3824 [email protected] Potential risk factors include: 1) a decline in home prices in Korea; 2) potential margin erosion in its overseas business, due to accelerated forays into overseas projects markets by Chinese E&C players amid China’s economic slowdown; and 3) potential overhang from second-largest shareholder SEBT Investment’s 12.28% stake in the company.

See the last page of this report for important disclosures Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Recommendation and valuation We initiate coverage of Daewoo E&C with a BUY rating and target price of KRW95,000 (17.9% upside from current levels). Our target price is based on a 2015E P/E of 12.3x, which suggests 23% premium to our target P/E for the construction sector. The 23% premium was derived by applying a 30% discount to the average 32.8% premium (versus the sector) that its peer Hyundai E&C had received in 2005-2011, prior to its 2011 acquisition by Hyundai Motor Group. The 30% discount is due to skepticism over the likelihood of a strong bidder appearing, as in the case of Hyundai E&C.

Figure 1 Target price calculation (%, x, KRW) Remark EPS (2015E) 769 Target P/E 12.3 23% premium on target construction sector P/E of 10x Calculated price 9,463 Target price 9,500 Current price 8,060 Upside 17.9 Source: Mirae Asset Research

Figure 2 Target premium calculation (x) 2005 2006 2007 2008 2009 2010 2011 Average Hyundai E&C 9.2 13.6 27.5 21.2 15.0 13.4 16.8 Daelim Industrial 6.1 9.5 9.9 33.2 6.7 7.8 8.7 GS E&C 7.0 8.4 15.8 14.5 10.9 11.3 13.4 Samsung Engineering 10.2 14.1 22.2 16.0 12.8 14.6 18.8 Hyundai Development 6.3 11.8 14.7 17.1 60.9 22.0 9.0 Sector average 7.4 10.9 15.7 20.2 22.8 13.9 12.5 Premium 24.8 23.9 75.9 4.9 (34.2) (3.7) 34.6 32.8 Discount rate (%) 30 Target premium 23.0 Source: Bloomberg, Mirae Asset Research

Figure 3 Daewoo E&C P/E band chart Figure 4 Daewoo E&C P/B band chart

(KRW) (KRW) 30.0x 20,000 20,000

25.0x

15,000 15,000 2.0x 20.0x 1.8x

1.5x 10,000 15.0x 10,000 1.3x 10.0x 1.0x 5,000 5,000

0 0 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Source: Quantiwise, Mirae Asset Research Source: Quantiwise, Mirae Asset Research

2 Mirae Asset Securities 2 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Figure 5 Peer valuation Daewoo Samsung Samsung Hyundai Daelim GS Hyundai Company E&C ENG C&T E&C Industrial E&C Develop.

Code 047040 028050 000830 000720 000210 006360 012630 Rating BUY HOLD BUY BUY HOLD HOLD HOLD Target price (KRW) 9,500 66,000 74,000 68,000 89,000 36,000 21,000 Share price (KRW) (6/11) 8,220 78,200 74,100 54,300 82,900 31,900 30,350 Upside (%) 15.6 (15.6) (0.1) 25.2 7.4 12.9 (30.8) Market cap (KRWbn) 3,416 3,128 11,576 6,047 2,885 2,265 2,288 Market cap (US$ m) 3,363 3,079 11,396 5,953 2,840 2,230 2,252 Foreign ownership (%) 7.1 27.9 24.6 21.3 28.6 21.5 49.9 Sales (KRW bn) 2012 8,223 11,440 25,326 13,325 10,253 9,569 3,334 2013E 8,782 9,824 28,433 13,938 9,847 9,566 4,217 2014E 9,599 9,630 31,216 15,824 10,144 9,779 4,245 2015E 10,534 9,655 34,255 17,343 10,784 10,447 4,479 Operating profit (KRW bn) 2012 346 732 490 760 486 176 104 2013E (245) (1,022) 433 793 40 (935) (148) 2014E 455 238 568 940 372 252 213 2015E 524 431 665 1,117 446 348 334 Net income (KRW bn) 2012 177 524 465 567 401 95 6 2013E (718) (677) 266 570 (12) (827) (201) 2014E 258 145 516 750 317 144 97 2015E 320 293 557 916 435 210 179 ROE (%) 2012 5.3 30.1 3.9 11.2 8.2 2.4 (0.0) 2013E (27.6) (74.0) 2.2 10.3 (0.5) (28.9) (9.8) 2014E 9.0 13.7 4.3 12.3 5.9 4.7 4.4 2015E 10.0 22.0 4.4 13.1 7.4 6.4 7.7 EPS (KRW) 2012 426 13,095 2,884 4,579 11,239 1,693 (1) 2013E (1,727) (16,915) 1,552 4,523 (714) (16,239) (2,768) 2014E 621 3,617 3,120 6,168 8,398 2,787 1,263 2015E 769 7,317 3,370 7,533 11,521 4,055 2,323 P/E (x) 2012 23.4 12.6 21.7 15.3 7.7 33.9 (16,727.0) 2013E 0.0 (4.1) 39.0 13.4 0.0 0.0 0.0 2014E 15.3 21.6 23.7 8.8 9.9 11.4 24.0 2015E 12.3 10.7 22.0 7.2 7.2 7.9 13.1 P/B (x) 2012 1.2 3.8 0.9 1.7 0.7 0.8 0.7 2013E 1.2 3.0 0.9 1.4 0.8 0.5 0.8 2014E 1.4 3.0 1.0 1.1 0.6 0.5 1.1 2015E 1.2 2.3 1.0 0.9 0.6 0.5 1.0 EV/EBITDA (x) 2012 16.3 13.7 20.4 8.6 4.9 14.1 26.2 2013E 0.0 (4.1) 20.4 7.6 28.7 0.0 0.0 2014E 10.9 13.8 19.1 5.5 7.4 11.6 16.1 2015E 9.5 8.0 16.9 4.5 6.1 9.2 11.0 Source: Mirae Asset Research

3 Mirae Asset Securities 3 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Outlook for the Korean housing market Korea’s housing market recovery, which began in 2H13, has been losing steam gradually since 1Q14. In particular, we see a high likelihood of key indices (e.g. apartment prices, pre-sale volume and transaction volume) turning downwards in 2H14, after peaking in 1H14.

1) Housing prices to peak in 1H14 We expect housing prices to weaken in 2H14, after showing relative strength in 1H14, as: 1) prices of reconstruction apartments have declined since end-February, due to the government’s plan to impose taxes on rental income (applied to both jeonse and monthly rent); and 2) the government’s recent announcement of plans to ease the rental income taxation burden is not enough to revive investor sentiment. Although the government could actually introduce measures to ease the taxation of housing rental income to some extent, we believe the taxation on housing rental income should weigh on the housing market, as: 1) property owners who had not paid taxes on their rental income will have to pay taxes one way or another; and 2) they will have to start reporting their rental income to the tax authorities.

The Ministry of Land, Infrastructure and Transport had previously announced plans to levy taxes separately on owners of two homes who earn KRW20m or less per year in rental income. However, the Ministry has recently been pushing to revise its plans, in order to apply the separate tax to those who earn rental income of KRW20bn or less per year, regardless of the number of homes owned. The plan is to apply a fixed 14% tax rate (versus a tax rate of 6%- 38%, if subject to the comprehensive income taxation system) and raise the deduction rate for estimated expenses to 60% from 45.3%. Moreover, the ministry is also considering plans to exempt those who earn rental income of KRW20bn or less without any other income from health insurance payments. However, we believe the government’s plans to ease the rental income taxation burden will undergo revision to some extent, in light of the fairness issue regarding health insurance payments and the government’s need to increase tax revenue.

Figure 6 Monthly rent taxation Current Future plan Single home-owning households Tax-free Tax-free 1) Under KRW20m per year Separate taxation of 14% from 2016 Aggregate taxation 6~38% Accept necessary expenses of 60% Two-home-owning households Accept necessary expenses of 45.3% Basic deduction of KRW4m No basic deduction 2) Over KRW20m per year Same as current law Aggregate taxation 6~38% Multi-home-owning households Accept necessary expenses of 45.3% Same as current law No basic deduction Source: Mirae Asset Research

Figure 7 Jeonse taxation Current Future plan Single home-owning households Deemed rent tax-free Deemed rent tax-free

Deposit over KRW0.3bn recognized Two-home-owning households Deemed rent tax-free as deemed rent (from 2016) Deposit over KRW0.3bn Multi-home-owning households recognized as deemed rent Source: Ministry of Strategy and Finance, Mirae Asset Research

4 Mirae Asset Securities 4 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Given that the Metropolitan area will likely see a sharp increase in home supply from 2015, following the surge in the pre-sales of apartments in this region in 2014, we believe housing prices will face greater downward pressure in 2H14, if significant measures to ease the taxation burden fail to pass the National Assembly during the extraordinary session in June.

Figure 8 Slowdown of housing price momentum since Feb 2014 Figure 9 Reconstruction price has been decreased

(MoM%) (MoM%) Reconstruction (LHS) (MoM%) 2.0 0.6 0.8 Excluding reconstruction (RHS) Nationwide Seoul 0.6 1.5 0.4 0.4 1.0 0.2 0.2 0.5 0.0 0.0 0.0 (0.2) (0.5) (0.4) (0.2) (0.6) (1.0) (0.4) (0.8) (1.5)

(1.0) (2.0) (0.6) Mar10 Nov10 Jul11 Mar12 Nov12 Jul13 Mar14 Mar10 Dec10 Sep11 Jun12 Mar13 Dec13

Source: Ministry of Land, Transport and Maritime Affairs, Mirae Asset Research Source: Ministry of Land, Transport and Maritime Affairs, Mirae Asset Research

2) Potential slowdown in pre-sale volume growth in 2H14 The expected home pre-sale volume in 2014 is 295k units, 4.4% up from 282k units in 2013. Year-to-May cumulative pre-sale volume reached 107k units, up by a hefty 46.6% YoY (from 73k units in 2013). Notably, pre-sale volume in Korea grew by 117.6% YoY in April and 43.9% YoY in May and is expected to rise by 45.3% YoY to 42k units in June. However, we expect pre-sale demand to decline HoH in 2H14, on a slight decline in home prices. Given the likely limited room for growth in home pre-sale volume in the Seoul Metropolitan Area from 2015 onwards (following its sharp growth in 2014), we expect annual pre-sale volume to be maintained at 260k units from 2015.

Figure 10 2014E presales volume up to 4.4% YoY Figure 11 Accumulated presales volume of 107,000 households

(May 2014)

('000 Unit) 2012 2013 2014 ('000 unit) Presale supply (LHS) (%) 300 400 Growth (RHS) 70 60 350 250 50 300 40 200 250 30 200 20 150 150 10 0 100 100 (10) 50 50 (20) 0 (30) 2000 2002 2004 2006 2008 2010 2012 2014E 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: Ministry of Land, Transport and Maritime Affairs, Mirae Asset Research Source: Ministry of Land, Transport and Maritime Affairs, Mirae Asset Research

5 Mirae Asset Securities 5 Seongjjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Figure 12 Presale momentum would decrease in 2H14 Figure 13 Overwhelming Seoull/Metropolitan presales volume

('000 unit) ('000 unit) Price channge (RHS) (%) Monthly presale supply Seoul/Mettropolitan (LHS) 60 200 30 2013 2014 Provinciall (LHS) 180 25 50 160 20 140 40 120 15 30 100 10

80 5 20 60 0 10 40 20 (5) 0 0 (10) Jan Feb Mar Apr May JunJulAugSep Oct Nov Dec 2000 2002 2004 2006 2008 2010 2012 2014E

Source: Ministry of Land, Transport and Maritime Affairs, Mirae Asset Research Source: Ministry of Land, Transport and MMaritime Affairs, Mirae Asset Research

3) Trading volume growth to weaken in 2H14 We expect total home trransaction volume in Korea to rise by 6.6% YoY to 900k units in 2014. In 1Q14, home transaction volume jumped by 61% YoY to 2277k units. While the increase in home transaction volume in 1H14 has been driven mainly by inncreased home purchasing, on expectations for a recovery in the Korean housing market, we expect trading volume growth to slow from 2H14, on a slight decline in home prices.

Figure 14 2014E transaction volume to increase 6.6% YoY Figure 15 Transaction momenttum should decrease in 2H14

('000 unit) (%) ('000 unit) 1,200 30 180 Total (LHS) YoY (RHS) 2012 2013 2014E 160 1,000 20 140 800 10 120 100 600 0 80 400 (10) 60 40 200 (20) 20 0 (30) 0 2006 2008 2010 2012 2014E Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: Ministry of Land, Transport and Maritime Affairs, Mirae Asset Research Source: Ministry of Land, Transport and Maritime Affairs, Mirae Asset Research

6 Mirae Asset Securities 6 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Daewoo E&C’s housing division Despite the sluggish growth in Korea’s overall domestic housing market, Daewoo E&C has been enjoying strong top-line growth, backed by its ability to respond proactively to the recent changes in Korea’s domestic housing market conditions. We expect the housing division’s 2014 full-year revenue to grow by 19.9% YoY to KRW2.4tn and its gross profit to jump by 68.4% YoY to KRW295bn (thanks to sharply improved margins). While the division’s gross margin declined to 5.7% in 2013, due to adjusted COGS to revenue ratio in 4Q13, it jumped to 13.8% in 1Q14. We expect its 2014 full-year gross margin to reach 12.3%. The housing division should post a revenue CAGR of 10.7% from end-2013 to 2016, thanks to continued growth in pre-sale volume since 2011, which should drive growth in the company’s domestic business going forward.

Figure 16 Sales breakdown (2013) Figure 17 Housing division sales and GP margin trends

(KRW bn) (%) 6,000 12 Sales (LHS) Gross margin (RHS) Housing 10 5,000 24% 8 Overseas 6 35% 4,000 4 Civil 3,000 2 engineering 0 14% 2,000 (2) Others 0% (4) Plant 5% 1,000 Constructi (6) on 22% 0 (8) 2010 2011 2012 2013 2014E 2015E 2016E

Source: Daewoo E&C, Mirae Asset Research Source: Daewoo E&C, Mirae Asset Research

In 2013, Daewoo E&C emerged as Korea’s largest pre-sale apartment supplier, with a 6.3% market share (its highest level since 2000). Its pre-sale market share is likely to fall slightly to 4.9% in 2014, as peers have recently been increasing their home supply. Following pre-sales of 18k apartment units in 2013 (the greatest volume since its pre-sale of 19k units in 2003), the company plans to pre-sale 14k apartments in 2014. The company provided 2.2k new homes (including residential-commercial composite building and officetels*) in 2013 and is expected to offer 20k new homes in 2014.

Figure 18 Daewoo E&C’s M/S in presale market

('000 unit) (%)

400 7 Presale market (LHS) Daewoo E&C M/S (RHS) 350 6

300 5 250 4 200 3 150 2 100

50 1

0 0 2000 2002 2004 2006 2008 2010 2012 2014E Source: Daewoo E&C, Mirae Asset Research * Officetels are multi-purpose buildings with residential and commercial units

7 Mirae Asset Securities 7 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

We attribute Daewoo E&C’s competitive edge over peers in the Korean housing market to its strategy of offering homes to non-speculative homebuyers. In light of growing expectations for home price rises and a decline in average family size, the company began to shift its business focus to small-sized, reasonably priced apartments in earnest from 2011. As a result, its total housing-related revenue fell short of the previous peak levels, although its home pre- sale volume reached the highest level since 2000. Moreover, we believe that its focus on non- speculative homebuyers has enabled the company to maintain its gross margin at low-10% levels, despite its market share gains.

Figure 19 Housing sales growth under presales volume Figure 20 Housing division GP margin of 10%

('000 unit) (KRW bn) (%) Daewoo E&C M/S (LHS) (%) 25 Daewoo E&C presale volume (LHS) 3,000 7 25 Housing devision GP margin (RHS)

Housing sales (RHS) 2,500 6 20 20 5 2,000 15 15 4 1,500 10 3 10 1,000 5 2 5 500 1 0

0 0 0 (5) 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012 2014E

Source: Daewoo E&C, Mirae Asset Research Source: Daewoo E&C, Mirae Asset Research

PF-related risks subsiding With the restart of KRW250bn worth of PF projects, we expect unstarted PF projects to decline to KRW500bn by end-2014. The amount of unstarted PF projects had already dropped to KRW747.2bn in 2013 from KRW1.4tn in 2012, thanks to the restart of major housing projects, including Gimpo Pungmu (KRW400bn), Hapjeong block No. 2 (KRW214.3bn) and Wirye A3-9 (KRW38bn). While loans worth KRW400bn for the Gimpo Pungmu PF project (construction of which was resumed in 2013) will mature in August 2014, we believe that the risk of default is not high, as: 1) partial repayment (KRW100bn) will be possible, thanks to the inflow of pre-sale proceeds (the rate of pre-sale volume that results in actual sales has exceeded 80%); and 2) loan rollover is also possible.

Figure 21 Daewoo E&C’s PF guarantee trends

(KRW bn) 3,500 Construction starts Construction unstarted 3,000

2,500 1,288.3 2,000 781.1 1,500 1,221.5 1,409.2 1,000 1,726.5 1,440.6 500 747.2 492.2 0 2011 2012 2013 2014E

Source: Daewoo E&C, Mirae Asset Research

8 Mirae Asset Securities 8 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Figure 22 Daewoo E&C’s PF guarantee Debt Guaranteed Bond Debt amount Location balance amount Debt schedule Type entities (KRW bn) (KRW bn) (KRW bn) Gyeonggi-do Bank 400.0 400.0 400.0 2011.08~2014.08 Loan / ABCP / ABS Seoul Securities 265.0 265.0 265.0 2013.04~2015.10 ABCP Seoul Bank 215.6 214.3 214.3 2012.02~2016.10 Loan / ABCP / ABSTB Seoul Securities 176.9 174.3 174.3 2012.09~2015.09 Loan / ABCP Chungcheongnam-do Insurance 118.0 118.0 118.0 2013.05~2015.05 Loan / ABCP Gyeonggi-do Bank 84.7 82.2 82.2 2013.04~2015.02 Loan / ABCP Seoul Securities 82.0 82.0 82.0 2012.11~2014.02 ABCP Incheon Bank 89.3 80.6 80.6 2010.07~2016.06 Loan / ABCP Seoul Insurance 68.5 68.5 68.5 2012.06~2014.04 Loan Incheon Bank 70.0 64.3 64.3 2012.12~2015.12 Loan Source: Daewoo E&C, Mirae Asset Research

Figure 23 Companies’ PF guarantee schedule 1 Hyundai Samsung Daewoo Daelim POSCO Lotte SK Hyundai Hanwha (KRW m) GS E&C E&C C&T E&C Industrial E&C E&C E&C Dev E&C 1Q14 102.1 86.7 82.0 89.2 263.0 219.6 110.0 - - 135.0 2Q14 215.0 - 68.5 150.0 - 110.0 411.9 167.0 - 180.0 3Q14 - - 400.0 293.0 - 301.1 999.6 - 149.0 - 4Q14 479.4 - - 147.5 - 737.0 - - - - 2014E 796.5 86.7 550.5 679.7 263.0 1,367.7 1,521.5 167.0 149.0 315.0 2015E 587.5 - 639.5 57.0 38.8 - 296.8 600.0 69.2 340.0 2016E~ - 443.2 362.5 - 387.8 - 326.3 - 228.5 295.0 Total 1,384.0 529.9 1,552.5 736.7 689.6 1,367.7 2,144.6 767.0 446.7 950.0 Source: DART, Mirae Asset Research

Figure 24 Companies’ PF guarantee schedule 2 (KRW Doosan Hyundai Doosan Ssangyong Taeyoung Kumho Halla Kolon Keangnam Dongbu m) Heavy Amco E&C E&C E&C Industrial E&C Global Enterprises E&C 1Q14 - 50.0 312.0 7.6 - - 90.0 - 55.1 - 2Q14 1,145.0 - 8.2 - - - - - 510.0 - 3Q14 - 22.0 - 32.5 - - - 40.0 - 400.0 4Q14 262.0 262.8 ------90.6 - 2014E 1,407.0 334.8 320.2 40.1 - - 90.0 40.0 655.7 400.0 2015E - 93.7 2.3 40.0 ------2016E~ 0.8 205.0 7.4 72.1 370.2 1,023.9 - - - - Total 1,407.8 633.5 329.9 152.3 370.2 1,023.9 90.0 40.0 655.7 400.0 Source: DART, Mirae Asset Research

9 Mirae Asset Securities 9 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Diversification of overseas markets We expect Daewoo E&C’s overseas division to post 76% YoY growth in order intake, to KRW7.4tn, and 21% YoY growth in revenue, to KRW3.5tn, in 2014. Africa had previously served as the main growth driver of the company’s overseas business, accounting for 55% of total order backlog (versus the Middle East’s 25% portion). However, the company has been trying to expand its exposure to the Middle East in order to achieve sustainable growth; as a result, the Middle East has emerged as the key growth driver of overseas orders since 2008. Backed by the winning of orders for Kuwait’s Clean Fuel Project (CFP; worth US$1bn), the Middle East has come to account for 81.6% of June-YTD order intake, worth US$3.2bn.

Figure 25 Overseas division sales up to KRW7tn Figure 26 High profitability of overseas division

(KRW bn) (KRW bn) (%) 9,000 6,000 12 New order Sales Sales (LHS) Gross margin (RHS) 8,000 10 5,000 7,000 8 6 6,000 4,000 4 5,000 3,000 2 4,000 0 2,000 3,000 (2) 2,000 (4) 1,000 1,000 (6) 0 0 (8) 2010 2011 2012 2013 2014E 2015E 2016E 2010 2011 2012 2013 2014E 2015E 2016E

Source: Daewoo E&C, Mirae Asset Research Source: Daewoo E&C, Mirae Asset Research

Figure 27 East Asia as Daewoo E&C’s main overseas market Figure 28 East Asia orders have been growing after 2007

(US$ m) (%) (%) 100 6,000 100 Middle East Africa New order (LHS) Middle East (RHS) 90 90 5,000 80 80 70 70 4,000 60 60 3,000 50 50 40 40 2,000 30 30 20 1,000 20 10 10 0 0 0 2000 2002 2004 2006 2008 2010 2012 2014E 2000 2002 2004 2006 2008 2010 2012 2014E

Source: Daewoo E&C, Mirae Asset Research Source: Daewoo E&C, Mirae Asset Research

We should note that the portion of single prime contracts in total order intake has been increasing in line with the growing exposure to the Middle East. The company’s portion of single prime contracts has been moving in a similar direction to its overseas division’s gross profit margin, which means that the single prime contracts awarded to Daewoo E&C is as profitable as its subcontractor contracts and JV contracts. While lack of technological prowess had been cited as the main obstacle to Daewoo E&C’s entry into the Middle Eastern market, the company’s recent increase of single prime contracts from the Middle East underscores its strengthened technological prowess and improved project execution capability.

10 Mirae Asset Securities 10 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Figure 29 Main contract proportion and profitability Figure 30 Main contract and East Asia order proportion

Main contract (LHS) (%) (%) (%) Overseas division GPM (RHS) 120 15 120 Main contract proportion

10 100 100 East Asia proportion 5 80 80 0 60 60 (5) 40 40 (10) 20 20 (15)

0 (20) 0 2000 2002 2004 2006 2008 2010 2012 2014E

2000 2002 2004 2006 2008 2010 2012 2014E

Source: Daewoo E&C, Mirae Asset Research Source: Daewoo E&C, Mirae Asset Research

The overseas division incurred gross losses of KRW346.2bn in 4Q13, due mainly to an adjustment in COGS-to-revenue ratio for low-margin construction projects, including the UAE’s RRE and S3 power plant projects, Saudi Arabia’s Sadara Tank Farm and Hout gas projects and Malaysia’s St. Regis Hotel project. Given that gross margin recovered to 8.1% in 1Q14, after an adjustment to COGS-to-revenue ratio, we believe the overseas division’s margin normally reaches 9% levels. Thanks to the reduced portion of low-margin projects, we expect the overseas division’s margin to rise gradually to 9.4% in 2016 from 9% in 2014.

11 Mirae Asset Securities 11 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Figure 31 Major overseas project schedule

(KRW bn) 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E Contract 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 Project Completion Amount date Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q CFP PJ Apr-14 Apr-18 1,154.6

Vietnam THT1 Dec-13 N/A 216.4

Al Faw Grand Port PJ Nov-13 Aug-16 751.7

Algeria CAFC Oil PJ Oct-13 N/A 665.3

Akkas CPF PJ Sep-13 Jul-15 708.3

PASIR RIS Jul-13 Jan-15 242.0

INDORAMA FERTILIZER Feb-13 Dec-15 309.5

JAZAN REFINERY PJ Nov-12 Apr-16 557.6

Algeria RDPP PJ Oct-12 Oct-16 1,053.8

SSGGP Aug-12 Feb-15 270.2

Algeria EL HARRACH PJ Jun-12 Dec-15 320.3

HOUT(KRL) Onshore Gas Facilities Mar-12 Mar-15 210.0

JORF LASFAR 2 Mar-12 Jun-14 298.7

SADARA TANK Dec-11 Mar-15 387.2 OML58 Jul-11 Apr-14 842.3

SUR IPP Jul-11 Apr-14 1,376.7

PATRIND HYDRO POWER Apr-11 Mar-15 314.3

Vietnam Hanoi Apartment Mar-11 Dec-14 203.2

S3 Feb-11 N/A 721.5

OTUMARA Feb-11 Mar-14 247

Swani Hospital Jan-11 Sep-13 218.6

JORF LASFAR Dec-10 Apr-14 1,144.0

Papua New Guinea LNG PJ Sep-10 Dec-13 362.4

ZWITINA STEAM CYCLE Aug-10 Feb-15 459.6

IRP II TANK PJ Jul-10 Nov-12 314.3

UAE RRE Mar-10 Feb-14 1,502.4

Algeria FERTILIZER PJ Dec-08 Jul-12 812.0

BCCP Jan-08 Dec-11 554.1

MCCP Sep-07 Dec-11 620.9

Source: Daewoo E&C, Mirae Asset Research

12 Mirae Asset Securities 12 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Earnings outlook

Earnings outlook for 2014 We estimate Daewoo E&C’s 2014 full-year revenue at KRW9.6tn (+12.9% YoY) and operating profit at KRW447.2bn (a dramatic turnaround from losses of KRW244.7bn in 2013). The company slipped into the red in 2013, on recognition of massive project costs (totaling KRW1.1tn). It booked losses of KRW374.5bn (cost), due to adjustments to the cost to revenue ratio for its Middle Eastern plant projects and domestic housing projects, while recognizing KRW160bn in losses from its domestic pre-sale business as SG&A expenses and KRW600bn in expected losses from unstarted PFs and discounted pre-sales as non-operating expenses.

We expect a recovery in gross margins for Daewoo E&C’s overseas and housing divisions to 9% (from -3.8% in 2013) and 12.3% (from -3.8% in 2013), respectively, in 2014. Thanks to the recovery in margins, company-wide gross margins and operating margins should also improve to 9.2% (from 3.5% in 2013) and 4.7% (from -2.9% in 2013), respectively, in 2014. Company-wide net profit will likely reach KRW157.9bn in 2014 (a turnaround from net losses of KRW717.8bn in 2013).

Earnings outlook for 2Q14

We expect Daewoo E&C’s quarterly revenue and operating profit to remain on an uptrend in 2Q14, following its strong 1Q14 revenue of KRW2.17tn (-4.6% YoY) and operating profit of KRW130.4bn (+13.3% YoY). We estimate its 2Q14 revenue at KRW2.45tn (+5.1% YoY) and operating profit at KRW114.3bn (+8.9% YoY). In 1Q14, the housing division’s gross margin rose to 13.8% on increased revenue contribution from its in-house pre-sale project sites (e.g. Misa Riverside City, Wirye New Town and Byeollae District of Namyangju) and profit recognition from completed projects (e.g. West Suwon Lake Prugio), while gross margins for the domestic civil engineering, architecture and plant divisions were also normalized. Despite an adjustment in COGS-revenue ratio in end-2013, the overseas project division posted a gross margin of 8.1% in 1Q14. Despite lowered margins for the housing division, we expect company-wide gross margin to reach 9% in 2Q14 (versus 10.1% in 1Q14).

Figure 32 2Q14 earnings preview (KRW bn, %) 2Q13 1Q14 2Q14(E) QoQ YoY Consensus diff. 3Q14(E) Revenue 2,326.9 2,165.4 2,446.6 13.0 5.1 2,451.4 (0.2) 2,489.7 Gross Profit 224.4 228.7 221.1 (3.3) (1.5) 227.3 Operating Profit 104.9 130.4 114.3 (12.3) 8.9 103.7 10.2 111.7 Pre-tax profit 62.8 95.6 85.9 (10.1) 36.8 75.5 13.8 86.8 Net profit 38.5 68.8 64.8 (5.7) 68.5 58.9 10.1 65.5 Gross margin 9.6 10.6 9.0 (1.5ppt) (0.6ppt) 9.1 Operating margin 4.5 6.0 4.7 (1.3ppt) 0.2ppt 4.2 0.4ppt 4.5 Pre-tax profit margin 2.7 4.4 3.5 (0.9ppt) 0.8ppt 3.1 0.4ppt 3.5 Net margin 1.7 3.2 2.7 (0.5ppt) 1.0ppt 2.4 0.2ppt 2.6 Source: Bloomberg, Mirae Asset Research

13 Mirae Asset Securities 13 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Figure 33 Daewoo E&C yearly earnings forecast (KRW bn) 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E New orders

Housing 3,652.0 3,632.5 3,531.5 3,913.8 3,992.1 4,032.0 3,991.7 3,951.8 3,912.2 Civil engineering 1,807.2 1,494.3 894.4 640.1 864.1 890.1 916.8 944.3 972.6 Construction 1,982.1 2,336.7 2,602.6 1,793.2 1,972.5 1,992.2 2,012.2 2,032.3 2,052.6 Plant 297.1 423.2 422.7 870.2 522.1 527.3 532.6 537.9 543.3 Others - - - Domestic 7,738.4 7,886.7 7,451.2 7,217.3 7,350.9 7,441.6 7,453.2 7,466.3 7,480.8 Overseas 3,958.2 5,384.1 6,361.2 4,197.2 7,387.1 7,756.4 7,989.1 8,228.8 8,475.7 Total 11,696.6 13,270.8 13,812.4 11,414.5 14,737.9 15,198.1 15,442.3 15,695.0 15,956.4 Sales

Housing 1,613.2 1,293.4 1,478.6 1,999.6 2,398.2 2,565.4 2,709.3 2,834.6 2,943.3 Civil engineering 1,567.5 1,552.3 1,236.1 1,152.9 1,128.5 1,119.4 1,115.4 1,116.3 1,121.7 Construction 1,062.0 1,216.2 1,538.6 1,900.0 2,011.5 2,005.7 1,997.6 2,003.0 2,010.2 Plant 606.9 452.1 468.1 433.9 425.6 452.8 474.1 491.2 505.1 Others 32.7 14.1 20.6 18.5 19.6 19.0 19.3 19.2 19.2 Domestic 4,882.3 4,528.1 4,742.0 5,504.9 5,983.3 6,162.3 6,315.7 6,464.2 6,599.6 Overseas 1,836.8 2,503.8 3,438.3 2,912.2 3,523.3 4,371.6 5,106.9 5,751.3 6,322.9 Total 6,719.1 7,031.9 8,180.3 8,417.1 9,599.1 10,533.9 11,422.7 12,215.5 12,922.4 Gross margin

Housing (0.9) 11.2 12.3 8.8 12.3 12.3 12.4 12.5 12.6 Civil engineering 6.9 8.6 6.9 5.3 7.0 7.0 7.0 7.0 7.0 Construction 9.0 12.1 10.7 6.6 6.6 6.6 6.6 6.6 6.7 Plant 7.1 6.6 14.0 11.0 12.0 12.1 12.1 12.2 12.2 Others 16.2 (16.3) (1.5) (3.8) (3.8) (3.8) (3.8) (3.8) (3.8) Domestic 4.9 10.0 10.5 7.4 9.3 9.4 9.6 9.7 9.8 Overseas (6.8) 8.6 8.9 (3.8) 9.0 9.3 9.4 9.5 9.5 Total 1.7 9.5 9.8 3.5 9.2 9.4 9.5 9.6 9.6 Gross profit 126.5 682.8 819.6 340.0 892.8 985.3 1,081.6 1,169.5 1,244.1 Operating profit (210.1) 297.6 345.7 (244.7) 454.7 524.2 588.3 648.9 700.4 Pretax profit (1,152.4) 210.0 227.9 (839.7) 346.4 423.5 493.3 559.2 615.5 Net profit (827.6) 177.1 176.9 (717.8) 257.9 319.8 372.5 422.2 464.7 Operating margin (3.1) 4.2 4.2 (2.9) 4.7 5.0 5.2 5.3 5.4 YoY growth T.R T.B 16.2 T.R T.B 12.4 12.5 10.5 8.1 Net margin (12.3) 2.5 2.2 (8.5) 2.7 2.9 3.1 3.3 3.5 YoY growth T.R T.B (0.1) T.R T.B 20.4 17.0 13.8 10.3 Source: Daewoo E&C, Mirae Asset Research

14 Mirae Asset Securities 14

Seongjin Byun, Analyst, 3774 1457, [email protected] DAEWOO E&C Eunsol Shim, 3774 3824, [email protected] 047040 KS

Figure 34 Quarterly earnings forecast (KRW bn, %) 1Q13 2Q13 3Q13 4Q13 2013 1Q14 2Q14 3Q14 4Q14 2014E 1Q15 2Q15 3Q15 4Q15 2015E 1Q16 2Q16 3Q16 4Q16 2016E Sales Housing 414.4 512.0 481.4 591.8 1,999.6 613.0 616.3 575.6 593.3 2,398.2 615.7 667.0 615.7 667.0 2,565.4 650.2 704.4 650.2 704.4 2,709.3 Civil engineering 221.7 321.4 280.7 329.1 1,152.9 224.5 320.0 304.7 279.3 1,128.5 235.1 313.4 279.8 291.0 1,119.4 234.2 312.3 278.9 290.0 1,115.4 Construction 413.3 501.0 428.2 557.5 1,900.0 465.5 523.0 502.9 520.1 2,011.5 487.5 521.5 501.4 495.3 2,005.7 485.5 519.4 499.4 493.3 1,997.6 Plant 124.5 126.0 97.9 85.5 433.9 77.2 102.1 114.9 131.3 425.6 82.1 117.7 122.2 130.7 452.8 86.0 123.3 128.0 136.8 474.1 Others 4.1 4.1 4.9 5.4 18.5 3.3 4.3 5.1 6.9 19.6 3.2 4.9 4.9 5.9 19.0 3.3 5.0 5.0 6.0 19.3 Domestic 1,178.0 1,464.5 1,293.1 1,569.3 5,504.9 1,383.5 1,565.8 1,503.1 1,530.9 5,983.3 1,423.6 1,624.6 1,524.2 1,589.9 6,162.3 1,459.3 1,664.4 1,561.5 1,630.6 6,315.7 Overseas 853.5 845.2 713.5 500.0 2,912.2 689.5 880.8 986.5 966.5 3,523.3 918.0 1,049.2 1,180.3 1,224.0 4,371.6 1,072.5 1,225.7 1,378.9 1,429.9 5,106.9 Total 2,031.5 2,309.7 2,006.6 2,069.3 8,417.1 2,165.4 2,446.6 2,489.7 2,497.4 9,599.1 2,341.7 2,673.8 2,704.5 2,814.0 10,533.9 2,531.7 2,890.1 2,940.4 3,060.5 11,422.7 Sales proportion (%) Housing 20.4 22.2 24.0 28.6 23.8 28.3 25.2 23.1 23.8 25.0 26.3 24.9 22.8 23.7 24.4 25.7 24.4 22.1 23.0 23.7 Civil engineering 10.9 13.9 14.0 15.9 13.7 10.4 13.1 12.2 11.2 11.8 10.0 11.7 10.3 10.3 10.6 9.3 10.8 9.5 9.5 9.8 Construction 20.3 21.7 21.3 26.9 22.6 21.5 21.4 20.2 20.8 21.0 20.8 19.5 18.5 17.6 19.0 19.2 18.0 17.0 16.1 17.5 Plant 6.1 5.5 4.9 4.1 5.2 3.6 4.2 4.6 5.3 4.4 3.5 4.4 4.5 4.6 4.3 3.4 4.3 4.4 4.5 4.2 Others 0.2 0.2 0.2 0.3 0.2 0.2 0.2 0.2 0.3 0.2 0.1 0.2 0.2 0.2 0.2 0.1 0.2 0.2 0.2 0.2 Domestic 58.0 63.4 64.4 75.8 65.4 63.9 64.0 60.4 61.3 62.3 60.8 60.8 56.4 56.5 58.5 57.6 57.6 53.1 53.3 55.3 Overseas 42.0 36.6 35.6 24.2 34.6 31.8 36.0 39.6 38.7 36.7 39.2 39.2 43.6 43.5 41.5 42.4 42.4 46.9 46.7 44.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 YoY growth (%) Housing 34.5 25.2 27.9 53.6 35.2 47.9 20.4 19.6 0.3 19.9 0.4 8.2 7.0 12.4 7.0 5.6 5.6 5.6 5.6 5.6 Civil engineering (10.1) (6.7) (14.0) 3.2 (6.7) 1.3 (0.4) 8.6 (15.1) (2.1) 4.7 (2.1) (8.2) 4.2 (0.8) (0.4) (0.4) (0.4) (0.4) (0.4) Construction 51.9 32.9 1.7 19.0 23.5 12.6 4.4 17.4 (6.7) 5.9 4.7 (0.3) (0.3) (4.8) (0.3) (0.4) (0.4) (0.4) (0.4) (0.4) Plant 37.9 4.0 (23.5) (33.6) (7.3) (38.0) (18.9) 17.4 53.6 (1.9) 6.4 15.3 6.4 (0.5) 6.4 4.7 4.7 4.7 4.7 4.7 Others (36.9) (8.9) 8.9 5.9 (10.2) (19.5) 4.9 3.7 27.1 5.7 (2.7) 15.0 (2.7) (13.8) (2.7) 1.4 1.4 1.4 1.4 1.4 Domestic 27.6 16.6 2.9 20.1 16.1 17.4 6.9 16.2 (2.4) 8.7 2.9 3.8 1.4 3.9 3.0 2.5 2.5 2.5 2.6 2.5 Overseas 23.5 (9.5) (26.3) (40.8) (15.3) (19.2) 4.2 38.3 93.3 21.0 33.1 19.1 19.6 26.7 24.1 16.8 16.8 16.8 16.8 16.8 Total 25.8 5.5 (9.8) (3.8) 2.9 6.6 5.9 24.1 20.7 14.0 8.1 9.3 8.6 12.7 9.7 8.1 8.1 8.7 8.8 8.4 Gross profit Housing 45.3 35.8 60.6 33.5 175.2 84.5 74.0 69.1 67.5 295.0 83.1 80.0 73.9 77.9 314.9 87.8 84.5 78.0 85.6 335.9 Civil engineering 22.1 33.0 13.6 (7.7) 61.0 25.0 19.2 21.3 13.5 79.0 18.8 26.6 19.6 13.6 78.6 16.4 26.5 19.5 15.9 78.4 Construction 41.7 48.0 47.5 (12.0) 125.2 34.6 36.6 30.2 31.4 132.8 34.1 46.9 30.1 21.6 132.7 34.0 46.7 30.0 21.7 132.4 Plant 13.7 14.9 11.1 7.9 47.6 12.3 12.1 13.0 13.7 51.1 9.0 14.1 14.1 17.4 54.6 9.5 14.8 14.7 18.5 57.5 Others 0.7 0.2 (1.6) - (0.7) (2.1) (0.0) (0.0) 1.4 (0.7) (0.0) (0.0) (0.0) (0.6) (0.7) (0.0) (0.0) (0.0) (0.6) (0.7) Domestic 123.5 131.9 131.2 21.7 408.3 154.3 141.8 133.6 127.4 557.1 145.1 167.7 137.6 129.7 580.1 147.6 172.6 142.2 141.1 603.5 Overseas 70.2 87.7 78.1 (346.2) (110.2) 55.8 79.3 93.7 88.3 317.1 83.5 97.6 112.1 112.0 405.2 101.9 114.0 131.0 131.3 478.1 Total 193.7 219.6 209.3 (324.5) 298.1 210.1 221.1 227.3 215.7 874.2 228.6 265.3 249.7 241.7 985.3 249.5 286.6 273.2 272.4 1,081.6 Source: DAEWOO E&C, Mirae Asset Research

Mirae Asset Securities

18 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Company description History Daewoo Engineering & Construction (Daewoo E&C) is an affiliate of Daewoo Group, which was founded as Daewoo Industrial in 1967. Daewoo Group established Daewoo E&C, acquiring Daewoo Industrial and Youngjin Construction in November 1973. The company became a major constructor in Korea, with the successfully construction of Seoul’s Dongjak Bridge, Lotte Hotel and the 88 Olympic Expressway. The company expanded its business territory to include Ecuador and Sudan, followed by the US, Cameroon, Taiwan and Japan. However, Daewoo E&C went into a corporate workout program as Daewoo Group disintegrated in August 1999, due to the prolonged economic slowdown and global market contraction. Daewoo E&C completed corporate restructuring in 2003 and Kumho Asiana Group acquired the company in 2006.

Figure 35 Event chart

(KRW) 1) US-triggered global finiancial crisis 2) Daewoo E&C acquired Korea 35,000 Express by KRW 1.6tn 1) Kumho Industrial and were placed under a debt workout program 1) Continued construction market 2) Kumho Asiana faced a liquidity slowdown 30,000 crisis due to unreasonable M&As 2) Daewoo E&C faced a liquidity 3) Korea Development Bank acquired crisis 3) Daewoo E&C sold CJ Korea 50.8% shares of Daewoo E&C Express to secure liquidity 25,000

20,000

15,000

10,000 1) Kumho Asiana Group acquired Daewoo E&C for KRW6.6tn 2) Daewoo E&C sold its company 5,000 building 3) Daewoo E&C resistered as foreign investment enterprise 0 Jan06 Aug06 Mar07 Oct07 May08 Dec08 Jul09 Feb10 Sep10 Apr11 Nov11 Jun12 Jan13 Aug13 Mar14

Source: Daewoo E&C, Mirae Asset Research

16 Mirae Asset Securities 16 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Business structure Daewoo E&C has four main business divisions: Housing, civil engineering, construction, and plant.

1) Housing The housing division accounts for 36% of Daewoo E&C’s sales. Daewoo E&C is ’s market leader, in terms of housing supply, including the prestigious PRUGIO residential complex brand.

2) Civil engineering The civil engineering division accounts for 21% of Daewoo E&C’s sales. Daewoo E&C has built major infrastructure projects in South Korea, such as roads, railways and harbors. The company is expanding from its traditional overseas bases into promising new markets in the Middle East, Asia and South America.

Figure 36 Housing division Figure 37 Civil engineering

Source: Daewoo E&C, Mirae Asset Research Source: Daewoo E&C, Mirae Asset Research

3) Construction The construction division accounts for 35% of Daewoo E&C’s sales. Daewoo E&C is a leader in the construction of high-rise buildings and intelligent building systems, or IBS. The company’s construction projects range from business facilities and hotels to exhibition, medical and sports centers.

4) Plant The plant division accounts for 8% of Daewoo E&C’s sales. Daewoo E&C’s plant construction projects have played a key role in the development of South Korea’s economy. Starting with the turnkey Ulsan Thermal Power Plant in 1977, projects have included combined-cycle, thermal, and tidal power plants and LNG storage tanks. The company has also built a large number of high-value-added plants overseas. Daewoo E&C is now entering into the new and renewable energy sector.

17 Mirae Asset Securities 17 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Figure 38 Construction division Figure 39 Plant engineering

Source: Daewoo E&C, Mirae Asset Research Source: Daewoo E&C, Mirae Asset Research

Figure 40 Sales breakdown (2013) Others 0% Plant 8%

Housing 36%

Construction 35%

Civil engineering 21%

Source: Daewoo E&C, Mirae Asset Research

18 Mirae Asset Securities 18 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Management description Park Young-sik became president of Daewoo E&C in June 2013. Park joined Daewoo E&C in 1980 and built a reputation for expertise in communication and overseas sales. Before becoming president, Park served as the executive vice-president in charge of corporate planning and sales. Park replaced Seo Jong-suk as CEO, following Seo’s investigation by prosecutors for allegedly creating slush funds related to the Korean government’s Four-Rivers project.

Shareholding structure In 2008, Kumho Asiana Group’s assets amounted to KRW26tn, with 52 affiliates. However, Kumho Asiana Group had to sell assets, reduce capital and adopt a high-dividend policy to recoup acquisition costs, after acquiring Daewoo E&C for KRW6.6tn (KRW27,000 per share, which is almost twice Daewoo E&C’s then-share price of KRW12,600). Nevertheless, Kumho Asiana Group faced a liquidity crisis, due to: 1) the US-triggered global financial crisis; 2) and snowballing losses, resulting from put option contracts with financial investors as part of the takeover of Daewoo E&C. As a result, Kumho Industrial and Kumho Tire were placed under a debt workout program and Kumho Asiana Group sold Daewoo E&C. Korea Development Bank acquired 50.8% shares of the company in 2010.

The second largest shareholder is SEBT Investment, with a 12.28% stake. SEBT Investment is a special purpose company that was established by IBK Investment & Securities and a KStone Partners-led consortium. SEBT Investment acquired Kumho Industrial’s stakes in Kumho Buslines, Seoul Express Bus Terminal and Daewoo E&C for KRW950bn (KRW8,140 per share) in 2012. Given the sale of other Kumho-related assets by SEBT Investment, SEPT’s stake in Daewoo E&C could potentially create overhang.

Figure 41 Current shareholders Shareholder ('000 shares) Portion (%) KDB 210,931 50.75 KDB Life Insurance 3,250 0.78 SEBT Investment 51,042 12.28 Foreign Investors 29,705 7.15 Treasury stocks 4,737 1.14 Others 115,958 27.90 Total 415,623 100.00

Source: Daewoo E&C, Mirae Asset Research

Figure 42 Kumho's Daewoo E&C stakes (15 Dec. 2006) Company 2006.12.15 Shares ('000) Stake (%) Acquisition cost per share (KRW) Acquisition cost (KRW bn) Kumho Industrial 62,622 18.46 26,022 1,630 Kumho Tire 19,039 5.61 26,181 498 Kumho Petrochemical 15,231 4.49 26,181 399 9,519 2.81 26,181 249 Kumho Life 3,808 1.11 26,181 100 Kumho Group total 110,218 32.48 26,091 2,876 FI 134,447 39.63 26,255 3,530 Total 244,666 72.11 26,181 6,406 Source: Daewoo E&C, Mirae Asset Research

19 Mirae Asset Securities 19 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

As an affiliate of Kumho Asiana Group, Daewoo E&C anticipated a synergy effect with Korea Express in the fields of overseas port development, domestic private SOC projects, housing construction and logistics center construction. For that reason, the company acquired a 24% share of Korea Express through put option contracts and exchangeable bonds, investing KRW1.6tn. However, the company sold the 424.5k shares of Korea Express for KRW886.2bn on 31 December 2011 to repay loans, due to excessive borrowing for acquisitions and the deteriorated financial structure. Out of the remaining 10.34% of the shares, the company sold the 5.01% of shares that it acquired through the exercise of put options for KRW104.5bn in 2012. In March 2014, Daewoo E&C sold the remaining 5.33% of shares of CJ Korea Express for KRW137.3bn to secure liquidity.

Figure 43 Participants in Korea Express deal (3 March 2008) Company Shares ('000) Portion (%) Price (KRW) Amount (KRWbn) Asiana Airlines 8,170 20.36 171,000 1,397 Daewoo E&C 9,624 23.98 171,000 1,646 Kumho Rent-a-car 1,744 4.35 171,000 298 Kumho P&B Chemicals 585 1.46 171,000 100 Kumho Group total 20,123 50.1 3,441 Lotte Shopping 585 1.46 Daesang 292 0.73 Kolon 58 0.15 Hyosung 58 0.15 Kiswire 29 0.07 Korea Post 1,170 2.91 Consus KC 924 2.30 Busan Bank 760 1.89 Others 3,877 9.66 171,000 663 Total 24,000 171,000 4,104 Source: Daewoo E&C, Mirae Asset Research

20 Mirae Asset Securities 20 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Financial structure As of end-2013, Daewoo E&C’s liability-to-equity ratio stood at 281.5%, with borrowing and net debt totaling KRW3.1tn and KRW2.6tn, respectively. Although KRW150bn worth of corporate bonds issued by the company is expected to mature in 2014, we believe that a short-term liquidity crisis is unlikely, in light of its annual operating cash flow worth KRW300bn. Despite its PF guarantee balance worth KRW1.9tn, as of end-2013, we believe that its PF-related risk is also at manageable levels, given the continued decline in the portion of unstarted PF project portion.

Figure 44 Daewoo E&C’s PF guarantee trends

(KRW bn) 3,500 Construction starts Construction unstarted 3,000

2,500 1,288.3 2,000 781.1 1,500 1,221.5 1,409.2 1,000 1,726.5 1,440.6 500 747.2 492.2 0 2011 2012 2013 2014E

Source: Daewoo E&C, Mirae Asset Research

Risk factors Potential downside risk factors for Daewoo E&C are a decline in home prices in Korea and fiercer competition in overseas project markets. Despite the recovery in Korea’s home pre-sale market on expectations for stabilization in home prices, a downturn in home prices could lead to a slowdown in pre-sale market growth going forward. In addition, the recent economic slowdown in China could accelerate the foray into overseas markets by Chinese E&C companies going forward, thus leading to intensified competition in overseas project markets and further margin erosion in Daewoo E&C’s overseas business. Furthermore, SEBT Investment’s 12.28% stake in Daewoo E&C could cause overhang concerns.

21 Mirae Asset Securities 21 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Summary financial statements

Profit & loss Balance sheet Year end Dec 31 (KRWbn) 2013 2014E 2015E 2016E Year end Dec 31 (KRWbn) 2013 2014E 2015E 2016E Revenue 8,782 9,599 10,534 11,423 Current assets 6,949 7,341 7,712 8,005 Cost of goods sold 8,442 8,706 9,549 10,341 Cash & equivalents 410 477 481 506 Gross profit 340 893 985 1,082 Short-term financial asset 155 191 199 207 SG&A 585 438 461493 Accounts receivable 3,699 3,817 4,000 4,193 EBIT (Adj.) (245) 455 524 588 Inventory 1,483 1,546 1,654 1,709 EBIT (245) 455 524588 Other current assets 1,203 1,311 1,377 1,391 Net interest income (loss) (86) (97) (91) (85) Non-current assets 3,173 3,248 3,338 3,513 Income (loss) from associates (3) 8 8 8 Net fixed assets 698 708 714 717 Others (506) (19) (18) (18) Investments 533 580 604628 Recurring profit (840) 346 424 493 Other long-term assets 1,942 1,959 2,021 2,167 Income tax (122) 88 104 121 Total assets 10,122 10,589 11,050 11,518 Net profit (718) 258 320 372 Current liabilities 4,757 4,815 4,977 5,108 Net profit (Controlling Interests) (718) 258 320 372 Accounts payable 1,051 1,118 1,259 1,370 EPS (Controlling Interests, KRW) (1,727) 621 769 896 Short-term debt 1,665 1,636 1,636 1,636 Other current liabilities 2,041 2,061 2,082 2,103 Growth & margins (%) 2013 2014E 2015E 2016E Non-current liabilities 2,712 2,843 2,822 2,787 Revenue growth 6.8 9.3 9.7 8.4 Long-term debt 1,456 1,403 1,353 1,303 Gross profit growth (58.5) 162.6 10.4 9.8 Other long-term liabilities 1,256 1,440 1,469 1,484 EBIT growth TN TP 15.3 12.2 Total liabilities 7,469 7,658 7,799 7,895 Net profit growth TN TP 24.0 16.5 Controlling Interests 2,596 2,872 3,192 3,564 EPS growth TN TP 24.0 16.5 Non-Controlling Interests 57 58 58 58 Gross margin 3.9 9.3 9.4 9.5 Shareholder's equity 2,654 2,931 3,250 3,623 EBIT margin (2.8) 4.7 5.0 5.2 BVPS(KRW) 6,247 6,911 7,680 8,576 Net profit margin (8.2) 2.7 3.0 3.3

Source: DWEC, Mirae Asset Research estimates Source: DWEC, Mirae Asset Research estimates

Cash flow Ratio analysis Year end Dec 31 (KRWbn) 2013 2014E 2015E 2016E Year end Dec 31 2013 2014E 2015E 2016E Cash flow from operations (505) 304 228 330 ROE (%) (27.6) 9.0 10.0 10.4 Net profit (718) 258 320 372 ROA (%) (7.2) 2.5 3.0 3.3 Depr. & amortization 59 80 83 81 Inventory days 60.5 57.6 55.4 53.7 Others 520 98 21 7 Receivables days 148.7 142.9 135.4 130.9 Change in working capital (366) (133) (196) (131) Payable days 45.7 41.2 41.2 42.0 Cash flow from investing 274 (151) (173) (255) Net debt/equity (%) 96.3 80.9 71.0 61.5 Capital expenditures (64) (64) (74) (72) Interest cover (x) (2.8) 4.7 5.8 6.9 Others 338 (86) (99) (184) Cash flow from financing 252 (86) (50) (50) Dividends 0 0 0 0 Increase in equity 0 0 0 0 Increase in debt 252 (86) (50) (50) Beginning cash 388 410 477 481 Ending cash 410 477 481 506 Source: DWEC, Mirae Asset Research estimates Source: DWEC, Mirae Asset Research estimates

22 Mirae Asset Securities 22 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

Recommendations By stock (12 months) By industry BUY: A target price + 10% or more above the current price, OVERWEIGHT: over +10% of the current industry index HOLD: Target price within - 10% to +10% of the current price NEUTRAL: -10% to +10% of the current industry index REDUCE: A target price of –10% or less below the current price UNDERWEIGHT: -10% or less than the current industry index Important Compliance Disclaimer and Disclosures This report is distributed to our clients only, and none of the report material may be copied or distributed to any other party. While Mirae Asset Securities have taken all reasonable care to ensure its reliability, we do not guarantee that it is accurate or complete. Therefore, Mirae Asset Securities shall not be liable for any result from the use of this report. This report has never been provided to any institutional investor or third party. This report has been prepared without any undue external influence or interference, and accurately reflects the personal views of the analyst on the company herein. No part of the compensation of the research analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the report. [Analyst: Seongjin Byun, Eunsol Shim] Securities Held by the Analyst Holdings of Participation Involvement Treasury Number of Purchase Purchase share of in Issuance of Stock Analyst Type with Affiliates Stock Held Shares Price Date over 1% Securities REMARK: Korean analyst is responsible for Korean securities and relevant sectors only.

Target Price and Recommendation Chart DWEC (047040 KS)

Date Recommendation 12M target price (KRW) Stock Price Target Price 2014-06-13 BUY (Initiate) (KRW) 9,500

11,400 10,900 10,400

9,900

9,400

8,900 8,400 7,900 7,400 6,900 6,400 Jun12 Dec12 Jun13 Dec13

Source: Bloomberg, Mirae Asset Research

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23 Mirae Asset Securities 23 Seongjin Byun, Analyst, 82 2 3774 1457, [email protected] DWEC Eunsol Shim, 82 2 3774 3824, [email protected] 047040 KS

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24 Mirae Asset Securities 24