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July 17, 2013 July 17, 2013 KOREA Company News & Analysis Major Indices Close Chg Chg (%) Samsung Heavy Industries (Buy/TP: W50,000) Raise TP KOSPI 1,887.49 21.13 1.13 Offshore and merchant vessels to sustain resilient earnings KOSPI 200 244.82 2.80 1.16 KOSDAQ 541.82 4.10 0.76 Jusung Engineering (Buy/TP: W8,500) Upgrade rating & Raise TP Turnaround in sight Turnover ('000 shares, Wbn) Volume Value Samsung Engineering (Trading Buy/TP: W93,000) KOSPI 378,452 3,970 A few silver linings KOSPI 200 94,268 3,200 KOSDAQ 321,241 1,875 Hotel Shilla (Buy/TP: W85,000) Raise TP Market Cap (Wbn) Expectations of margin recovery coming to pass Value KOSPI 1,097,774 KOSDAQ 123,251 Sector News & Analysis KOSPI Turnover (Wbn) Banks (Overweight) Buy Sell Net Solid fundamentals to lay foundation for recovery in 2H Foreign 1,076 959 117 Institutional 1,127 887 240 Economy & Strategy Update Retail 1,747 2,100 -353 Technical Analysis KOSDAQ Turnover (Wbn) Buy Sell Net Short of momentum, a technical rebound seems limited Foreign 93 85 8 Quant Strategy Institutional 81 71 10 Retail 1,704 1,720 -16 Misconceptions about Korean exporters Program Buy / Sell (Wbn) Buy Sell Net KOSPI 902 447 455 KOSDAQ 17 19 -2 Advances & Declines Advances Declines Unchanged KOSPI 501 297 91 KOSDAQ 506 394 78 KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value KODEX LEVERAGE 10,710 210 532 Samsung Electronics 1,320,000 22,000 323 KODEX INVERSE 8,055 -85 281 KODEX 200 24,425 235 174 Hyundai Motor 219,000 6,000 149 KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Celltrion 49,100 1,700 117 Nasmedia 15,350 300 69 Woory Industrial 8,650 570 59 Lumens 10,050 -150 53 Danal 10,900 450 45 Note: As of July 17, 2013 This document is a summary of a report prepared by Daewoo Securities Co., Ltd. (“Daewoo”) and published on our website. Please review the compliance notices contained in the original report. Information and opinions contained herein have been compiled in good faith from sources deemed to be reliable. However, the information has not been independently verified. Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy or completeness of the information and opinions contained in this document. Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for informational purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed or published in whole or in part for any purpose. Samsung Heavy Industries (010140 KS) Offshore and merchant vessels to sustain resilient earnings Shipbuilding 2Q preview: Revenue of W3.78tr (+12.7% YoY), OP of W301.3bn (+13.8% YoY) For 2Q, we forecast Samsung Heavy Industries (SHI) to post revenue of W3.78tr Earnings Preview (+12.7% YoY), operating profit of W301.3bn (+13.8% YoY), and net profit of W236.1bn (+22.2% YoY). OP margin is estimated to come in at 8%, ahead of our previous July 17, 2013 projection and the market consensus. The improvement in operating earnings should be attributable to an increased mix of (Maintain) Buy higher-margin offshore plants (to around 60% of revenue in 2Q13 from 50% in 2Q12). In particular, we believe drillships, the most profitable offshore segment, accounted for Target Price (12M, W) 50,000 35% of revenue in the quarter. Other positive drivers are the sharply declining exposure to low-priced orders taken in 1H10 and increased exposure to LNG carriers, which are Share Price (07/16/13, W) 38,100 preventing further erosion in margins at the merchant vessel unit. Furthermore, we believe the increase in heavy tail payments has boosted the firm’s cash flow, helping it to Expected Return 31% reduce its debt and thus improve its balance sheet. Earnings to continue to outshine rivals’ in 2H OP (13F, Wbn) 1,341 SHI’s earnings outperformance is likely to continue in 2H, driven by what we believe is Consensus OP (13F, Wbn) 1,257 the most robust order backlog among domestic shipbuilders. Drillships, a key area of strength for SHI, still comprise a high percentage of its backlog (over 35%), with EPS Growth (13F, %) 26.8 offshore plants accounting for more than 60%. We expect the shipbuilder will easily Market EPS Growth (13F, %) 19.8 achieve its annual order guidance (US$13bn), with monthly orders evenly spread P/E (13F, x) 8.7 throughout 2H. We believe SHI secured sufficient margins from its LNG FPSO contracts Market P/E (13F, x) 9.1 and its CPF contract (for INPEX) on the back of its competitiveness. We thus see OP KOSPI 1,866.36 margin remaining stable at around 8% in 2H. The large-scale projects could cause some fluctuations in quarterly earnings depending on their delivery schedules, but we believe Market Cap (Wbn) 8,796 annual earnings growth should largely remain intact, as long as there are no surprises. Shares Outstanding (mn) 231 Free Float (%) 69.3 We see little risk of margin erosion despite the industry slump, given SHI’s high exposure Foreign Ownership (%) 30.5 to LNG carriers and containerships in the merchant vessel segment. Earnings should Beta (12M) 1.23 remain stable in 2H, as LNG vessel prices have remained relatively resilient over the years 52-Week Low (W) 29,800 and SHI now enjoys higher productivity in mega-containerships. As of end-2Q, total debt 52-Week High (W) 40,300 is estimated at W2.3tr, down W400bn from the previous quarter (vs. W1tr in cash holdings). We expect debt to shrink to W1tr by year-end with the increase of heavy tail (%) 1M 6M 12M payments. Absolute 7.2 0.7 5.0 Relative 8.4 6.3 2.3 Maintain Buy and raise TP to W50,000 Share price We retain our Buy rating on SHI and lift our target price by 8.2% to W50,000. SHI has 120 KOSPI become the market leader by attracting substantial orders in offshore plants, LNG 110 carriers, and mega-containerships. Our new target price reflects our bullish expectations 100 for earnings and fundamentals over the medium to long term. In 2H, we expect the 90 company to sustain a healthy order flow and sharply reduce its debt burden. We remain 80 upbeat on the stock from a long-term perspective, as we are confident the firm will 70 7/12 11/12 3/13 7/13 continue to deliver the best earnings performance in its peer group. Daewoo Securities Co., Ltd. FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F Shipbuilding/Machinery Revenue (Wbn) 13,146 13,392 14,490 15,154 15,912 16,629 OP (Wbn) 1,433 1,083 1,206 1,341 1,416 1,513 Ki-jong Sung OP margin (%) 10.9 8.1 8.3 8.9 8.9 9.1 +822-768-3263 [email protected] NP (Wbn) 1,000 851 796 1,010 1,095 1,177 EPS (W) 4,330 3,685 3,448 4,372 4,740 5,097 ROE (%) 28.7 19.4 16.1 17.7 16.5 15.3 P/E (x) 9.5 7.6 11.2 8.7 8.0 7.5 P/B (x) 2.1 1.2 1.5 1.3 1.1 1.0 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS BEGINNING ON PAGE 6. Jusung Engineering (036930 KQ) Turnaround in sight Technology What’s New: Earnings to continue to grow after swinging back to profit in 2Q Earnings turnaround expected in 2Q13: We expect Jusung Engineering to post 2Q13 Earnings Preview revenue of W42.5bn (+154% QoQ) and an operating profit of W1.3bn, on an OP margin July 17, 2013 of 3%. The company should swing back to profit after posting eight consecutive quarters of operating losses since 3Q11. The display and semiconductor divisions should each contribute W32bn and W7.5bn to revenues, with OLED encapsulation equipment sales driving growth (W38.6bn in orders placed by LG Display in 1Q). (Upgrade) Buy Revenue expansion to continue in 2H13: As Jusung’s revenues are anticipated to Target Price (12M, W) 8,500 continue to increase in 2H, profitability should also improve. We forecast that revenue and operating profit will each slightly improve to W46.2bn (+9% QoQ) and W2.2bn Share Price (07/16/13, W) 6,110 (+67% QoQ; OP margin of 4.7%) in 3Q, and then, surge to W70bn (+51% QoQ) and W7.3bn (+236% QoQ; OP margin of 10.4%) in 4Q. Expected Return 39% Catalysts: LCD deposition equipment orders + semiconductor equipment sales LCD equipment orders: LG Display’s Guangzhou line (8G, 70k/month) is expected to place OP (13F, Wbn) -1 equipment orders starting 3Q, boosting Jusung’s 2H LCD deposition equipment orders to Consensus OP (13F, Wbn) 36 W50-60bn. The company is also anticipated to receive OLED encapsulation equipment orders EPS Growth (13F, %) RR worth W10bn in 2H in addition to W8.5bn in 2Q.
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