Construction/Plant Overweight (Maintain) Global EPC market to expand on rising oil prices Energy sector capex to expand, driven by rising oil prices Energy producers likely to focus on business diversification through downstream Issue Comment spending, rather than on production competition January 17, 2018 Global downstream capex growth positive to Korean firms’ overseas order recovery Mirae Asset Daewoo Co., Steady rise in oil prices to improve oil producers’ fiscal balances Ltd. [Construction/Construction Oil prices are steadily moving higher, with Brent crude recently breaking above US$70/bbl— Materials ] the highest level in three years. The rebound has been primarily driven by: 1) ongoing OPEC Kwangsoo Lee production cuts; 2) political instability in the Middle East; and 3) improving demand. The rise +822 -3774 -1457 in oil prices is likely to improve oil-producing nations’ fiscal balances. On average, OPEC [email protected] countries require an oil price of US$94/bbl to maintain a balanced budget (as of 2016). Global energy capex to grow History shows oil prices are positively correlated to capex in the energy sector. After reaching US$1tr in 2013, global energy capex steadily declined through 2016 due to falling oil prices. In 2017, however, global energy capex resumed growth following a rebound in oil prices, expanding 12% YoY to US$630bn. The increase in capex driven by rising oil prices is anticipated to continue in 2018. Reflecting such expectations, global EPC stocks have returned 13% on average over the past month. Changing dynamics to drive increase in downstream capex The intense battle in the energy sector was triggered by US shale gas and oil producers. In order to gain market share, these unconventional oil and gas producers aggressively ramped up production, causing a rapid decline in oil prices. While this eventually took a heavy toll on shale companies, with some going into bankruptcy, it also forced traditional oil producers to scale back production, which, in turn, set off a rebound in oil prices. Neither traditional oil producers nor shale companies are likely to aggressively expand upstream investments in response to the oil recovery, as both sides have learned from recent experience that managing output is mutually beneficial. We believe the focus will be on maintaining price stability by keeping production under control. As such, we think energy investments will be concentrated in the downstream space for business diversification rather than the upstream space. Global downstream capex expansion to support Korean firms’ overseas order recovery We expect global downstream capex expansion to contribute to an overseas order recovery at Korean EPC firms, especially considering their experience and competitive position in the global EPC market. We maintain our positive view on domestic EPC firms based on our expectation of an overseas order recovery. The top 15 global EPC firms recorded an average operating profit of W642bn in 2012 prior to the oil collapse, three times the 2016 figure (W194bn). This suggests earnings could rapidly recover once EPC investments gather steam. January 17, 2018 Construction/Plant Figure 1. Fiscal break-even oil price (2016) (US$/bbl) 140 · OPEC, oil producers: fiscal break-even oil price · Non-traditional energy: production costs 120 100 80 60 40 20 0 Iran Libya Oman OPEC avg. New oil Qatar Saudi Deepwater UAE Iraq Eagle Ford Bakken Existing oil Kuwait sands Arabia sands Source: IMF, OPEC, Mirae Asset Daewoo Research Figure 2. Energy sector capex vs. oil price trend (US$/bbl) (US$bn) 120 Capex (R) Dubai crude (L) 1,200 100 1,000 80 800 60 600 40 400 20 200 0 0 05 06 07 08 09 10 11 12 13 14 15 16 17 18F Source: EIA, Mirae Asset Daewoo Research Figure 3. Average operating profit of top 15 global EPC firms and oil prices (US$bn) (US$/bbl) 700 OP (L) Dubai crude (R) 120 600 100 500 80 400 60 300 40 200 100 20 0 0 2012 2013 2014 2015 2016 Note: Top 15 global EPC firms are Samsung Engineering, Hyundai E&C, GS E&C, Daelim Industrial, Daewoo E&C, Fluor, JGC, Chiyoda, Toyo Engineering, Tecnimont, TechnipFMC, Saipem, Tecnicas Reunidas, Petrofac, and Larsen & Toubro. Source: OPEC, Bloomberg, WISEfn, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 January 17, 2018 Construction/Plant APPENDIX 1 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 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. Distribution United Kingdom: This report is being distributed by Mirae Asset Securities (UK) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”).