June 10, 2019 Korea Morning Focus Company News & Analysis Major Indices Close Chg Chg (%) Hyundai E&C (000720/Buy/TP: W75,300) KOSPI 2,072.33 3.22 0.16 Company visit note: 1) Watch for profit growth KOSPI 200 268.27 0.28 0.10 KOSDAQ 716.53 8.78 1.24 Sector News & Analysis Turnover ('000 shares, Wbn) Conglomerates (Overweight) Volume Value How major shareholders are navigating inheritance taxes KOSPI 357,533 4,347 KOSPI 200 65,650 2,782 KOSDAQ 709,467 4,016 Market Cap (Wbn) Value KOSPI 1,380,064 KOSDAQ 243,723 KOSPI Turnover (Wbn) Buy Sell Net Foreign 1,403 1,437 -33 Institutional 1,033 967 66 Retail 1,888 1,928 -40 KOSDAQ Turnover (Wbn) Buy Sell Net Foreign 432 374 58 Institutional 255 182 73 Retail 3,306 3,422 -117 Program Buy / Sell (Wbn) Buy Sell Net KOSPI 1,134 1,087 47 KOSDAQ 396 311 85 Advances & Declines Advances Declines Unchanged KOSPI 565 260 66 KOSDAQ 915 278 94 KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Samsung Electronics 44,200 300 511 KODEX Leverage 11,790 15 305 KODEX 200 Futures 7,790 -15 219 Inverse 2X Baekkwang Mineral 5,400 1,245 193 Products Hynix 65,400 300 154 KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value RSupport 4,430 430 144 Korea Cement 3,460 525 114 S Net 9,600 80 94 FSN 1,675 320 92 SAMCO 21,000 500 83 Note: As of June 07, 2019 This document is a summary of a report prepared by Mirae Asset Daewoo Co., Ltd. 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This document may not be reproduced, further distributed or published in whole or in part for any purpose. Hyundai E&C (000720 KS) Company visit note: 1) Watch for profit growth Construction Overseas order recovery Company Report Expectations on overseas orders are coming to fruition. Hyundai E&C looks set to land June 10, 2019 the Iraqi common seawater supply project (W2.9tr) and the Saudi Marjan 6 & 12 project (W3.3tr) in June. In addition, the company is seeking overseas contracts of more than US$7bn in 2H19, including a combined cycle power plant project in Algeria, a dredging/reclamation project in Kuwait, and a bridge project in India. (Maintain) Buy Hyundai E&C has a 2019 overseas order target of W13.1tr. With 1H19 orders on track to exceed W8tr and additional orders expected in 2H19, we believe the company will Target Price(12M, W) 75,300 easily achieve its target. The recovery in overseas orders should not only boost revenue but also improve profits, as the use of idle labor should lead to lower SG&A expenses. Share Price (06/07/19, W) 52,000 Housing profit growth to continue Expected Return 45% For the housing business, we expect revenue growth and margin improvements to continue. We forecast housing revenue to expand to W4.4tr in 2019 and W5.2tr in 2020. The mix of in-house projects should also increase, accelerating margin OP (19F, Wbn) 1,028 improvements. In particular, profit growth should become more visible as projects Consensus OP (19F, Wbn) 1,004 presold in 2018, such as the Gaepo Jugong Complex 8 (contract value of W1tr), Gimpo Hillstate River City (contract value of W1.5tr), Sejong Master Hills (contract value of EPS Growth (19F, %) 21.0 W0.4tr), and Ilsan Kintex One City (contract value of W0.4tr) projects, pick up pace. Market EPS Growth (19F, %) -20.8 P/E (19F, x) 12.6 Order recovery and profit growth: A good bet during uncertain times Market P/E (19F, x) 11.9 As overseas orders begin to materialize in June and housing presales gather traction in KOSPI 2,072.33 2H19, expectations on 2020 earnings should become more bullish. For construction firms, order growth is critical. In addition to a recovery in orders, we also expect profits Market Cap (Wbn) 5,790 to grow. In particular, we think profit expansion in the more stable housing business Shares Outstanding (mn) 111 will help upgrade non-consolidated earnings. Free Float (%) 65.1 Foreign Ownership (%) 25.2 For 2Q19, we forecast the company to post revenue of W4.1tr and operating profit of Beta (12M) 1.57 W249.3bn, in line with the consensus. Our earnings estimates are even more bullish for 52-Week Low 44,200 2H19. In light of our expectation of a recovery in overseas orders and profit growth, we 52-Week High 72,300 maintain our Buy rating and target price of W75,300 on Hyundai E&C. At a time when uncertainties surrounding earnings estimates are increasing across the broader equity (%) 1M 6M 12M market, we believe Hyundai E&C’s stable profit growth makes it a compelling Absolute 2.8 -8.6 -24.7 alternative. Relative 8.0 -8.5 -10.3 110 Hyundai E&C KOSPI 100 90 80 70 60 50 5.18 9.18 1.19 5.19 Mirae Asset Daewoo Co., Ltd. [ Construction/Building Materials] FY (12) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 18,825 16,887 16,731 16,709 17,373 20,773 Kwangsoo Lee +822-3774-1457 OP (Wbn) 1,159 986 840 1,028 1,139 1,399 [email protected] OP Margin (%) 6.2 5.8 5.0 6.2 6.6 6.7 NP (Wbn) 572 202 382 462 469 530 EPS (W) 5,133 1,810 3,424 4,143 4,209 4,755 ROE (%) 9.5 3.2 6.0 7.3 7.0 7.5 P/E (x) 8.3 20.1 15.9 12.6 12.4 10.9 P/B (x) 0.8 0.6 1.0 0.9 0.8 0.8 Dividend Yield (%) 1.2 1.4 0.9 1.0 1.0 1.0 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 Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. June 10, 2019 Hyundai E&C Table 1. Hyundai E&C’s major overseas projects (parent) (US$bn) Project Type Expected value Notes Iraq common seawater supply project Plant 2.6 Likely to win contract in June Saudi Arabia Marjan 6 & 12 Plant 2.8 Likely to win contract in June Bidding in April, contract Panama metro Civil works 2.5 award in June Equity investment completed; Algeria combined cycle power plant Power 0.8 expected in June Kuwait Dredging/reclamation 0.7 Set to bid in 3Q19 Algeria combined cycle power plant 2 Power 0.8 Set to bid in 4Q19 Qatar hospital Building 0.2 2H19 India bridge Civil works 0.1 2H19 Source: Company data, Mirae Asset Daewoo Research Figure 1. Housing revenue (parent) (Wtr) Housing revenue to reach 6 W5.2tr in 2020 5 4 3 2 1 0 2014 2015 2016 2017 2018 2019E 2020E Source: Company data, Mirae Asset Daewoo Research Figure 2. Apartment presale volume (parent) (units) 30,000 25,000 Stable apartment presales (2019 target: 20,516; 3,032 sold so far) 20,000 15,000 10,000 5,000 0 2013 2014 2015 2016 2017 2018 2019 Source: Company data, Mirae Asset Daewoo Research Mirae Asset Daewoo Research Conglomerates How major shareholders are navigating inheritance taxes Overweight (Maintain) I. Inherent tax status of major conglomerate groups 1. OCI Group: Inheritance taxes on former chairman Lee Soo-young’s 10.9% stake in Industry Report OCI are estimated to be W174.5bn. His heirs, including Vice Chairman Lee Woo-hyun, June 10, 2019 have raised the funds to pay the taxes by selling some of their shares in April. 2. LG Group: Inheritance taxes on former chairman Koo Bon-moo’s 11.3% stake in LG Corp. are estimated to be W921.5bn. Of this, Chairman Koo Kwang-mo owes Mirae Asset Daewoo Co., Ltd. W716.2bn. We believe Chairman Koo will sell some of his shares in LG Corp. after taking steps to enhance the company’s value. [Conglomerates/Software] 3. Doosan Group: Inheritance taxes on former chairman Park Yong-gon’s 1.6% stake Dae-ro Jeong in Doosan Corp. are estimated to be W17.9bn. His heirs, including Chairman Park +822-3774-1634 Jeong-won, sold part of their shares in Doosan Corp. in May to pay their tax bill. [email protected] 4. Hanjin Group: Inheritance taxes on former chairman Cho Yang-ho’s 17.8% stake in Hanjin KAL are estimated to be W279.7bn.