Samsung Heavy Industries (010140) 2021 Guidance for Merchant Vessels Already Met Dongik Jeong Shipbuilding / Holding Companies April 1, 2021 +82-2-6114-2965 [email protected] Maintain HOLD and raise target price We revise up our 12m TP to KRW6,500 (12m fwd BVPS x 1.06x target P/B) for SHI to reflect to KRW6,500 changes in: (1) sustainable ROE, (2) the 12m fwd base period, (3) total shareholders’ equity resulting from revised earnings forecasts and (4) terminal growth rate as well as risk-free rate resulting from change in market rate assumptions. The last closing price (Apr 1) sits above our new TP, thus we maintain HOLD. Bull-case scenario applied to reflect As our bull-case scenario—international oil prices surpass USD60.00/bbl, which is based on rise in international oil price and solid WTI crude oil, and new order wins exceed USD7.0bn—is currently playing out, we apply a 20% new order wins premium to sustainable ROE. WTI crude recently climbed to the USD60.00 level/bbl while 2021’s new order wins look highly likely to exceed USD7.0bn amid an already solid order influx. 1Q21 new order wins at USD4.9bn; In 1Q21, SHI won 39 orders for merchant vessels totaling USD4.9bn (34 containerships, four 2021 annual guidance for merchant VLCCs, one LNG carrier) but no orders for offshore plants. The company’s 2021 new order vessels already met guidance is USD4.6bn for merchant vessels and USD3.2bn for offshore plants, thus guidance for merchant vessels has already been met. This can be attributable to a combination of factors, including high expectations of post-vaccination economic recovery, bullish freight rates and concerns over potential growth in newbuilding price. 1Q21 preview: Earnings to miss For 1Q21, we estimate K-IFRS consolidated revenue to reach KRW1.74tn (-4.7% YoY) market consensus and the operating loss to widen YoY to KRW70.3bn (-4.0% OPM). Hold Maintain Trading Data Risk & Total Return (annualized over three years) Free float 70.5% Target Price (Raised) KRW6,500 Avg. T/O val. (3m, KRWbn) 63.8 Return 1 2 3 4 High5 Risk Dividend yield* 0.0% Foreign ownership 16.3% 1 FALSE FALSE FALSE FALSE FALSE Major shareholders Samsung Electronics and Total return -13.6% 2 FALSE TRUE FALSE FALSE FALSE Current price (Apr 1) KRW7,520 9 others 21.9% 3 FALSE FALSE FALSE FALSE FALSE Consensus target price KRW6,591 National Pension Service 7.1% 4High FALSE FALSE FALSE FALSE FALSE Market capitalization USD4.7bn Stock Price Performance 5 FALSE FALSE FALSE FALSE FALSE * 12-month forward (%) 1M 3M 6M 12M Absolute 14.6 6.8 41.1 96.3 Relative 11.9 -0.6 6.4 7.2 Stock Price & Relative Performance Earnings Forecast & Valuation Fiscal year-end 2020A 2021E 2022E 2023E Relative performance (LHS) Stock price (RHS) Revenue (KRWbn) 6,860 7,107 7,755 8,560 % KRW OP (KRWbn) -1,054 -124 105 235 50 9,000 NP to control. int. (KRWbn) -1,482 -268 -34 57 40 7,800 EPS (KRW) -2,353 -425 -54 90 30 EPS growth (%) RR RR RR TTB 20 6,600 P/E (x) N/A N/A N/A 83.7 10 5,400 EV/EBITDA (x) N/A 55.4 22.6 17.0 0 4,200 P/B (x) 1.2 1.2 1.2 1.2 -10 ROE (%) -33.1 -7.1 -0.9 1.4 -20 3,000 Div. yield (%) N/A 0.0 0.0 0.0 Apr '20 Jul '20 Oct '20 Jan '21 Apr '21 Source(s): Company data, KB Securities Revenue should meet the market consensus but OP should fall short because of larger-than-expected provisions for construction losses coming from huge order wins in 1Q21; the provisions amount to 3% of non-gas line orders received in January as well as 1% of non-gas line orders received between February and March. Ongoing upward pressure on commodity prices (incl. steel plate) could create a need for additional provisioning, but given that price negotiations are underway, we did not reflect this in our earnings forecast. 2 Investment Opinion & Risks Base-case scenario: Catalysts 1) Order intake at USD8.0-10.0bn 2) WTI price at USD50.00-70.00 Bull-case scenario KRW8,100 (1.32x target P/B) Bull-case scenario: Upside risks Current price KRW7,520 (Apr 1) 1) Order intake above USD10.0bn 2) WTI price above USD70.00; Base-case scenario (target price) KRW6,500 (1.06x target P/B) offshore order intake above USD3.0bn Bear-case scenario: Downside risks Bear-case scenario KRW4,800 (0.79x target P/B) 1) Order intake below USD8.0bn 2) WTI price below USD50.00; offshore order intake below USD1.0bn Revised Earnings Estimates Valuation & Target Price Calculation (KRWbn, %) Previous Revised Change 2021E 2022E 2021E 2022E 2021E 2022E 1) Valuation method: Revenue 6,681 7,059 7,107 7,755 6.4 9.9 P/B-ROE model OP -119 103 -124 105 Loss 1.8 widens 2) Target price calculation: KRW6,105 12m fwd BVPS x 1.06x multiple NP (to control. int.) -249 -30 -268 -34 Loss Loss widens widens 3) Target price range: Source(s): KB Securities estimates KRW4,800 - KRW8,100 KB Estimates vs. Consensus 4) Valuation at target price: (KRWbn, %) KB Estimates Consensus Difference 1.08x 2021E P/B 2021E 2022E 2021E 2022E 2021E 2022E Revenue 7,107 7,755 6,999 7,388 1.5 5.0 OP -124 105 -72 36 Loss 188.5 widens NP (to control. int.) -268 -34 -156 -48 Loss Loss widens narrows Source(s): FnGuide consensus (3m), KB Securities estimates Revenue Composition (2021E) Earnings Sensitivity Analysis (%) EPS change 0.2% 2021E 2022E Loss Loss 23.8% +1% in FX rate narrows narrows Shipbuilding Loss Loss Offshore +1pp in interest rate Construction & Other widens widens 76.0% Source(s): KB Securities estimates Peer Group Comparison (KRWbn x, %) Market P/E P/B EV/EBITDA ROE Dividend Yield Cap 2021E 2022E 2021E 2022E 2021E 2022E 2021E 2022E 2021E 2022E Samsung Heavy Industries 4,738 N/A N/A 1.0 1.0 37.0 26.0 -4.0 -1.2 0.0 0.0 KSOE 9,094 91.4 45.2 0.8 0.8 19.8 16.2 0.9 1.9 0.0 0.0 DSME 2,940 17.9 9.4 0.7 0.7 7.3 5.0 4.2 7.4 0.0 0.0 Keppel 8,210 13.8 11.4 0.9 0.8 17.1 14.9 6.3 7.3 3.1 3.9 Source(s): FnGuide, Bloomberg consensus, KB Securities 3 Table 1. Target Price Calculation Fair value Line Items Bull Base Bear Notes Case Case Case Cost of equity (A= a+(b x c)) 8.92 Risk-free rate (a) 0.69 Avg. 1y monetary stabilization yield (last three months) Market risk premium (b) 7.37 Required rate of return - risk-free rate Beta (c) 1.12 52w adj. beta 20% premium to upcycle average; bull case/bear case ROEs +20%/-20% Sustainable ROE (B) 11.18 9.32 7.45 compared to base case ROE Min. (50% long-term retention rate x ROE, avg. 30y KTB yield for last three Terminal growth rate (C) 1.98 months) Target P/B (D= (B-C) / (A-C)) 1.32 1.06 0.79 Fair equity value (E=D X d) 5,097 4,065 3,033 12m fwd total equity (d) 3,847 No. of shares (e) 63,011 Fair price per share (F=E/e) 8,089 6,451 4,813 12m target price (G≒F) 8,100 6,500 4,800 Current price (H) 7,520 Apr 1, 2021 Upside (I= G/H) 7.3 -13.6 -36.4 Rating HOLD Source(s): Company data, KB Securities estimates Note: MRP of 7.37% = WMI500 total return of 10.97% – 1y MSB total return of 3.61% Table 2. Quarterly Earnings (K-IFRS consolidated) 1Q21E Change Diff. (KRWbn, %) 1Q20 2Q20 3Q20 4Q20 KB Estimate Consensus YoY QoQ Consensus Revenue 1,826.6 1,691.5 1,676.8 1,665.3 1,741.2 1,729.9 -4.7 4.6 0.7 OP -47.8 -707.7 -13.4 -285.1 -70.3 -31.7 Loss widens Loss narrows Loss widens EBT -220.1 -699.7 -11.1 -547.0 -109.7 -54.6 Loss narrows Loss narrows Loss widens NP (to control. int.) -224.8 -701.0 -5.5 -559.0 -134.5 -55.1 Loss narrows Loss narrows Loss widens OPM -2.6 -41.8 -0.8 -17.1 -4.0 -1.8 EBT margin -12.0 -41.4 -0.7 -32.8 -6.3 -3.2 NPM (to control. int.) -12.3 -41.4 -0.3 -33.6 -7.7 -3.2 Source(s): Company data, FnGuide consensus (3m), KB Securities estimates Fig 1. Shipbuilding/Offshore New Orders Fig 2. Monthly New Order Intake (USDbn) (USDbn) 2021 guidance 25 8.0 2021 order wins (USD7.8bn) 21.2 x 10x 2021 guidance 20 2020 order wins 6.0 15.3 14.9 4.9 2020 order wins 15 13.3 (USD5.5bn) 4.0 9.7 9.6 10.0 10 8.2 7.8 8.4 7.8 7.3 6.9 2.0 5 1.4 6.3 7.1 0.5 5.5 4.9 0 0.0 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source(s): Company data, KB Securities estimates Source(s): Company data, KB Securities Note: Dotted line represents order guidance for corresponding year 4 Income Statement Statement of Financial Position (KRWbn) 2019A 2020A 2021E 2022E 2023E (KRWbn) 2019A 2020A 2021E 2022E 2023E (Reporting standard) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (Reporting standard) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) Revenue 7,350 6,860 7,107 7,755 8,560 Total assets 13,600 12,922 13,651 13,842 13,980 Cost of revenue 7,288 7,326 6,662 7,069 7,726 Current assets 6,929 6,698 7,562 7,899 8,167 Gross profit 61 -466 445 686 834 Cash and cash equivalents 384 987 945 888 887 SG&A expenses 678 589 569 582 599 Current financial assets 546 597 600 600 600 Operating profit -617 -1,054 -124 105 235 Trade receivables 201 259 284 310 342 EBITDA -300 -772 150 369 490 Inventory 2,340 1,821 1,947 2,068 2,195 Non-operating accounts -523 -421 -160 -150 -160 Other current assets 3,459 3,034 3,786 4,033 4,143 Interest income 26 10 13 13 13 Non-current assets 6,671 6,224 6,089 5,944 5,813 Interest expenses 123 165 170 170 170 Investment assets 54 62 63 64 65 Profit on equity method 0 -3 -3 -3 -3 Property, plant and equipment 5,727 5,505 5,342 5,188 5,051 Net other non-operating income -425 -264 0 10 0 Intangible assets 46 28 33 37 40 Profit before tax -1,139 -1,475 -284 -45 75 Other non-current assets 843 629 651 654 658 Income tax expense 176 18 -78 -12 21 Total liabilities 8,351 9,204 9,789 9,858 9,941 Net profit -1,315 -1,493 -206 -33 55 Current liabilities 7,089 7,534 7,959 8,027 8,109 NP attributable to controlling interests -1,311 -1,482 -268 -34 57 Trade payables 651 418 526 574 634 Adj.