September 26, 2019 Korea Daily Focus Company News & Analysis Samsung Heavy Industries (010140/Buy/TP: W10,500) Focus on renewed order momentum rather than order cancellation CJ CheilJedang (097950/Buy/TP: W340,000) Processed food recovery is a key variable Yuhan (000100/Buy/TP: W310,000) Licensing deals to drive re-rating Samsung Heavy Industries (010140 KS ) Focus on renewed order momentum rather than order cancellation Shipbuilding Cancellation of drillship orders removes risks Company Report Samsung Heavy Industries (SHI) disclosed on September 24 th that Transocean (RIG September 26, 2019 US/CP: US$5.11) has cancelled its orders for two unfinished drillships . (The orders were originally made by Ocean Rig, which was acquired by Transocean.) Given that SHI has already received US$520mn, or 37% of the contract price (US$1.43bn), the order cancellation should not entail a heavy provisioning burden. The fair value of a vessel in the event of an order cancellation is usually set at 60% of the newbuilding price. Even if (Maintain) Buy the fair value is adjusted down further to reflect the shipbuilding industry’s current weakness, we estimate related loss provisions will be equivalent to just 2-3% of Target Price (12M, W) 10,500 shareholders’ equity. The negative impact on enterprise value should therefore be limited. Share Price (09/25/19, W) 7,960 Look beyond past risks to new opportunities Expected Return 32% SHI recently won a huge contract for more than 10 small/medium-sized LNG-fueled oil tankers. In our view, this large-scale contract is meaningful in at least three ways. First, it will allow SHI to secure a lead in LNG-fueled ships, a promising segment in the OP (19F, Wbn) -103 shipbuilding industry. Second, it is positive from a profitability standpoint, as the Consensus OP (19F, Wbn) -81 contract price represents a 30% premium to the market rate. Lastly, the contract delivery schedule should help maximize shipyard efficiency in 2020, given that the final EPS Growth (19F, %) - delivery is scheduled for January 31 st , 2021. (Although SHI has a n order backlog of two Market EPS Growth (19F, %) -28.1 years, some other recent orders are not set for delivery until 1H22 and thus will not P/E (19F, x) - keep shipyards fully occupied in the near term.) As a result, we expect SHI to start Market P/E (19F, x) 13.3 seeing sharp margin improvement in 1Q20, when the LNG-fueled oil tanker orders KOSPI 2,073.39 enter production full swing. Market Cap (Wbn) 5,015 Maintain Buy and TP of W10,500; Focus on renewed order momentum Shares Outstanding (mn) 630 Free Float (%) 70.4 SHI has achieved 54% of its annual order target, winning orders worth US$4.2bn Foreign Ownership (%) 19.6 through the first eight months of 2019. Even with just one quarter remaining, we Beta (12M) 1.26 believe SHI stands a good chance of meeting its annual order target. First, the 52-Week Low 6,350 shipbuilder is likely to win US$1.5bn worth of additional orders related to existing LNG 52-Week High 9,450 carrier contracts. In addition, SHI is set to participate in tenders for Evergreen’s (2603 TT/CP: NT$13.15) ultra-large containerships and Novatek's 15LNG-powered icebreakers (%) 1M 6M 12M (for the Arctic LNG 2 project); even if SHI wins just one of these contracts, it will be Absolute 6.4 -6.0 1.4 worth US$1bn. Moreover, if SHI is awarded just one of the large-scale offshore projects Relative 0.0 -2.8 14.4 of ConocoPhillips (COP US/CP: US$59.48) or Shell (RDSA LN/CP: GBp2338.5) on which it is bidding, it would meet its annual order target. In light of SHI’s renewed order 130 Samsung Heavy Industries KOSPI momentum, we maintain our Buy rating with a target price of W10,500. 120 110 100 90 80 70 9.18 1.19 5.19 9.19 Mirae Asset Daewoo Co., Ltd. [ Telecom Services/Robotics/Shipbuilding ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 10,414 7,901 5,265 6,977 7,820 8,211 Hakmoo Lee +822 -3774 -1785 OP (Wbn) -147 -524 -409 -103 124 206 [email protected] OP margin (%) -1.4 -6.6 -7.8 -1.5 1.6 2.5 NP (Wbn) -121 -339 -388 -412 124 201 EPS (W) -382 -766 -693 -654 197 320 ROE (%) -2.3 -5.6 -6.2 -6.3 1.9 3.1 P/E (x) - - - - 40.4 24.9 P/B (x) 0.5 0.4 0.6 0.7 0.7 0.7 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0 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 CJ CheilJedang (097950 KS ) Processed food recovery is a key variable Food & Beverage 3Q19 preview Company Report For 3Q19, we project CJ CheilJedang (CJCJ) to post an 18.3% YoY rise in revenue and a September 26, 2019 5.3% YoY fall in operating profit on a consolidated basis. For the company ’s mainstay businesses (processed food, foodstuff, bio, and feed/livestock; excluding CJ Logistics [000120 KS/Buy/TP: W200,000/CP: W148,000]), we look for revenue growth of 25.9% YoY, but see operating profit declining 17.1% YoY (to W175bn). We expect the processed food and feed/livestock units to fare poorly. (Maintain) Buy In processed food, which includes Schwan’s (acquired in 1Q19), we expect operating Target Price (12M, W) 340,000 profit to contract 8.3% YoY. Excluding Schwan ’s, we estimate a much sharper fall in operating profit (-34.8% YoY), due to: 1) higher prices of raw materials (rice, etc.); 2) the recognition of Chuseok gift set returns (due to the holiday occurring earlier this year); 3) Share Price (09/25/19, W) 236,000 increased marketing spending in home meal replacements (HMRs) and other competitive segments; 4) initial costs related to the operation of the Jincheon plant ; 5) Expected Return 44% purchase price allocation (PPA) related to Schwan ’s; and 6) costs associated with SKU rationalization. OP (19F, Wbn) 795 In bio, we look for operating profit growth of 4.8% YoY. Despite lower prices of lysine Consensus OP (19F, Wbn) 854 and methionine and high base effects for Selecta, we expect operating profit to improve YoY thanks to higher prices and volume growth of tryptophan/nucleotides and valine. EPS Growth (19F, %) -72.3 Market EPS Growth (19F, %) -28.1 We expect the feed/livestock unit to turn to a loss YoY, as poultry pricing in Indonesia and hog pricing in Vietnam have been recovering more slowly than expected following P/E (19F, x) 15.7 the outbreak of African swine fever. Market P/E (19F, x) 13.3 KOSPI 2,073.39 Processed food unit in need of fundamental improvements; Investments in high value-added bio business Market Cap (Wbn) 3,553 Shares Outstanding (mn) 16 Improving the profitability of the processed food unit remains a challenge for CJCJ. The Free Float (%) 51.9 unit has performed poorly since 2H18, hurt by: 1) investments in the Jincheon plant; 2) Foreign Ownership (%) 22.0 the effects of SKU expansion; and 3) increased SG&A expenses due to investments and marketing expenses in the HMR segment. Currently, CJCJ is overhauling the processed Beta (12M) 0.38 food business by reducing less-profitable SKUs. CJCJ re duced SKUs by approximately 52-Week Low 221,500 300 in 1H19 and plans an additional reduction of 700 SKUs in 2H19, bringing the SKU 52-Week High 361,500 count down from 4,200 in 2018 to 3,200 at end-2019. (%) 1M 6M 12M Meanwhile, CJCJ is investing in nucleotides and tryptophan, which are high value-added Absolute 2.8 -26.5 -28.7 bio products. The company expanded tryptophan capacity by 8,000 tonnes (from 23,000 Relative -3.4 -23.9 -19.6 to 31,000 tonnes) in June, as 100% capacity had been reached. We expect the volume growth to generate operating leverage effects. CJCJ also plans to expand nucleotide 120 CJ CheilJedang KOSPI capacity by 10,000 tonnes (from 35,000 to 45,000 tonnes) by end-2019 to meet growing 110 demand from China’s downstream industries (instant noodles, fermented paste , etc.). 100 Higher prices and volume growth should support nucleotide earnings expansion. 90 80 Maintain Buy and TP of W340,000 70 60 With CJCJ working on improving its fundamentals, we believe profitability is likely to 9.18 1.19 5.19 9.19 improve in earnest from 2020. That said, the short-term earnings outlook is weak. Thus, we advise accumulating the stock at current share price leve ls, given the earnings Mirae Asset Daewoo Co., Ltd. upside in 2020 and CJCJ’s long-term growth potential. [ F&B ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 14,563 16,477 18,670 22,251 24,529 26,688 Woon -mok Baek +822 -3774 -1679 OP (Wbn) 844 777 833 795 927 1,015 [email protected] OP Margin (%) 5.8 4.7 4.5 3.6 3.8 3.8 NP (Wbn) 276 370 875 246 351 390 EPS (W) 19,044 25,536 54,173 15,029 21,400 23,822 ROE (%) 8.4 10.9 21.5 5.0 6.7 7.1 P/E (x) 18.8 14.3 6.1 15.7 11.0 9.9 P/B (x) 1.5 1.5 1.1 0.8 0.7 0.7 Dividend Yield (%) 0.7 0.8 1.1 1.5 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 Yuhan (000100 KS ) Licensing deals to drive re -rating Three major out-licensing deals likely to be reflected in share price Healthcare We maintain our Buy rating on Yuhan with a target price of W310,000.