Samsung C&T Corporation
(028260 KS ) Stable in -house earnings and value of affiliate stakes to trigger re -rating
Initiate coverage with Buy and TP of W180,000 Initiation Report We initiate our coverage on Samsung C&T Corporation (Samsung C&T) with a Buy rating and target price of W180,000 (32% upside potential). We derived our target price January 30, 2018 using a sum-of-the-parts (SOTP) methodology, reflecting the value of in-house businesses (based on 2018F estimates) and the value of affiliate equity stakes.
We estimate in-house businesses represent 20% of Samsung C&T’s enterprise value, and affiliate stakes make up the remaining 80%, including 35% for Samsung (Initiate) Buy Electronics (SEC) shares and 25% for Samsung BioLogics shares. In our view, the share price of Samsung C&T, the de facto holding company of Samsung Group, is more Target Price (12M, W) 180,000 closely tied to changes in the value of its affiliate stakes.
Share Price (01/26/18, W) 136,500 Stabilizing earnings and value of affiliate stakes to trigger re-rating Samsung C&T’s businesses (consolidated) can be divided into: 1) engineering & Expected Return 32% construction (E&C); 2) trading & investment (T&I); 3) fashion; 4) leisure; 5) F&B; and 6) biologics. The company derives the bulk of its revenue from E&C and T&I , which contribute 43% and 40%, respectively, to overall revenue. While other businesses, OP (17F, Wbn) 858 account for only a small portion of revenue, they provide a buffer against the earnings Consensus OP (17F, Wbn) 850 volatility caused by the sharp cyclical swings in construction and trading. 1) 2018 forecasts: Revenue of W30.32tr (+2.8% YoY) and OP of W935.8bn (+9.1% YoY) EPS Growth (17F, %) 517.0 Following the E&C business’s return to operating profit in 2Q16, Samsung C&T’s in- Market EPS Growth (17F, %) 45.5 house earnings have been improving overall, backed by: 1) visible progress on high- P/E (17F, x) 36.4 tech and housing projects and SG&A expense improvements in construction; 2) Market P/E (17F, x) 10.5 continued earnings stability in T&I; and 3) portfolio adjustments in fashion. KOSPI 2,574.76 2) Affiliate stakes valued at W37.5tr, up 70.9% from end-2015 Market Cap (Wbn) 25,893 Samsung C&T’s net asset value (NAV) has continued to grow, driven by the increasing value of holdings in core affiliates, including SEC (4.6% stake currently valued at Shares Outstanding (mn) 191 W15.2tr, vs. W7.5tr at end-2015), Samsung BioLogics (W12tr currently, vs. W5tr at end- Free Float (%) 45.7 2015), and Samsung Life (19.3% stake currently valued at W5tr, vs. W4.3tr at end-2015). Foreign Ownership (%) 9.9 The company’s market cap, however, has fallen to W25.9tr, down 2.5% from W26.6tr at Beta (12M) 1.58 end-2015. We believe the stock has given up its entire premium related to expectations 52-Week Low 119,500 for ownership restructuring and is now reflecting only the values of its in-house 52-Week High 149,500 businesses and affiliate stakes. Looking ahead, we expect the stock to re-rate higher, fueled by the resumption of group restructuring and aggressive shareholder returns . (%) 1M 6M 12M Absolute 11.9 -1.8 7.9 Key issues related to Samsung Group’s ownership restructuring Relative 5.5 -7.1 -12.7 1) Samsung C&T’s role within Samsung Group: Samsung C&T’s stakes in SEC and
130 Samsung C&T Corporation Samsung Life make it the group’s de facto holding company. KOSPI 120 2) New circular shareholdings: Samsung SDI will likely have to sell 2.1% of Samsung C&T within six months of notification by the Fair Trade Commission (FTC). 110 3) Litigation regarding merger: We see a low probability of the merger being nullified. 100 4) Samsung Life’s disposal of SEC shares: Regulatory issues should force Samsung Life 90 to sell some of its SEC shares, which will likely be directly purchased by Samsung C&T. 80 1.17 5.17 9.17 1.18 5) Samsung C&T’s shareholder return policy: The company has raised its dividend per share (DPS) and could potentially consider retiring treasury shares.
Mirae Asset Daewoo Co., Ltd. 6) Potential collection of royalties: Samsung C&T could begin collecting brand royalties once the current trademark arrangement between affiliates is dissolved. [ Holding Companies/IT Services ] FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F
Dae -ro Jeong Revenue (Wbn) 5,130 13,345 28,103 29,507 30,324 30,938 +822 -3774 -1634 OP (Wbn) 213 37 140 858 936 945 [email protected] OP margin (%) 4.2 0.3 0.5 2.9 3.1 3.1
Su Yeon Lee NP (Wbn) 456 2,747 107 662 782 855 +822 -3774 -7162 EPS (W) 3,632 17,857 561 3,462 4,087 4,471 [email protected] ROE (%) 9.9 25.2 0.6 3.2 3.4 3.6
P/E (x) 43.5 7.8 223.6 36.4 33.4 30.5
P/B (x) 3.6 1.5 1.2 1.0 1.0 1.0
Dividend yield (%) 0.0 0.4 0.4 1.6 1.5 1.5 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates
January 30, 2018 Samsung C&T Corporation
Investment summary
Stabilizing earnings and value of affiliate stakes to trigger re-rating
1) 2018 forecasts: Revenue of W30.32tr (+2.8% YoY) and OP of W935.8bn (+9.1% YoY)
Following the construction business’s return to operating profit in 2Q16, Samsung C&T’s in- house earnings have been improving overall, backed by: 1) visible progress on high-tech and housing projects and SG&A expense improvements in construction; 2) continued earnings stability in trading; and 3) portfolio adjustments in fashion.
2) Affiliate stakes valued at W37.5tr, up 70.9% from end-2015
Samsung C&T’s NAV has continued to grow, driven by the increasing value of its holdings in core affiliates, including SEC (4.6% stake currently valued at W15.2tr, vs. W7.5tr at end-2015), Samsung BioLogics (43.4% stake currently valued at W12tr, vs. W5tr at end-2015), and Samsung Life (19.3% stake currently valued at W5tr, vs. W4.3tr at end-2015). The company’s market cap, however, has actually fallen to W25.9tr, down 2.5% from W26.6tr at end-2015. We believe the stock has given up its entire premium related to expectations for ownership restructuring and now reflects only the value of its in-house businesses and affiliate stakes. Looking ahead, we expect the stock to re-rate higher, fueled by the resumption of group ownership restructuring and aggressive shareholder returns.
Figure 1. Total asset value trend: Value of stakes in key Figure 2. Discount to NAV at record-high level affiliates
(Wtr) (%) 50 Samsung C&T operating value 50 SEC Samsung BioLogics 40 40 4.4 Samsung Life 30 Value of other investment assets 4.8 20 30 3.6 10.7 5.2 10 4.4 20 4.3 4.3 0 5.0 15.2 -10 10.8 10 7.5 -20 5.8 6.2 7.6 0 -30 10/15 1/16 4/16 7/16 10/16 1/17 4/17 7/17 10/17 1/18 2015 2016 2017F Source Mirae Asset Daewoo Research Source Mirae Asset Daewoo Research Figure 4. Estimated changes in per-share value, assuming Figure 3. DPS trend and outlook cancellation of treasury shares (13%)
(W) (%) (W) BPS (W) 2,500 DPS (L) 2.5 200,000 +7.1% 5,000 EPS +16.0 Dividend yield (R) 4,000 2,000 2.0 150,000
3,000 1,500 1.5 100,000
2,000 1,000 1.0 50,000 1,000 500 0.5
0 0 Before소각 share 전 After 소각 share 후 Before소각 share 전 After 소각share 후 0 0.0 retirement retirement retirement retirement 2014 2015 2016 2017 2018F
Source Mirae Asset Daewoo Research Source Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 2 January 30, 2018 Samsung C&T Corporation
I. Valuation and TP calculation
Initiate coverage with Buy and TP of W180,000
We initiate our coverage on Samsung C&T with a Buy rating and target price of W180,000 (32% upside potential). We derived our target price using a SOTP methodology, reflecting the value of in-house businesses (based on 2018F estimates) and the value of affiliate equity stakes.
We estimate in-house businesses represent 20% of Samsung C&T’s enterprise value, with affiliate stakes making up the remaining 80%, including 35% for SEC shares and 25% for Samsung BioLogics shares. In our view, the share price of Samsung C&T, the de facto holding company of Samsung Group, is more closely tied to changes in the value of its affiliate stakes.
When making investment decisions regarding the firm, we thus recommend first factoring in changes in the value of its affiliate stakes, and then considering actual earnings and growth potential of key in-house operations.
Table 1. Target price calculation (Wbn) 2017F 2018F Details
Operating value ①①① 7,591 7,926
E&C 1,971 2,041 3.9x 2017-18F EV/EBITDA
F&B 1,344 1,418 8.5x 2017-18F EV/EBITDA
Leisure 2,464 2,529 15.1x 2017-18F EV/EBITDA
Fashion 250 357 6.8x 2017-18F EV/EBITDA
T&I 1,563 1,582 8.5x 2017-18F EV/EBITDA
Investment value ②②② 35,142 37,513 Listed subsidiaries 33,524 35,896 Based on market value
Unlisted subsidiaries 1,618 1,618 Based on book value
Total asset value ①①① + ②②② 42,733 45,439 Net debt 3,509 3,509 As of end-3Q17 Treasury stock 3,304 3,580 13.8% of shares issued NAV 42,529 45,510
Market cap 23,901 25,893 Common shares
Discount to NAV (%) 43.8 43.1
No. of shares issued (‘000 shares) 189,690 189,690 Shares issued NAV per share 224,202 239,918 Theoretical target price 168,152 179,939 25% discount to NAV per share
Target price 168,000 180,000
Current price 136,500 136,500 Based on January 26, 2018 closing price
Upside potential 23.1% 31.9% Source Mirae Asset Daewoo Research
Table 2. Samsung C&T’s stakes in key affiliates (No. of shares, %, W, Wbn) No. of shares Stake Current share price Book value Value Listed subsidiaries 31,778 35,896
SEC (005930 KS) 5,976,362 4.6 2,695,000 15,323 15,174 Samsung BioLogics (207940 KS) 28,742,466 43.4 365,000 9,701 12,014 Samsung Life (032830 KS) 38,688,000 19.3 132,000 4,372 5,029 Samsung SDS (018260 KS) 13,215,822 17.1 193,000 2,227 3,436 Samsung Engineering (028050 KS) 13,668,989 7.0 12,100 150 237 Samsung Heavy Industries (010140 KS) 486,698 0.1 11,100 5 5 Unlisted subsidiaries 892 1,618 SECUI 1,000,000 8.7 14 14
Other 879 1,604 Source Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 3 January 30, 2018 Samsung C&T Corporation
Figure 5. Samsung C&T’s total asset value trends (2015-17): Operating value (+31%) vs. value of affiliate stakes (+60.1%)
(Wtr) 50 Samsung C&T operating value SEC Samsung BioLogics 40 Samsung Life 4.4 Value of other investment assets 4.8
30 3.6 10.7 5.2 4.4 20 4.3 4.3 5.0 15.2 10.8 10 7.5
5.8 6.2 7.6 0 2015 2016 2017F
Note: Total asset value = sum of operating value and value of affiliate stakes (end-2017) Source: Mirae Asset Daewoo Research
Figure 6. Samsung C&T’s discount to NAV: Average discount of holding companies with in- house business operations is 30%
(%) 50
40
30
20
10
0
-10
-20
-30 10/15 1/16 4/16 7/16 10/16 1/17 4/17 7/17 10/17 1/18
Source Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 4 January 30, 2018 Samsung C&T Corporation
Table 3. Peer valuation comparison (Wbn) E&C T&I Hyundai Daelim Industrial Daewoo E&C Hyundai E&C GS E&C LG International POSCO Daewoo Development EV 3,189 3,464 2,582 2,806 2,925 2,369 6,484
Market cap 2,826 2,523 3,302 4,543 2,186 1,190 2,967
Net debt 272 967 -690 -1,696 759 1,183 3,527 EBITDA 698 878 697 1,380 600 322 671 Operating profit 584 782 656 1,205 538 258 494 Depreciation 114 96 41 174 63 64 177 EV/EBITDA 4.6 4.0 3.8 2.1 4.9 7.4 9.7 Applied EV/EBITDA 3.9x 8.5x
F&B Leisure Fashion Hyundai Shinsegae Merlin Oriental CJ Freshway Six Flags LF Handsome Hansae Youngone Fila Korea Green Food Food Ent . Land EV 1,241 659 649 6,975 8,925 37,095 778 898 1,306 1,305 1,945
Market cap 1,588 542 427 5,155 6,145 39,442 1,013 826 1,136 1,447 1,098
Net debt -342 118 223 1,750 2,049 -2,874 -232 76 174 -136 858 EBITDA 158 77 72 757 611 1,616 161 127 130 256 286 Operating profit 130 40 48 540 487 1,260 123 103 106 195 247 Depreciation 28 38 25 241 118 381 38 24 23 61 39 EV/EBITDA 7.9 8.6 9.0 9.2 14.2 22.0 4.9 7.1 10.1 5.1 6.8 Applied EV/EBITDA 8.5x 15.1x 6.8x
Note: Based on January 26, 2018 closing prices and 2018F data Source : Bloomberg, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 5 January 30, 2018 Samsung C&T Corporation
Figure 7. P/E band
(W) 260,000 70x
60x 230,000
200,000 50x
170,000 40x 140,000
30x 110,000
80,000
50,000 1/16 7/16 1/17 7/17 1/18 Source Mirae Asset Daewoo Research
Figure 8. P/B band
(W) 200,000
1.4x 180,000 1.3x
160,000 1.2x
1.1x 140,000 1.0x
120,000
100,000 1/16 7/16 1/17 7/17 1/18 Source Mirae Asset Daewoo Research
Figure 9. Share performance
(W) 11/10/16 IPO of Samsung BioLogics 200,000 9/1/15 3/24/16 Launch of post-merger Elliott abandons its 11/29/16 Samsung C&T litigation SEC says that it has no plans to 180,000 8/12/15 consider a merger between a Organizational 5/31/16 holdco and Samsung C&T 12/21/17 reshuffle The Seoul High Court FTC orders Samsung 160,000 rules that the share 3/24/17 SDI to sell Samsung buyback price should SEC delays holdco plan C&T shares be adjusted 140,000 10/6/16 11/23/15 Elliott calls for EMA's positive recommendation for SEC to split itself Samsung Bioepis's biosimilar product 120,000 into two units 10/19/17 8/25/16 A lower court rules in favor of Expectations for corporate governance Samsung C&T in the merger improvement boosts shares nullification suit. 100,000 8/15 10/15 12/15 2/16 4/16 6/16 8/16 10/16 12/16 2/17 4/17 6/17 8/17 10/17 12/17
Source Press materials, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 6 January 30, 2018 Samsung C&T Corporation
II. Analysis by business division
The merger between Samsung C&T and Cheil Industries in September 2015 allowed post- merger Samsung C&T to secure a well-diversified business portfolio. Samsung C&T’s businesses (post-merger) can be broken down into: 1) E&C; 2) T&I; 3) fashion; 4) leisure; 5) F&B; and 6) biologics.
The company derives the bulk of its revenue from E&C and T&I, which contribute 43% and 40%, respectively, to overall revenue. While other businesses, such as fashion, leisure, and F&B account for only a small portion of revenue, they provide a buffer against the earnings volatility caused by the sharp cyclical swings in construction and trading.
Following the E&C business’s return to operating profit in 2Q16, Samsung C&T’s in-house earnings have been improving overall, backed by: 1) visible progress on high-tech and housing projects and SG&A expense improvements in construction; 2) continued earnings stability in trading; and 3) portfolio adjustments in fashion.
Table 4. Quarterly and annual earnings (Wbn) 1Q17 2Q17 3Q17 4Q17F 1Q18F 2Q18F 3Q18F 4Q18F 2016 2017F 2018F Revenue 6,703.0 7,319.0 7,469.5 7,993.2 6,712.4 7,656.9 7,753.4 8,201.0 28,103.1 29,507.4 30,323.7 E&C 2,711.0 3,163.0 3,126.0 3,678.2 2,629.0 3,302.8 3,226.8 3,695.3 12,952.8 12,678.2 12,854.0 T&I 2,870.0 3,004.0 3,195.0 2,969.6 2,828.1 3,050.1 3,249.3 3,074.6 10,538.4 12,038.6 12,202.1 Fashion 465.0 401.0 374.0 543.8 514.2 435.1 407.8 561.9 1,843.0 1,783.8 1,919.1 Leisure 103.0 232.0 198.0 179.3 134.5 247.5 213.8 187.8 677.3 712.3 783.6 F&B 447.0 456.0 472.0 483.2 471.8 481.1 500.9 507.5 1,797.0 1,858.2 1,961.3 Biologics 107.0 63.0 104.5 139.0 134.9 140.2 154.7 173.9 294.5 413.5 603.7 Revenue breakdown 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% E&C 40.4% 43.2% 41.9% 46.0% 39.2% 43.1% 41.6% 45.1% 46.1% 43.0% 42.4% T&I 42.8% 41.0% 42.8% 37.2% 42.1% 39.8% 41.9% 37.5% 37.5% 40.8% 40.2% Fashion 6.9% 5.5% 5.0% 6.8% 7.7% 5.7% 5.3% 6.9% 6.6% 6.0% 6.3% Leisure 1.5% 3.2% 2.7% 2.2% 2.0% 3.2% 2.8% 2.3% 2.4% 2.4% 2.6% F&B 6.7% 6.2% 6.3% 6.0% 7.0% 6.3% 6.5% 6.2% 6.4% 6.3% 6.5% Biologics 1.6% 0.9% 1.4% 1.7% 2.0% 1.8% 2.0% 2.1% 1.0% 1.4% 2.0% Operating profit 137.0 255.0 220.0 244.9 164.4 254.5 258.4 252.1 139.1 857.5 935.8 OP margin 2.0% 3.5% 2.9% 3.1% 2.4% 3.3% 3.3% 3.1% 0.5% 2.9% 3.1% E&C 91.0 153.0 105.0 141.4 94.2 135.4 136.7 141.9 34.3 490.4 508.2 OP margin 3.4% 4.8% 3.4% 3.8% 3.6% 4.1% 4.2% 3.8% 0.3% 3.9% 4.0% T&I 43.0 46.0 46.0 48.8 43.8 42.6 44.1 49.3 70.1 183.8 186.1 OP margin 1.5% 1.5% 1.4% 1.6% 1.5% 1.4% 1.4% 1.6% 0.7% 1.5% 1.5% Fashion -1.0 9.0 -13.0 3.2 4.7 7.3 -9.0 7.3 -45.7 -1.8 10.4 OP margin -0.2% 2.2% -3.5% 0.6% 0.9% 1.7% -2.2% 1.3% -2.5% -0.1% 0.5% Leisure -19.0 29.0 47.0 14.1 -17.6 21.4 40.8 13.6 46.6 71.1 58.1 OP margin -18.4% 12.5% 23.7% 7.9% -13.1% 8.6% 19.1% 7.2% 6.9% 10.0% 7.4% F&B 31.0 38.0 26.0 27.3 29.2 36.4 35.3 28.0 109.9 122.3 128.8 OP margin 6.9% 8.3% 5.5% 5.7% 6.2% 7.6% 7.0% 5.5% 6.1% 6.6% 6.6% Biologics -8.0 -20.0 9.0 10.0 10.2 11.4 10.5 12.0 -76.2 -9.0 44.1 OP margin -7.5% -31.7% 8.6% 7.2% 7.6% 8.1% 6.8% 6.9% -25.9% -2.2% 7.3% Unallocated profit 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other non -operating net 182.0 -64.1 -20.7 54.3 99.8 8.8 -28.1 127.6 101.3 151.6 208.2 profit Equity-method gains -39.0 -24.5 -23.7 -14.7 -17.5 -18.2 -16.5 -14.7 -151.0 -101.9 -66.9 Pretax profit 279.9 166.9 175.8 284.5 246.8 245.1 213.9 365.0 89.8 907.0 1,077.1 Net profit 185.5 111.6 139.0 188.6 163.6 163.9 169.1 241.9 20.8 624.7 743.2 Net profit (controlling) 212.0 121.0 158.5 170.8 187.0 177.7 192.9 219.1 107.4 662.4 781.9 Source : Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 7 January 30, 2018 Samsung C&T Corporation
1) Engineering & construction (E&C) business
▶▶▶ Business overview
In 2017, we estimate that the breakdown for the E&C business’s revenue was as follows: building (high-rise/high tech) 41%; civil (roads/railroads) 20%; plant (power plant/energy) 20%; housing 17%; and other 2%.
▶▶▶ Status and earnings outlook
The business is displaying robust order-winning capabilities across a variety of project segments, as well as strong stability backed by steady order intake from group affiliates. At end-3Q17, the business’s total order backlogs stood at W28.4tr, 32% of which stemmed from group affiliates.
The group has been delivering steady quarterly earnings since 2Q16, backed by improving profitability.
We note the recent contraction in the revenue contribution of overseas projects to nearly 40%. After having posted massive losses on overseas projects (e.g., Roy Hill) in 2015, the E&C business has employed a profit-focused order-taking strategy, leading to a decline in earnings volatility. Based on its conservative profit management strategy (preemptive reflection of costs and risks), the group will likely exhibit earnings stability over the long term (although we could see earnings volatility on a quarterly basis).
Table 5. E&C group quarterly and annual earnings (Wbn ) 1Q17 2Q17 3Q17 4Q17F 1Q18F 2Q18F 3Q18F 4Q18F 2016 2017F 2018F
Revenue 2,711.0 3,163.0 3,126.0 3,678.2 2,629.0 3,302.8 3,226.8 3,695.3 12,952.8 12,678.2 12,854.0 YoY (%) -2.9% -1.8% 5.0% -7.1% -3.0% 4.4% 3.2% 0.5% 141.9% -2.1% 1.4% Building 906.0 1,297.0 1,397.0 1,669.6 878.8 1,324.2 1,440.1 1,691.9 5,072.0 5,269.6 5,335.0 YoY (%) -7.5% 21.9% 21.1% -11.0% -3.0% 2.1% 3.1% 1.3% 6.8% 3.9% 1.2% Plant 741.0 582.0 513.0 724.5 694.5 658.5 553.2 702.0 3,593.0 2,560.5 2,608.2 YoY (%) -24.0% -42.7% -35.7% -10.0% -6.3% 13.1% 7.8% -3.1% 30.8% -28.7% 1.9% Civil 599.0 684.0 585.0 653.3 573.2 697.0 600.4 664.6 2,254.0 2,521.3 2,535.3 YoY (%) 40.6% 11.0% 6.2% -1.2% -4.3% 1.9% 2.6% 1.7% -31.1% 11.9% 0.6% Residential 408.0 529.0 559.0 563.4 415.1 555.7 565.8 569.5 1,807.0 2,059.4 2,106.0 YoY (%) 16.6% 7.7% 34.1% 2.6% 1.7% 5.1% 1.2% 1.1% -17.4% 14.0% 2.3% Other 57.0 71.0 72.0 67.4 67.4 67.4 67.4 67.4 226.8 267.4 269.5 YoY (%) -9.4% 97.2% 26.3% -4.9% 18.2% -5.1% -6.4% 0.0% 147.5% 17.9% 0.8% Operating profit 91.0 153.0 105.0 141.4 94.2 135.4 136.7 141.9 34.3 490.4 508.2 YoY (%) -122.0% 29.7% -31.4% -20.5% 3.5% -11.5% 30.2% 0.4% -126.5% 1327.8% 3.6% OP margin 3.4% 4.8% 3.4% 3.8% 3.6% 4.1% 4.2% 3.8% 0.3% 3.9% 4.0% Source : Mirae Asset Daewoo Research
Figure 10. E&C: Quarterly new orders Figure 11. E&C: Order backlog breakdown by project type
(Wbn) 5,000
Building Residential Civil Plant Building 17.1% 4,000 Plant 28.1%
3,000
2,000 Civil 17.2% Residential 1,000 37.5%
0 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17F
Source Mirae Asset Daewoo Research Note: As of 3Q17 Source Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 8 January 30, 2018 Samsung C&T Corporation
2) Trading & investment (T&I) business
▶▶▶ Business overview
In 2017, we estimate that the breakdown for the T&I business’s revenue was as follows: steel 32%; chemicals and industrial materials 31%; natural resources 25%; and living industries 12%. For the T&I business, the key revenue drivers are trading and plant project planning.
▶▶▶ Status and earnings outlook
The T&I business boasts a robust overseas network that includes 82 overseas offices in 45 countries (as of end-3Q17).
Despite its tight margins, the business shows low earnings volatility relative to revenue. Indeed, although T&I revenue has trended down since 2015 amid low oil prices, operating profit has been on a gradual rise, thanks to the business’s vertical integration into industrial materials (e.g., steel) and product mix improvement. In addition, increasing planning fees for overseas EPC projects have helped ease earnings volatility for the T&I business as a whole.
Meanwhile, since the Samsung C&T/Cheil Industries merger, the T&I business has been seeking new opportunities by creating synergies with other businesses, including fashion (sourcing of new brands; helping existing brands expand into overseas markets), and F&B.
Table 6. T&I: Quarterly and annual earnings (Wbn) 1Q17 2Q17 3Q17 4Q17F 1Q18F 2Q18F 3Q18F 4Q18F 2016 2017F 2018F
Revenue 2,870.0 3,004.0 3,195.0 2,969.6 2,828.1 3,050.1 3,249.3 3,074.6 10,538.4 12,038.6 12,202.1 YoY (%) 10.2% 11.8% 25.6% 9.8% -1.5% 1.5% 1.7% 3.5% -8.2% 14.2% 1.4% Chemicals 988.0 957.0 933.0 871.3 1,010.8 973.3 948.6 888.7 3,313.0 3,749.3 3,821.4 YoY (%) 12.1% 14.1% 15.5% 11.0% 2.3% 1.7% 1.7% 2.0% 4.2% 13.2% 1.9% Steel 964.0 1,027.0 976.0 886.3 884.5 1,071.6 1,022.2 927.0 3,327.0 3,853.3 3,905.3 YoY (%) 13.0% 19.7% 18.7% 11.6% -8.2% 4.3% 4.7% 4.6% -5.6% 15.8% 1.3% Natural resources 589.0 701.0 871.0 791.3 602.6 686.0 861.0 837.4 2,388.0 2,952.3 2,987.1 YoY(%) 29.2% 0.3% 65.0% 12.2% 2.3% -2.1% -1.1% 5.8% -14.2% 23.6% 1.2% Living industries/other 329.0 319.0 415.0 420.7 330.2 319.2 417.4 421.5 1,510.4 1,483.7 1,488.3 YoY (%) -20.6% 9.6% 7.8% 0.2% 0.4% 0.1% 0.6% 0.2% -24.2% -1.8% 0.3% Operating profit 43.0 46.0 46.0 48.8 43.8 45.6 47.4 49.3 70.1 183.8 186.1 YoY (%) 2423.5% 318.2% 253.8% 10.0% 1.8% -0.8% 3.0% 0.9% -12.9% 162.2% 1.2% OP margin 1.5% 1.5% 1.4% 1.6% 1.5% 1.5% 1.5% 1.6% 0.7% 1.5% 1.5% Source : DART, Mirae Asset Daewoo Research
Figure 12. T&I: Revenue breakdown by business unit Figure 13. T&I: Revenue and OP margin
Living (Wtr) (%) industries/other 20 Revenue (L) 2 12.3% OP margin (R)
15 1.5 Chemicals 31.1%
Natural 10 1 resources 24.5%
5 0.5
Steel 32.0% 0 0 2014 2015 2016 2017F 2018F
Source Mirae Asset Daewoo Research Source Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 9 January 30, 2018 Samsung C&T Corporation
3) Leisure business
▶▶▶ Business overview
The leisure business is comprised of the resort unit, which operates Everland (a theme park) and Caribbean Bay (a water park), and the golf unit, which operates six courses, including Anyang Country Club, Gapyeong Benest, Anseong Benest, Dongrae Benest, Glenross, and Lakeside (162 holes in total).
▶▶▶ Status and earnings outlook
The resort unit displays high fluctuations in quarterly revenue, greatly affected by seasonality. Historically, it has recorded the strongest revenue in 2Q and the lowest in 1Q. To reduce its vulnerability to seasonal factors and sustain revenue growth, the unit is focusing on enhancing facility utilization/cost efficiency to improve profitability and expanding ticket size. The golf unit is also steadily pushing up profitability by upgrading courses to premium levels and improving the quality of services.
Meanwhile, Samsung C&T owns about 6,000,000 ㎡ (4,000,000 ㎡ of which is undeveloped) of Samsung Group’s Yongin site. Significantly, the overall Yongin site contains approximately 3,300,000 ㎡ of land that is considered available for development (excluding an approximately 10,000,000 ㎡ designated green zone), and Samsung C&T holds 1,500,000 ㎡ of this total
Currently, Samsung C&T is using part of its land in Yongin to operate a theme park, and plans to house leisure business operating assets on the remainder of the land. Accordingly, the company is unlikely to revalue its assets in the near future. Notably, at end-2015, the company decided to suspend its plans to build a resort complex on the Yongin site—which had been presented as strategic growth driver for the leisure business during the Cheil Industries IPO process.
In reflecting the value of the leisure business in Samsung C&T’s valuation, we factored in both operating value and the development value of the aforementioned land holdings.
Table 7. Leisure: Quarterly and annual earnings (Wbn ) 1Q17 2Q17 3Q17 4Q17F 1Q18F 2Q18F 3Q18F 4Q18F 2016 2017F 2018F
Revenue 115.4 232.0 198.0 179.3 134.5 247.5 213.8 187.8 677.3 724.7 783.6 YoY (%) 26.4% 10.5% -1.5% 2.5% 16.5% 6.7% 8.0% 4.7% 40.5% 7.0% 8.1% Operating profit -19.0 29.0 47.0 14.1 -17.6 21.4 40.8 13.6 46.6 71.1 58.1 YoY (%) -37.1% 38.1% 11.9% 1.9% RR -26.3% -13.3% -3.9% -456.2% 52.5% -18.3% OP margin -16.5% 12.5% 23.7% 7.9% -13.1% 8.6% 19.1% 7.2% 6.9% 9.8% 7.4% Source : DART, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 10 January 30, 2018 Samsung C&T Corporation
4) F&B business
▶▶▶ Business overview
The F&B business consists of catering and food materials distribution units. For 2017, we estimate that the catering unit accounted for 72% of revenue, with food materials contributing the remaining 28%. Samsung Welstory, a wholly-owned subsidiary of Samsung C&T, is in charge of the F&B businesses.
▶▶▶ Status and earnings outlook
The catering unit is aggressively expanding its external customer base while servicing its stable captive demand. Meanwhile, the food materials unit is providing food materials logistics services to catering, food processing, and restaurant companies. To improve price competitiveness, the unit is expanding into the restaurant and franchise businesses.
The F&B business, which achieved stable top-line growth based on the steady flow of revenue from affiliates, has maintained robust profitability (OP margin of around 6%) since 2010. And starting in 2012, it has accelerated global outreach efforts to secure future growth drivers.
* China : Samsung C&T’s F&B business has made inroads into China after establishing a joint venture (85:15) with Hongjun Group, a Chinese catering firm, in 2012. In 2016, the company also set up Shanghai Welstory Food (70% stake) to advance into the B2B food materials distribution market and strengthen cost competitiveness with the ultimate goal of generating synergies with the catering business. We estimate the F&B business’s China- related revenue at W65.5bn for 2016 and W88.5bn for 2017.
* Vietnam: The F&B business entered the Vietnamese market in 2015 via the establishment of Welstory Vietnam (a 90% stake) and the acquisition of local companies. We estimate Vietnam-related revenue at W68.5bn for 2016 and W90bn for 2017.
Table 8. F&B: quarterly and annual earnings (Wbn ) 1Q17 2Q17 3Q17 4Q17F 1Q18F 2Q18F 3Q18F 4Q18F 2016 2017F 2018F
Revenue 447.0 456.0 472.0 483.2 471.8 481.1 500.9 507.5 1,797.0 1,858.2 1,961.3 YoY (%) 3.3% 2.2% 3.1% 5.0% 5.5% 5.5% 6.1% 5.0% 6.5% 3.4% 5.5% Operating profit 31.0 38.0 26.0 27.3 29.2 36.4 35.3 28.0 109.9 122.3 128.8 YoY (%) 19.2% -2.6% 44.4% 1.7% -5.8% -4.2% 35.7% 2.3% 0.3% 11.3% 5.3% OP margin 6.9% 8.3% 5.5% 5.7% 6.2% 7.6% 7.0% 5.5% 6.1% 6.6% 6.6% Source : DART, Mirae Asset Daewoo Research
Figure 14. F&B: Revenue and OP margin Figure 15. F&B: Ownership structure
(Wtr) (%)
2.5 Revenue (L) 10 OP margin (R) Samsung C&T 2 8
100% 1.5 6 Samsung Welstory Catering (72%) Joint venture with Hongjun Group 85% 1 4 Welstory Vietnam 90% 0.5 2 Food materials 70% distribution Shanghai Welstory Food 0 0 (28%) 2014 2015 2016 2017F 2018F
Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 11 January 30, 2018 Samsung C&T Corporation
5) Fashion
▶▶▶ Business overview
The fashion business boasts a diverse business portfolio of in-house brands, including Beanpole (casual wear), Galaxy/Rogatis (business apparel), and Kuho (women’s wear), and imported brands. In addition, the business has expanded into the SPA market, which boasts high growth potential. Through its SPA brands, Samsung C&T’s fashion business is expanding its presence in the Chinese market.
▶▶▶ Status and earnings outlook
The fashion business exhibits seasonality in revenue —sluggish in 3Q, but robust in 4Q. In 2016, the business incurred W45.7bn in operating losses due to massive expenses (including inventory valuation losses and business withdrawal costs) related to brand rationalization efforts. In 2017, quarterly revenue fell YoY due to a reduction in the number of brands, while operating losses were incurred on higher sales discounts in 1Q and 3Q.
Going forward, earnings will likely improve on: 1) the normalization of revenue across all apparel categories; and 2) brand rationalization efforts. The pace of recovery should hinge on the normalization of the 8 Seconds brand and its presence in the Chinese market.
*SPA expansion: In February 2012, the fashion business launched the 8 Seconds SPA brand, which has since managed to secure cost competitiveness via overseas production base expansion. In 2016, Samsung C&T moved into the Chinese market (both online and offline). The company aims to generate W3tr in SPA revenue by 2020.
*Chinese expansion: Samsung C&T plans to expand Chinese revenue via SPA brands and miscellaneous products which have high growth prospects. The company is seeking to increase online revenue via partnerships with local online firms in the Chinese market. The company aims to achieve W3tr in Chinese revenue in 2020.
*Synergies with the T&I business: Leveraging the T&I business’s extensive overseas networks (82 overseas subsidiaries in 45 countries), Samsung C&T is aiming to enter the global wholesale space through foreign brand acquisition, IT accessory growth, and the overseas expansion of in-house brands.
Table 9. Fashion: Quarterly and annual earnings (Wbn) 1Q17 2Q17 3Q17 4Q17F 1Q18F 2Q18F 3Q18F 4Q18F 2016 2017F 2018F
Revenue 465.0 401.0 374.0 543.8 514.2 435.1 407.8 561.9 1,843.0 1,783.8 1,919.1 YoY (%) -2.5% -8.7% -4.1% 1.3% 10.6% 8.5% 9.0% 3.3% 0.8% -3.2% 7.6% Operating profit -1.0 9.0 -13.0 3.2 4.7 7.3 -9.0 7.3 -45.7 -1.8 10.4 YoY (%) TTR 800.0% RR TTB TTB -18.4% RR 127.7% 410.7% RR TTB OP margin -0.2% 2.2% -3.5% 0.6% 0.9% 1.7% -2.2% 1.3% -2.5% -0.1% 0.5% Source : DART, Mirae Asset Daewoo Research
Figure 16. Fashion: Revenue breakdown Figure 17. Fashion: Revenue and OP margin
(Wtr) (%) SPA/other 2.5 Revenue (L) 4 19.6% Menswear OP margin (R) 23.5% 2.0 2
1.5 0 1.0
-2 0.5 Casual wear/ Women's accessories wear/imported 31.0% brands, 25.9% 0.0 -4 2014 2015 2016 2017F 2018F
Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 12 January 30, 2018 Samsung C&T Corporation
6) Biologics
▶▶▶ Status and earnings outlook
Samsung C&T engages in the biologics business via Samsung BioLogics and Samsung Bioepis.
Samsung BioLogics, a CMO of biologic drugs, boasts industry-leading capacity of 362,000 liters, with its first plant (30,000 liters) and second plant (152,000 liters) currently in commercial operation after gaining manufacturing approvals from the US FDA and the European Medicines Agency (EMA). The third plant (180,000 liters) is likely to be validated in 2018, and initiate pilot production and win manufacturing approval in 2019.
Customers include Bristol-Myers Squibb and Roche, while major partners include Merck and Biogen. Since commencing operations, the first and second plants have won combined orders of US$3.33bn, with an order backlog of US$2.73bn. We expect Samsung BioLogics to benefit steadily from: 1) CMO market expansion stemming from biologic drug launches; 2) the burgeoning biosimilar market; and 3) new drug developers’ increasing outsourcing exposure.
Samsung Bioepis, which engages in biosimilar R&D and commercialization, is currently developing six biosimilar drugs. The company has already secured approvals for the sale of four biosimilars each in Europe and Korea, and one in the US. In the European market, the company’s Benepali (Enbrel biosimilar) and Flixabi (Remicade biosimilar) products are making steady market share gains. The company’s marketing partners include Merck and Biogen. In August 2018, the company signed a joint R&D partnership with Takeda Pharmaceutical Company and embarked on the development of a therapeutic candidate TAK-671 (acute pancreatitis treatment), thus laying the foundation to expand into biologic drug development.
▶▶▶ Other
Samsung BioLogics will likely wait until it is able to confirm the progress of its third plant (to come online in 2020) before considering construction of a fourth plant. Of note, Biogen has a right to increase its stake in Samsung Bioepis to 49.99% in 2018 under its joint venture agreement with Samsung BioLogics.
Table 10. Biologics: Quarterly and annual earnings (Wbn) 1Q17 2Q17 3Q17 4Q17F 1Q18F 2Q18F 3Q18F 4Q18F 2016 2017F 2018F
Revenue 107.6 63.2 127.5 140.9 134.9 140.2 154.7 173.9 294.6 439.2 603.3 YoY (%) 21.3 33.1 141.5 33.4 25.4 121.8 21.3 23.4 223.0 49.1 37.4 Operating profit 3.4 -8.5 20.5 22 10.1 21.7 23.7 29.1 -30.4 37.4 98.7 YoY (%) TTB RR TTB TTB 197.1 TTB 15.6 32.3 RR TTB 163.9 OP margin 3.2 -13.4 16.1 15.6 7.5 15.5 15.3 16.7 -10.3 8.5 16.4 Note: On a non-consolidated basis Source : FnGuide consensus, Mirae Asset Daewoo Research
Figure 18. Comparison of global CMOs’ capacity Figure 19. Samsung BioLogics’ annual revenue
(Wtr) (%) 1.5 50 Catalent 3 Revenue (L) OP margin (R) Wuxi Biologics 6 1.2 40
CMC 52 0.9 30 Patheon 55 0.6 20 Lonza 280
Boehringer Ingelheim 300 0.3 10
삼성바이오로직스Samsung BioLogics 30 152 180 (kiloliters) 0.0 0 0 50 100 150 200 250 300 350 400 2014 2015 2016 2017F 2018F 2019F 2020F
Source: Company data, Mirae Asset Daewoo Research Note: Based on non-consolidated K-IFRS and FnGuide consensus Source : Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 13 January 30, 2018 Samsung C&T Corporation
III. Samsung Group ownership restructuring
Q1. What is the role of Samsung C&T within Samsung Group?
A1. The company serves as the de facto holding company thanks to its stakes in Samsung Life and SEC.
Samsung Group holds firm control over Samsung C&T, with the combined stake of the group’s largest shareholder and related parties standing at around 39%. Furthermore, factoring in KCC’s 8.97% stake and treasury stock of 13.83%, the group’s influence on the company appears equivalent to majority ownership. Significantly, because Samsung C&T holds significant stakes in Samsung Life (19.3%) and SEC (4.6%), it acts as Samsung Group’s de facto holding company.
Table 11. Samsung C&T’s major shareholders (%, Wbn) Shareholder No. of shares Stake Value Lee Jae-yong 32,674,500 17.2 4,460 Lee Boo-jin 10,456,450 5.5 1,427 Controlling family (1) Lee Seo-hyun 10,456,450 5.5 1,427 Lee Kun-hee 5,425,733 2.9 741 Subtotal 59,013,133 31.1 8,055 SEMCO 5,000,000 2.6 683 Samsung SDI 4,042,758 2.1 552 Samsung F&M 2,617,297 1.4 357 Affiliates (2) Samsung Life Public Welfare Foundation 2,000,000 1.1 273 Samsung Foundation of Culture 1,144,086 0.6 156 Samsung Welfare Foundation 80,946 0.0 11 Subtotal 14,885,087 7.8 2,032 (3) = (1) + (2) 73,898,220 39.0 10,087 Treasury shares (4) 26,225,503 13.8 3,580 (5) = (3) + (4) 100,123,723 52.8 13,667 Total shares issued 189,690,043 100.0 25,893 Note: Based on closing prices as of January 26, 2018 Source : DART, Mirae Asset Daewoo Research Figure 20. Samsung Group’s structure
Lee Jae-yong and affiliates
31.1%
Samsung C&T [028260 KS]
100% Samsung Welstory
43.4% 4.7% 19.3% 20.8% 5.4% Samsung BioLogics SEC 8.3% Samsung Life [207940 KS] [005930 KS] [032830 KS] 93.3% 1.5% (50.1%)
Samsung Bioepis 17.0%
22.6% Samsung SDS Cheil Worldwide 25.2% Samsung F&M 15.0.% [018260 KS] [030000 KS] [000810 KS] 17.1%
23.7% SEMCO 2.3% Samsung Heavy 16.9% Samsung Securities 29.4% [009150 KS] [010140 KS] [016360 KS]
19.6% Samsung SDI 11.7% Samsung 7.0% Samsung Card 71.9% [006400 KS] Engineering [029780 KS] [028050 KS] 15.2% 84.8% Hotel Shilla 5.1% Samsung Asset 100% Samsung Display [008770 KS] Management 7.7%
11.0% S1 5.4% [012750 KS]
Source: DART, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 14 January 30, 2018 Samsung C&T Corporation
Q2. How will Samsung Group’s new circular shareholdings be handled? A2. Samsung SDI is likely to unload its 2.1% stake in Samsung C&T.
In December 2017, the FTC decided to revise its guidelines on new circular shareholdings arising from a merger, which could force Samsung Group to unwind new circular shareholdings caused by the Samsung C&T/Cheil Industries tie-up. As such, Samsung SDI is likely to need to unload its 2.1% stake (4,042,758 shares) in Samsung C&T within six months of notification.
Under the current guidelines, the FTC views both type 1 (surviving entity within a circular shareholding + disappearing entity outside of the tie) and type 2 (disappearing entity within a circular shareholding + surviving entity outside of the tie) cases in the same way, as they both strengthen circular ownership and generate similar economic benefits. Under the revised guidelines, however, type 2 cases will be considered new circular shareholdings, and the FTC will mandate that they be unwound within six months of notification. Notably, the regulator has stated that if its interpretation of what constitutes a new circular shareholding is deemed incorrect by other authorities, further revisions to the relevant guidelines will be made.
Figure 21. FTC’s revision to new circular shareholding guidelines
Source: FTC, Mirae Asset Daewoo Research Figure 22. Circular shareholding ties arising from the merger between Samsung C&T and Cheil Industries
[Pre-merger] 19.6%
Samsung SDI 7.2% (Old) Samsung C&T 3.5% SEC [006400 KS] [000830 KS KS] - disappearing [005930 KS] Merged 3.7% (Old) Samsung C&T [028260 KS] - surviving
//
[Post-merger] 19.6%
4.7% Samsung SDI Samsung C&T 3.5% SEC [006400 KS] [028260 KS] [005930 KS]
Designated as a new circular shareholding ‰‰‰ Samsung SDI must unload its 2.1% stake in Samsung C&T
Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 15 January 30, 2018 Samsung C&T Corporation
When the FTC finalizes its guidelines on new circular shareholdings, it will notify Samsung Group and recommend that the group address relevant ties within a six-month grace period. If the group fails to so, the FTC will take follow-up actions, which could include an enforcement order. The unwinding of Samsung SDI’s 2.1% stake in Samsung C&T would reduce the number of circular shareholdings across Samsung Group to four (three stem from SEMCO’s 2.6% stake in Samsung C&T; one stems from Samsung F&M’s 1.5% stake in Samsung C&T) and eliminate all pending legal or regulatory issues related to circular shareholdings (under current law). If the group intends to untie all of its circular shareholdings, SEMCO and Samsung F&M are likely to sell their stakes in Samsung C&T, which are the smallest within the remaining circular shareholding ties.
Samsung SDI sold 5mn Samsung C&T shares
On February 25, 2016, Samsung SDI sold 5mn Samsung C&T shares (2.6%) immediately before the Samsung C&T/Cheil Industries merger in compliance with the FTC’s guidelines barring new circular shareholdings arising from a merger. *5mn shares (2mn shares held by Samsung Life Public Welfare Foundation, 1.305mn shares by Lee Jae-yong, and a block deal of 1.695mn shares) *Sale price and total value: W153,000/share (based on the February 24, 2016 closing price) and total value of W765bn
Table 12. Samsung Group’s new circular shareholdings No. Affiliate 1 Affiliate 2 Affiliate 3 Affiliate 4 Affiliate 5 Affiliate 6 Notes Samsung Samsung 1 → SEC → SEMCO → C&T C&T 4.2% 23.7% 2.6%
Samsung Samsung Samsung 2 → → SEC → SEMCO → SEMCO C&T Life C&T → Samsung C&T 19.3% 7.6% 23.7% 2.6% Samsung Samsung Samsung Samsung 3 → → → SEC → SEMCO → C&T Life F&M C&T 19.3% 15.0% 1.3% 23.7% 2.6% Samsung Samsung 4 → SEC → Samsung SDI → C&T C&T 4.2% 19.6% 2.1% Samsung SDI Samsung Samsung Samsung 5 → → SEC → Samsung SDI → → Samsung C&T C&T Life C&T * Six-month grace 19.3% 7.6% 19.6% 2.1% period Samsung Samsung Samsung Samsung 6 → → → SEC → Samsung SDI → C&T Life F&M C&T 19.3% 15.0% 1.3% 19.6% 2.1% Samsung Samsung Samsung Samsung 7 → → → Samsung F&M C&T Life F&M C&T → Samsung C&T 19.3% 15.0% 1.4% Source : FTC, Mirae Asset Daewoo Research
Figure 23. Timeline for the unwinding of Samsung Group’s new circular shareholdings
When the FTC finalizes its guidelines, it will noti fy Samsung Group of changes and recommend that the group unwind new circular shareholdings. If the group does not address the issues within the grace period, the FTC will take follow-up actions
Dec. 2017 Feb.-Mar. 2018Aug.-Sep. 2018 Dec. 2018
The FTC decided to revise its Samsung Group is likely to untie guidelines on new circular new circular shareholdings within six shareholdings arising from a months of notification. merger (12/21)
Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 16 January 30, 2018 Samsung C&T Corporation
Q3. What will be the result of litigation regarding the Samsung C&T/Cheil Industries merger?
A3. We see a low probability of the merger being nullified.
Samsung C&T is currently facing legal challenges from Ilsung Pharmaceuticals and three other shareholders, who are seeking to: 1) adjust the appraisal rights price for Samsung C&T shares; and/or 2) nullify the merger.
1) Appraisal rights price adjustment lawsuit: Pending at the Supreme Court
In August 2015, Ilsung Pharmaceuticals and three other minority shareholders filed a lawsuit claiming that the appraisal rights price offered by Samsung C&T failed to reflect the fair value of the company. A lower court ruled in favor of Samsung C&T in January 2016, but the Seoul High Court ruled on appeal in May 2016 that the buyback price should be adjusted up by W9,368 per share (W57,234 ‰ W66,602). The Seoul High Court asserted that there were valid questions regarding whether the Samsung Group intentionally lowered Samsung C&T’s stock price, as the controlling family stood to benefit from an overvaluation of Cheil Industries and an undervaluation of Samsung C&T. The case has now made its way to the Supreme Court, as Samsung C&T immediately appealed after the Seoul High Court’s ruling. A total of 3,700,250 shares of Samsung C&T (3,307,070 owned by Ilsung Pharmaceuticals) are to be affected by the Supreme Court’s ruling.
2) Merger nullification lawsuit: Pending at the Seoul High Court
In March 2016, Ilsung Pharmaceuticals and three other shareholders filed another suit to completely nullify the Samsung C&T/Cheil Industries merger. A lower court found that although the merger had been pursued as part of Samsung Group’s comprehensive ownership succession measures, it was also expected to stabilize management. Accordingly, the court ruled that ownership succession was not the only objective of the merger, and that the merger ratio (0.35:1) was in compliance with the Financial Investment Services and Capital Markets Act (FSCMA). All in all, the lower court stated that it did not see sufficient evidence (e.g., price manipulation and/or illegal transactions) to rule that the merger should be invalidated. Ilsung Pharmaceuticals and other shareholders have appealed the ruling to the Seoul High Court.
In light of Supreme Court precedent, we see only a limited risk of the merger being nullified on the grounds of unfair pricing. (A Supreme Court ruling dated January 10, 2008, stated that in cases where “a listed company determined the merger price and exchange ratio pursuant to the requirements, procedures, and methods set forth under the Securities and Exchange Act and the Enforcement Decree thereof, the merger shall not be nullified on the grounds of an unfair merger price, unless the price was calculated based on false data and/or unrealistic projections.”)
Mirae Asset Daewoo Research 17 January 30, 2018 Samsung C&T Corporation
Table 13. Timeline of Samsung C&T/Cheil Industries merger Date From BOD approval to shareholders’ meeting 5/26/15 Cheil Industries and Samsung C&T announce that merger was approved by their respective BODs. 5/27/15 Minority shareholder Elliott Associates announces that it will oppose the merger. Elliott notifies Samsung C&T of shareholders’ meeting and files an injunction request to block the 6/9/15 merger . 6/10/15 Samsung C&T decides to sell its treasury shares (5.76%) to KCC . Elliott files an injunction request to 6/11/15 block the sale of treasury shares . 6/12/15 The FTC approves the merger. 7/1/15 A court rejects Elliott’s request for an injunction to block the proposed merger. 7/3/15 Institutional Shareholder Services (ISS) speaks out against the merger. 7/7/15 A court rejects Elliott’s request for an injunction to block the sale of treasury shares. 7/16/15 An appellate court dismisses an appeal filed by Elliott to block the sale of treasury shares. Date After shareholders’ meeting Dissenting shareholders, including Elliott and Ilsung Pharmaceuticals, file a lawsuit against Samsung 8/15 C&T to adjust the appraisal rights price . 9/1/15 The merged company, Samsung C&T, is launched. Regarding the lawsuit related to the appraisal righ ts price, a lower court rules in favor of Samsung 1/16 C&T . Dissenting shareholders file an appeal . 3/23/16 Elliott withdraws its lawsuit against Samsung C&T . Four dissenting shareholders, including Ilsung 3/24/16 Pharmaceuticals, file a lawsuit to nullify the merger . The Seoul High Court rules against Samsung C&T in the lawsuit regarding the appraisal rights price . 5/31/16 Samsung C&T files an appeal . A lower court rules in favor of Samsung C&T in the merger nullification suit. Ilsung Pharmaceuticals 10/19/17 and other shareholders appeal. The appraisal rights price adjustment and merger nullification lawsuits land at the Supreme Court -present and the Seoul High Court, respectively. Source: Media reports, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 18 January 30, 2018 Samsung C&T Corporation
Q4. Will Samsung Life dispose of SEC shares?
A4. Regulatory issues should force Samsung Life to sell some of its SEC shares, which will likely be directly purchased by Samsung C&T.
1) Control over SEC needs to be strengthened
Currently, Samsung Group’s stake in SEC is relatively low at 19.86%. And despite being the de facto holding company of the group, Samsung C&T holds only a 4.65% SEC stake, which pales in comparison to the 8.27% stake of largest shareholder Samsung Life.
In our view, Samsung Life will not be able to maintain its position as the largest shareholder of SEC in light of strengthening regulations regarding the separation of financial and non- financial capital and toughening accounting rules on insurers. Indeed, we believe that the life insurer will be forced to sell some of its SEC shares due to regulatory issues. And it is likely that Samsung C&T will directly purchase the shares to be sold by Samsung Life. *Samsung Life’s potential disposal of SEC shares: (1) Separation of financial and non-financial capital
SEC’s treasury share cancellation will push up financial affiliates’ combined percentage stake in the electronics giant. Once financial affiliates’ combined stake in SEC exceeds 10%, Samsung Life will be subject to a Financial Services Commission (FSC) review of its eligibility for largest shareholder status (Article 24 of Act on the Structural Improvement of the Financial Industry).
Currently, the combined holdings of Samsung Life and Samsung F&M in SEC do not exceed 10%, with the two insurers owning 8.27% and 1.45%, respectively. Once SEC completely cancels its treasury shares in 2018 as scheduled, however, the insurers’ combined stake should rise to 10.45%, surpassing the 10% threshold.
In light of the rules regarding the separation of financial and non-financial capital, as well as recent regulatory trends, Samsung Life is unlikely to win FSC approval. Considering SEC’s additional treasury share cancellation plans, Samsung Life and Samsung F&M are forecast to unload a combined 0.45% stake in SEC, which will likely be directly purchased by Samsung F&M.
Table 14. Act on the Structural Improvement of the Financial Industry Details
(Article 24) Stockholding limit on other companies ① Where any financial institution and financial institutions belonging to the conglomerate to which the former financial institution belongs (hereinafter referred to as the same affiliated financial institutions) desire to perform the following acts, they shall obtain prior approval from the Financial Services Commission according to the standards as determined by presidential decree: 1. Holding not less than 20/100 of the total number of issued voting stocks of other companies; or ∙∙∙∙∙∙ 3. Holding not less than 10/100 of the total number of issued voting stocks of other companies, and controlling the relevant company by any same affiliated financial institution or conglomerate to which the same affiliated financial institutions belong, as determined by presidential decree. Source: Mirae Asset Daewoo Research
Table 15. Prospective changes to financial affiliates’ SEC stake after treasury share cancellation Before cancellation No. of shares Stake Notes Samsung Life 10,622,814 8.27% Samsung F&M 1,856,370 1.45% Based on 128,386,494 shares issued as of January 2018 Total 12,479,184 9.72% After cancellation No. of shares Stake Notes Samsung Life 10,622,814 8.90% Based on 119,395,651 shares issued assuming the cancellation of Samsung F&M 1,856,370 1.55% 8,990,843 shares in 2018 Total 12,479,184 10.455 Financial affiliates ’ stake exceeds 10% factoring in Total value estimated at W1.37tr based on SEC ”s January 26, 2018 539,619 0.45% SEC ’s treasury share cancellation plan closing price of W2,539,000 Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 19 January 30, 2018 Samsung C&T Corporation
*Samsung Life’s potential disposal of SEC shares: (2) Proposed revision to the Insurance Business Act
It is also worth keeping an eye on a proposed revision to the Insurance Business Act (put forth by Lee Jong-gul and several other lawmakers) that would require insurance firms to adopt mark-to-market valuations for their equity and bond holdings. If the amendment is passed, Samsung Life would have to divest a significant portion of its stake in SEC.
Under the current Insurance Business Act, the share of equities/bonds issued by other companies in an insurer’s total assets under management (AUM) or total equity capital is barred from exceeding certain thresholds. This rule is aimed at ensuring stable and effective asset management, which would support the timely payment of claims to policyholders. Specifically, the aggregate amount of shares owned by large shareholders and bonds issued by subsidiaries prescribed under presidential decree shall not exceed 60% of the firm’s total equity capital or 3% of its total assets, whichever is less. The valuation criteria are not separately defined in the current Insurance Business Act. However, separate tables outlined in the Regulation on Supervision of Insurance Business stipulate mark-to- market valuations for total assets and equity capital, but acquisition price-based valuations for equity and bond investments.
Table 16. Details of amendment to the Insurance Business Act Details
Article 106 (methods and ratio of asset management) ① - ③ (not revised)
Table 17. Pros and cons of the proposed revision Pros Cons ① At present, the valuation methodology (acquisition price -based) for insurers ’ ① Regulations limiting an insurer ’s investments in major shareholders and stock/bond holdings is different from the standards imposed on other financial affiliates are aimed at preventing unfair financial support. Acquisition price-based institutions’ holdings. No clear justification has been given for this difference. valuations of stock/bond holdings, as mandated by the current regulations, can play a role in reducing the provision of unfair financial support. The proposed revision aims to ensure that mutual savings banks and other financial investment businesses face the same asset valuation standards.
② At present , insurers ’ total assets are calculated based on market price s, while ② If an insurance company that holds shares of its affiliate s in compliance with their stock/bond holdings are evaluated based on acquisition prices. current regulations is forced to sell them upon the enforcement of the r evised bill, this might reduce trust in regulators. The proposed revision could eliminate valuation distortions arising from changes in stock/bond prices.
③ If an insurance company holds a stock for a long period of time, the difference ③ Korea ’s current acquisition cost -based valuation standard is not without between the acquisition price and market price could widen depending on share precedent. Indeed, Japan also uses acquisition cost as the valuation metric for performance. affiliate equity holdings:
The value of AUM (corporate bonds, stocks, debt, etc.) related to large shareholders and affiliates of an insurance company shall not exceed 6% percent of total assets. When evaluating total assets and the value of AUM, short-term trading securities are evaluated based on the market price, while subsidiary/affiliate shares and other securities are calculated based on the acquisition cost.
Source: National Policy Committee, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 20 January 30, 2018 Samsung C&T Corporation
As of end-September 2017, Samsung Life’s total assets and equity capital stand at W211.1tr and W28.3tr, respectively, which means the ceiling on the firm’s affiliate stake holdings (60% of total equity capital or 3% of total assets, whichever is less) is around W6.5tr. Meanwhile, Samsung Life currently holds a total of 10,622,814 common shares in SEC, with a total acquisition cost of W563bn (per-share average acquisition cost of W53,000), vs. a mark-to- market valuation of W27tr, based on the end-2017 per-share price of roughly W2,550,000.
Samsung Life is not in violation of the current asset management regulations on insurers, which are based on acquisition prices, not market prices. However, if the proposed revision to the Insurance Business Act is passed, the life insurer would be required to dispose of approximately 6.3% of SEC (worth nearly W20tr) within seven years of enforcement. In light of the expected tightening of international accounting standards and supervisory regulations on insurers (e.g., the IFRS 4 phase II and Solvency II), Samsung Life could be forced to sell a significant portion of its affiliate stakes (e.g., SEC).
If Samsung Life faces growing pressure to dispose of its stake in SEC amid tightening asset management regulations on insurers, we expect Samsung C&T to aggressively expand positions in SEC to help the group maintain control of the electronics giant.
Table 18. Samsung Life likely to dispose of its SEC stake if the proposed Insurance Business Act revision is passed (Wtr) Total assets Total capital Ceiling on affiliate stake holdings
Samsung Life 211.1 28.3 6.3 No. of shares Acquisition cost Mark-to-market valuation
Samsung Life’s SEC stake 10,622,814 (8.3%) 0.6 27.0 No. of divested shares Divestment amount Post-divestment stake Samsung Life ’s SEC stake after the passage of the 8,137,826 (6.3%) 20.7 2.0% revision (projected) Note: As of 3Q17 and based on January 26, 2018 closing prices Source: Mirae Asset Daewoo Research
Figure 24. Ceiling on Samsung Life’s affiliate stake holdings and its SEC stake value (based on acquisition prices vs. market prices)
(Wtr) 30 27.0
25
20 3% of total assets (approx. W20.7tr) 15
10 6.3 5 0.6 0 Limit한도 (3%(총자산 of total3%) assets) Acquisition취득원가 price Market 평가금액 price
Note: As of 3Q17 and based on January 27, 2018 closing prices Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 21 January 30, 2018 Samsung C&T Corporation
2) Samsung C&T’s purchase of additional SEC shares to drive up dividend income
In 2017, Samsung C&T generated dividend income of roughly W359.9bn (nearly 41% of its total pretax profit) from its stakes in affiliates, including Samsung Life (19.3%), SEC (4.6%), and Samsung SDS.
Meanwhile, factoring in SEC shareholder return policies for 2018-20 (revealed in October 2017), we expect Samsung C&T to book greater dividend income from its SEC shares from 2018 onwards.
Samsung C&T’s annual dividend income from its SEC stake is projected to rise from W125.5bn in 2016 to W289.9bn in 2017 and W478.1bn in 2018.
*SEC’s shareholder return program for 2018-20 (unveiled on October 31, 2017)
1) Dividend payout expansion: After expanding its annual dividends by 20% in 2017, SEC will double its dividends in 2018 and maintain that same level in 2019-20.
2) Future M&A investments will not be deducted from free cash flow (FCF): This policy change will increase the amount of capital available for return to shareholders and result in greater transparency and visibility.
3) The minimum proportion of FCF allocated for shareholder returns will be set at 50% over the three-year period.
※ After dividend payouts, any remaining FCF portion available for shareholder returns will be used either for additional cash dividends or share buybacks.
Table 19. SEC’s annual dividend payouts 2016 2017F 2019F 2020F Annual dividend payout (Wtr) 4.0 4.1 8.2 8.2 DPS (W) 28,500 34,200 68,400 68,400 Growth (YoY) 35.7% 20.0% 100% 0% Source: DART, Mirae Asset Daewoo Research
Table 20. SEC’s major shareholders and their dividend income (Wbn, %) Major shareholders Dividend income
No. of shares Stake Value 2016 2017F 2018F 2019F Lee Kun-hee 4,985,464 3.88 13,984 142 171 341 341 Controlling Hong Ra-hee 1,083,072 0.84 3,038 31 37 74 74 family (1) Lee Jae-yong 840,403 0.65 2,357 24 29 57 57 Subtotal 6,908,939 5.38 19,380 197 236 473 473 Samsung Life 10,622,814 8.27 29,797 303 363 727 727 Samsung C&T 5,976,362 4.65 16,764 170 204 409 409 Samsung F&M 1,856,370 1.45 5,207 53 63 127 127 Affiliates (2) Samsung Welfare Foundation 89,683 0.07 252 3 3 6 6 Samsung Foundation of Culture 37,615 0.03 106 1 1 3 3 Subtotal 18,582,844 14.47 52,125 530 636 1,271 1,271 (1) + (2) 25,491,783 19.86 71,504 727 872 1,744 1,744 Source : DART, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 22 January 30, 2018 Samsung C&T Corporation
Figure 26. Samsung C&T’s dividend income from stakes in Figure 25. Dividend income trend for Samsung C&T affiliates
(Wbn) (%) (Wbn) 1000 Samsung C&T's SEC dividend income - A (L) 100 600 SEC Samsung C&T's pretax profit - B (L) Samsung Life 14 Weight - A/B (R) 500 Samsung SDS 14 800 80 62.1 Other 52.9 46.4 400 46.4 14 600 60 9.9 46.4 300 400 40 17 200 6.6 385.5 408.8 69.6 289.9 200 20 100 125.5 0 0 0 2017F 2018F 2019F 2016 2017F 2018F 2019F Source: DART, Mirae Asset Daewoo Research Source: DART, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 23 January 30, 2018 Samsung C&T Corporation
Q5. What will be the direction of Samsung C&T’s shareholder return policy going forward?
A5. The company has raised its DPS and could potentially consider retiring treasury shares.
1) DPS increases
Samsung C&T announced on January 8, 2018 that it would pay out an annual DPS of W2,000 from 2017 through 2019. Thus, the company’s annual dividend payout should increase 3.6 times from the 2016 level to W330bn. Based on our 2017 earnings forecast, we estimate dividend payout ratio at 48.5% on a consolidated basis and dividend yield at 1.64%. Based on 2018 earnings estimates, consolidated dividend payout ratio and dividend yield are anticipated to come in at 41.7% and 1.50%, respectively.
2) Potential cancellation of treasury shares
Samsung C&T could also consider retiring its treasury stock as part of its efforts to strengthen shareholder returns. Currently, treasury stock is equivalent to 13.8% of the company’s total shares issued.
If the company cancels all its entire treasury shares, NAV and EPS would increase by 7.1% and 16.0%, respectively, with the combined stake of the controlling family rising by 5%p from 31.1% to 36.1%. Including the holdings of related parties/affiliates, the combined stake would climb by 6.2%p from 39.0% to 45.2%.
Table 21. Samsung C&T’s dividend payout (Wbn, W, %) 2012 2013 2014 2015 2016 1Q17 2Q17 3Q17 4Q17F 2017F 2018F
Total debt 910 2,330 1,760 7,746 7,130 5,966 6,104 6,247 5,865 5,865 5,655 Short-term 586 1,027 375 3,803 3,473 2,740 2,988 3,513 3,513 3,513 3,303 Long-term 324 1,303 1,385 3,943 3,657 3,225 3,116 2,734 2,352 2,352 2,352 Cash and cash equivalents 35 156 374 2,133 3,759 2,971 2,699 2,738 2,778 2,778 2,915 Net debt 876 2,174 1,386 5,613 3,371 2,995 3,405 3,509 3,087 3,087 2,740 Consolidated NP 141 45 456 2,747 107 212 121 159 171 662 782 Profit net profit 151 96 424 2,361 410 214 114 129 160 617 728 DPS 0 0 0 500 550 - - - - 2,000 2,000 Dividend yield - - - 0.37% 0.40% - - - - 1.64% 1.47% Total payout - - - 84 91 - - - - 327 327 (Consolidated) Payout ratio - - - 3.05% 84.56% - - - - 48.45% 39.32% Note: Based on January 26, 2018 closing price Source: DART, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 24 January 30, 2018 Samsung C&T Corporation
Table 22. Potential changes in major shareholders’ stakes in the event of treasury stock cancellation (%, Wbn) Stake Stake Shareholder No. of shares Value Shareholder No. of shares Value ratio ratio Lee Jae-yong 32,674,500 17.2 4,460 Lee Jae-yong 32,674,500 20.0 4,460
Lee Boo-jin 10,456,450 5.5 1,427 Lee Boo-jin 10,456,450 6.4 1,427 Controlling family Controlling family Lee Seo-hyun 10,456,450 5.5 1,427 Lee Seo-hyun 10,456,450 6.4 1,427 (1) (1) Lee Kun-hee 5,425,733 2.9 741 Lee Kun-hee 5,425,733 3.3 741
Subtotal 59,013,133 31.1 8,055 Subtotal 59,013,133 36.1 8,055
SEMCO 5,000,000 2.6 683 SEMCO 5,000,000 3.1 683
Samsung SDI 4,042,758 2.1 552 Samsung SDI 4,042,758 2.5 552
Samsung F&M 2,617,297 1.4 357 Samsung F&M 2,617,297 1.6 357
Samsung Life Samsung Life Public Welfare 2,000,000 1.1 273 Public Welfare 2,000,000 1.2 273
Affiliates Foundation Affiliates Foundation (2) Samsung (2) Samsung Foundation of 1,144,086 0.6 156 Foundation of 1,144,086 0.7 156
Culture Culture Samsung Samsung Welfare 80,946 0.0 11 Welfare 80,946 0.0 11
Foundation Foundation Subtotal 14,885,087 7.8 2,032 Subtotal 14,885,087 9.1 2,032
(3) = (1) + (2) 73,898,220 39.0 10,087 Controlling family + affiliates (3) = (1) + (2) 73,898,220 45.2 10,087
Treasury shares (4) 26,225,503 13.8 3,580 Treasury shares (4) 0 0 0
(5) = (3) + (4) 100,123,723 52.8 13,667 (5) = (3) + (4) 73,898,220 45.2 10,087
Total shares issued 189,690,043 100.0 25,893 Total shares issued 163,464,540 100.0 22,313
Note: Based on closing price as of January 26t 2018
Source: DART, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 25 January 30, 2018 Samsung C&T Corporation
Q6. Will Samsung C&T be able to collect brand royalties?
A6. Samsung C&T could begin collecting brand royalties if the current trademark arrangement between affiliates is dissolved.
Unlike many domestic conglomerates, Samsung Group ’s trademark is co-owned by 13 of its affiliates, including SEC and Samsung C&T, with their stakes set in proportion to revenue. Affiliates that are not registered as co-owners (Samsung Welstory, S1, Renault Samsung, etc.) are believed to pay royalty fees. For Samsung Welstory, company disclosures reveal that royalty fees amount to 0.5% of the revenue, excluding transactions with trademark co- owners.
Generally, a holding company (or de facto holding company) manages all aspects related to the brand and collects royalties from affiliates. As such, we believe Samsung’s brand royalties will mostly be collected by Samsung C&T going forward. However, this would require the group to dissolve its current co-ownership agreement. Samsung C&T should be able to take over brand co-ownership rights by paying affiliates to relinquish their rights.
Table 23. Major group affiliates’ revenue (Wbn) Listed 2012 2013 2014 2015 2016 SEC 141,206 158,372 137,826 135,205 133,947 Samsung Heavy Industries 14,424 14,706 12,584 9,333 9,884 Samsung C&T (previously Cheil Industries) 2,700 3,018 3,313 8,885 20,002 Previous Samsung C&T 17,241 18,845 19,150 - - Samsung SDI 4,908 2,919 4,720 6,680 4,423 SEMCO 5,469 6,119 4,784 5,297 4,690 Samsung Engineering 9,285 8,235 7,472 4,923 5,602 Samsung SDS 4,424 4,633 4,575 4,353 4,007 Hotel Shilla 2,190 2,275 2,795 2,782 3,155 S1 1,007 1,160 1,620 1,789 1,818 Cheil Worldwide 854 927 882 820 1,023 Multicampus 80 103 122 126 176 Samsung Life 30,383 19,209 26,886 27,014 26,103 Samsung F&M 19,258 15,205 20,675 21,386 21,336 Samsung Securities 2,545 2,087 3,042 3,880 4,361 Samsung Card 3,699 2,811 3,432 3,212 3,389 Total (1) 259,671 260,623 253,879 235,685 243,916 Unlisted 2012 2013 2014 2015 2016 Samsung Display 22,305 29,387 24,981 26,397 24,659 Samsung Welstory - 120 1,584 1,662 1,726 Samsung Medison 277 269 285 268 260 Samsung Economic Research Institute 154 166 172 166 148 Samsung BioLogics - 0 29 91 295 SECUI 94 104 94 86 79 Samsung Lions 53 43 51 58 71 Samsung Venture Investment 26 24 23 37 38 Samsung Bioepis - 44 76 24 147 Samsung Asset Management 137 106 138 164 171 Samsung Futures 74 47 53 58 65 Total (2) 23,120 30,310 27,485 29,013 27,659 Other affiliates (3) 20,149 42,959 21,533 7,182 7,221 Total revenue (1) + (2) + (3) 302,940 333,892 302,897 271,880 278,796 Note: On a non-consolidated basis Source: DART, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 26 January 30, 2018 Samsung C&T Corporation
Samsung C&T Corporation (028260 KS/Buy/TP: W180,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F Revenue 28,103 29,507 30,324 30,938 Current Assets 13,359 13,577 14,293 14,971 Cost of Sales 24,771 25,692 25,948 26,579 Cash and Cash Equivalents 2,699 2,850 3,287 3,373 Gross Profit 3,332 3,815 4,376 4,359 AR & Other Receivables 4,641 4,670 4,791 5,049 SG&A Expenses 3,192 2,958 3,440 3,413 Inventories 1,313 1,321 1,355 1,428 Operating Profit (Adj) 140 858 936 945 Other Current Assets 4,706 4,736 4,860 5,121 Operating Profit 140 858 936 945 Non-Current Assets 31,100 31,058 31,248 32,190 Non-Operating Profit -50 49 141 228 Investments in Associates 5,700 5,735 5,885 6,201 Net Financial Income -80 -63 0 0 Property, Plant and Equipment 5,281 4,845 4,428 4,081 Net Gain from Inv in Associates -151 -102 -67 -67 Intangible Assets 1,601 1,418 1,418 1,418 Pretax Profit 90 907 1,077 1,173 Total Assets 44,459 44,635 45,541 47,161 Income Tax 69 282 334 363 Current Liabilities 14,705 11,520 11,642 12,502 Profit from Continuing Operations 21 625 743 810 AP & Other Payables 4,587 4,615 4,735 4,990 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 3,508 3,548 3,549 3,551 Net Profit 21 625 743 810 Other Current Liabilities 6,610 3,357 3,358 3,961 Controlling Interests 107 662 782 855 Non-Current Liabilities 8,648 7,756 7,887 8,164 Non-Controlling Interests -87 -38 -39 -45 Long-Term Financial Liabilities 3,657 2,734 2,734 2,734 Total Comprehensive Profit 1,399 4,353 743 810 Other Non-Current Liabilities 4,991 5,022 5,153 5,430 Controlling Interests 1,476 4,433 761 830 Total Liabilities 23,353 19,276 19,529 20,666 Non-Controlling Interests -77 -80 -18 -20 Controlling Interests 18,302 22,621 23,312 23,841 EBITDA 639 1,335 1,353 1,292 Capital Stock 19 19 19 19 FCF (Free Cash Flow) 871 -3,720 1,165 1,768 Capital Surplus 10,468 10,468 10,468 10,468 EBITDA Margin (%) 2.3 4.5 4.5 4.2 Retained Earnings 5,230 5,801 6,493 7,021 Operating Profit Margin (%) 0.5 2.9 3.1 3.1 Non-Controlling Interests 2,804 2,739 2,700 2,654 Net Profit Margin (%) 0.4 2.2 2.6 2.8 Stockholders' Equity 21,106 25,360 26,012 26,495
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F Cash Flows from Op Activities 1,355 -3,206 1,165 1,768 P/E (x) 223.6 36.4 33.4 30.5 Net Profit 21 625 743 810 P/CF (x) 34.5 19.9 20.8 20.4 Non-Cash Income and Expense 675 587 511 470 P/B (x) 1.2 1.0 1.0 1.0 Depreciation 500 478 417 347 EV/EBITDA (x) 47.0 21.7 22.5 23.4 Amortization 0 0 0 0 EPS (W) 561 3,462 4,087 4,471 Others 175 109 94 123 CFPS (W) 3,639 6,333 6,554 6,689 Chg in Working Capital 715 -4,556 5 610 BPS (W) 105,657 128,235 131,847 134,610 Chg in AR & Other Receivables 188 193 -103 -219 DPS (W) 550 2,000 2,000 2,000 Chg in Inventories 84 40 -34 -73 Payout ratio (%) 431.4 52.3 44.0 40.4 Chg in AP & Other Payables 107 4 48 101 Dividend Yield (%) 0.4 1.6 1.5 1.5 Income Tax Paid -254 -269 -334 -363 Revenue Growth (%) 110.6 5.0 2.8 2.0 Cash Flows from Inv Activities -812 4,287 -489 -1,040 EBITDA Growth (%) 100.9 108.9 1.3 -4.5 Chg in PP&E -377 -478 0 0 Operating Profit Growth (%) 278.4 512.9 9.1 1.0 Chg in Intangible Assets -47 11 0 0 EPS Growth (%) -96.9 517.1 18.1 9.4 Chg in Financial Assets -2,543 -117 -489 -1,040 Accounts Receivable Turnover (x) 7.1 7.5 7.6 7.4 Others 2,155 4,871 0 0 Inventory Turnover (x) 20.8 22.4 22.7 22.2 Cash Flows from Fin Activities 122 -975 -90 -325 Accounts Payable Turnover (x) 13.9 14.0 14.0 13.7 Chg in Financial Liabilities -889 -883 1 2 ROA (%) 0.0 1.4 1.6 1.7 Chg in Equity 429 0 0 0 ROE (%) 0.6 3.2 3.4 3.6 Dividends Paid -87 -95 -91 -327 ROIC (%) 0.5 8.1 9.0 11.2 Others 669 3 0 0 Liability to Equity Ratio (%) 110.6 76.0 75.1 78.0 Increase (Decrease) in Cash 632 152 437 86 Current Ratio (%) 90.8 117.9 122.8 119.8 Beginning Balance 2,066 2,699 2,850 3,287 Net Debt to Equity Ratio (%) 15.4 8.7 6.7 6.0 Ending Balance 2,699 2,850 3,287 3,373 Interest Coverage Ratio (x) 0.7 6.6 0.0 0.0 Source: Company data, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 27 January 30, 2018 Samsung C&T Corporation
APPENDIX 1
Important Disclosures & Disclaimers 2-Year Rating and Target Price History
Company (Code) Date Rating Target Price (W) Samsung C&T Corporation Samsung C&T Corporation (028260) 01/28/2018 Buy 180,000 200,000
150,000
100,000
50,000
0 Jan 16 Jan 17 Jan 18
Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% 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 Mirae Asset Daewoo Co., Ltd., 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 analyst’s 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.
Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 75.50% 16.00% 8.50% 0.00% Investment Banking Services 62.50% 33.33% 4.17% 0.00% * Based on recommendations in the last 12-months (as of December 31, 2017)
Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subj ect company and do not own 1% or more of the subject company's shares outstanding.
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 or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s 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. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined 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 Mirae Asset Daewoo except as otherwise stated herein.
Disclaimers This report was prepared by Mirae Asset 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 in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset 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. In case of 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. 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 or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial
Mirae Asset Daewoo Research 28 January 30, 2018 Samsung C&T Corporation
situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset 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. Mirae Asset 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. 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 Mirae Asset Daewoo.
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Mirae Asset Daewoo Research 29 January 30, 2018 Samsung C&T Corporation
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