Labour cost and FX to pressure short-term earnings

l Equity Research l
South Korea I General Industrials
17 April 2014
Korea shipbuilding
Labour cost and FX to pressure short-term earnings
hide column-old rating
Price
Ticker
(lc)
042660 KS
30,700
009540 KS
207,500
010140 KS
30,900
Daewoo Shipbuilding & Marine Engineering
Hyundai Heavy Industries
Samsung Heavy Industries
Rec
OP
IL
OP
PT (lc)
New
Chg (%)
42,000
(6.7)
200,000
(23.1)
42,000
(10.6)
Up/(Dn)
side (%)
36.8
(3.6)
35.9
PER (x)
FY1E FY2E
15.7
10.9
56.5
27.1
9.6
9.0
EV/EBITDA (x)
FY1E
FY2E
12.2
9.8
25.6
20.5
6.6
6.0
PBR (x)
FY1E FY2E
1.2
1.2
1.0
1.0
1.1
1.1
Share prices as of 17 April 2014
Source: Companies, FactSet, Standard Chartered Research estimates
 We see increased labour cost hike pressure on Korean shipbuilders and expect a larger percentage hike this year.
Coupled with a strong KRW, we believe these should hurt Korean shipbuilders’ long-term competitiveness.
 While it makes sense to move into more value-added segments, we believe it is difficult to avoid the short-term
earnings volatility due to the learning cost involved. We believe the uncertainty surrounding Korean shipbuilders’
earnings is rising.
 LNG-related products’ (LNG carrier and F-LNG) order flow appears relatively strong.
 We prefer DSME among Korean shipbuilders. The company has the best earnings and order visibility, in our view.
After years of stagnant labour cost hikes, we expect a stronger demand for labour
cost hikes this year. Hyundai Heavy Industries’ (HHI) labour union has already
requested for a larger percentage hike in labour costs this year and we expect to see
similar requests from other major shipbuilders’ labour unions in the coming weeks.
Labour cost hike is not a simple issue
We believe that a larger labour cost gap to competitors should exacerbate the cost
competitiveness of Korean shipbuilders in certain products, mainly commodity-like
commercial vessels, forcing Korean shipbuilders to change their operational strategy.
Balancing short-term earnings volatility and long-term competitiveness
While we believe that Korean shipbuilders are following the right strategy of moving
into more value-added segments, we think it is difficult to avoid short-term earnings
volatility. Korean shipbuilders have moved into more engineering-centric products in
recent years; accordingly, in our view, earnings visibility has declined because of the
non-conventionality of these products.
We expect higher earnings volatility (than previous quarters) in Korean shipbuilders’
1Q14 earnings. The contribution of non-conventional structures is rising and is a
swing factor of shipbuilders’ profitability, in our view. Moreover, some of the mega
projects require the so-called ‘local content’, which can be an additional swing factor
to their profitability.
We prefer DSME
We see the highest earnings visibility in Daewoo Shipbuilding & Marine Engineering
among the Korean shipbuilders. It also has the largest order visibility, thanks to a
USD 4.5bn Yamal LNG carrier order, which we expect to be awarded in 1H14. We
expect a muted order flow in commercial vessels over the next three months after
strong 2013 order flows. After a new-build price hike, the cost merit has faded for
commercial vessels.
James KP Hong
Kiyoun Lim
+82 2 3703 5164
Equity Research
Standard Chartered Securities Korea Ltd
+82 2 3703 5173
Equity Research
Standard Chartered Securities Korea Ltd
Important disclosures can be found in the Disclosures Appendix
All rights reserved. Standard Chartered Bank 2014
http://research.standardchartered.com
Equity Research l Korea shipbuilding
Labour cost hike
Shipbuilders lag salary hikes
We selected a number of Korean companies to compare the historical salaries of
their employees. Among the major Korean companies (the largest in each sector), we
found that HHI has lagged in terms of salary hikes since the global financial crisis.
Even in the most experienced employee category (average years of service above 18
years), HHI’s average salary per employee was down 0.7%, while most other
companies showed a 10-64% growth.
Figure 1: Labour cost trend of Korean companies
Average years of service
Salary growth
2008
2013
2001-2013
2008-2013
18.4
18.0
5.2%
-0.7%
Major Korean companies
Hyundai Heavy Industries
Samsung Electronics
7.2
9.3
10.1%
64.1%
Hyundai Motors
16.1
16.8
6.5%
39.6%
Hyundai E&C
12.7
9.7
3.2%
25.6%
Samsung Heavy Industries
10.7
12.3
6.6%
9.6%
Daewoo Shipbuilding
15.8
16.9
6.8%
10.8%
Other shipbuilders
Source: Company, Standard Chartered Research
Figure 2: Average salary of an employee in major Korean companies
HHI’s salary growth lags other major companies
Increased pressure of salary hike
40%
Hyundai Heavy Industries
Hyundai Motors Company
Samsung Electronics
Hyundai E&C
30%
YoY change
20%
10%
0%
-10%
-20%
-30%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Company, Standard Chartered Research
Strong salary hike expected in HHI
We believe that HHI is the most vulnerable to a labour cost hike this year, given the
company lagged its competitors in 2012-13. Samsung Heavy Industries (SHI) and
DSME’s labour costs stabilised in 2012-13, despite moving employees to the offshore
business.
HHI’s labour union is currently requesting a c.6% salary hike, which, we believe,
sounds reasonable, given the stagnant salary hike over the past two years. As
Chairman Mong-Joon Chung is running for the June election (Seoul city mayor), HHI
will be more open to its labour union’s request, in our view.
17 April 2014
2
Equity Research l Korea shipbuilding
Figure 3: HHI lags SHI and DSME in salary growth
Figure 4: Falling salary vs. stable average years of service
Salary gap widened in recent years
HHI employee’s salary remained weak in 2012-13
HHI
25%
SHI
DSME
20%
Average years of service (RHS)
25
15%
YoY change
15%
10%
5%
0%
20
10%
15
5%
10
0%
Source: Company, Standard Chartered Research
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2013
2012
2011
2010
2009
2008
2007
2006
0
2005
-10%
2004
-10%
2003
5
2002
-5%
2001
-5%
years
YoY change
20%
Average salary chage (YoY)
Source: Company, Standard Chartered Research
Labour cost hike enforces a different strategy
Labour cost hike is not a simple issue for shipbuilders. Higher labour cost means that
companies are forced to do more value-added works, such as specialty vessels and
offshore facilities. At the same time, rising labour cost should weigh on the
profitability of commercial vessel orders. Labour cost contribution varies by vessel
types, but should be negative for HHI, which has a higher contribution from
commercial vessels.
Figure 6: Order book portfolio of Korea’s Big-3
Figure 5: Per employee sales
Sales generation from shipbuilding and offshore
HHI
SHI
2,000
Order book to shift to value-added products
DSME
LNGC
Tanker
Drilling-rig
100%
1,500
('000 USD)
Containership
Special ship& Others
Production facilities
80%
1,000
60%
40%
500
20%
0
0%
2009
2010
2011
2012
Source: Company, Standard Chartered Research
2013
HHI
DSME
SHI
Note: Based on backlog as of March 2014
Source: Company, Standard Chartered Research
Impact on earnings
We adjust our earnings for Korean shipbuilders based on FX and labour cost
assumptions. These two cost factors are not independent, given that labour cost is
the biggest KRW exposure for shipbuilders. They can hedge FX risks for other cost
factors, such as steel plate and engine parts.
Among Korean shipbuilders, only SHI is fully hedging its FX position. DSME and HHI,
on the other hand, are open to FX fluctuation and are not fully hedged.
Figure 7: EPS forecast changes
2014E
DSME
SHI
HHI
New
1,908
3,219
3,673
Old
2,045
3,283
4,438
2015E
Diff (%)
-6.7%
-1.9%
-17.2%
New
2,766
3,435
7,662
Old
2,819
3,488
10,264
Diff (%)
-1.8%
-1.5%
-25.4%
Source: Factset, Standard Chartered Research estimates
17 April 2014
3
Equity Research l Korea shipbuilding
Daewoo Shipbuilding & Marine Engineering
Outperform rating
Price target: KRW 42,000
DSME is our preferred stock in the Korean shipbuilding space
We see limited downside in DSME’s 1H14 earnings. The company should meet
market expectations, and we expect earnings to continue to recover as DSME
delivers its first-ever products (including pipe-laying vessel) for which it booked a
large provisioning last year.
Moreover, order visibility remains strong. Our channel checks with component
suppliers in March indicate a strong LNG carrier order flow. We expect the Yamal
LNG carrier order (15 units of ice-class LNGC, USD 300mn each) to be booked
before 3Q14.
Figure 8: DSME – Quarterly earnings trend
K-IFRS consolidated
(KRW bn, %)
1Q13
2Q13
3Q13
4Q13
1Q14E
2Q14E
3Q14E
4Q14E
2013
2014E
2015E
Sales
3,259
4,088
3,659
4,300
3,922
4,077
3,766
3,797
15,305
15,562
16,928
COGS
3,069
3,808
3,389
4,011
3,635
3,733
3,438
3,443
14,277
14,249
15,338
Gross profit
189
280
269
289
286
344
328
354
1,028
1,313
1,590
SG&A
122
154
153
158
161
166
157
157
587
641
683
67
127
116
131
126
178
171
198
441
672
907
Non-OP items
9
-50
17
-90
-9
-9
-9
-9
-114
-36
-36
Pre-tax profit
76
77
133
41
117
169
162
189
327
636
871
Income tax
27
24
39
-6
35
51
49
57
85
191
261
Net profit
49
53
94
47
82
118
113
132
242
445
609
GPM
5.8%
6.9%
7.4%
6.7%
7.3%
8.4%
8.7%
9.3%
6.7%
8.4%
9.4%
OPM
2.1%
3.1%
3.2%
3.0%
3.2%
4.4%
4.5%
5.2%
2.9%
4.3%
5.4%
NPM
1.5%
1.3%
2.6%
1.1%
2.1%
2.9%
3.0%
3.5%
1.6%
2.9%
3.6%
35.7%
31.7%
29.5%
-14.1%
30.0%
30.0%
30.0%
30.0%
26.0%
30.0%
30.0%
Operating profit
Profit margin
Effective tax rate
Source: Company, Standard Chartered Research estimates
We are 2% above market consensus
We expect DSME’s earnings visibility to improve throughout 2014, as the company
continues on its recovery path since 2013. LNG-related products (LNG carrier and
LNG-FPSO) are the key drivers for 2014 and DSME is well-positioned, in our view.
As LNG-related products enjoy a higher-than-company-average profitability, we
believe a larger contribution from these products should improve DSME’s overall
margin.
Figure 9: Our estimates versus consensus
2014E
Our est. Consensus
Sales
2015E
Diff (%)
Our est. Consensus
Diff (%)
15,562
16,020
-2.9%
16,928
16,823
+0.6%
OP
672
661
+1.7%
907
858
+5.6%
NP
375
452
-17.0%
540
619
-12.8%
Source: Bloomberg consensus, Standard Chartered Research estimates
17 April 2014
4
Equity Research l Korea shipbuilding
Samsung Heavy Industries
We are long-term positive on SHI’s strategy
While we are positive on SHI’s long-term strategy, we believe its 1H14 earnings
should disappoint the market, due mainly to possible provisioning of offshore
Outperform rating
Price target: KRW 42,000
products following the group internal audit. SHI has won USD 3bn+ orders from
production facilities since 2011, including first-ever products such as floating central
processing facility (CPF) of Ichthys and Prelude LNG-FPSO. Moreover, the growing
sales contribution from Egina Oil-FPSO should weigh on its overall profitability, given
the higher local content required.
We expect rising competition in the drillship space to further push SHI into higher
value-added products, inevitably leading to learning costs. Korean shipbuilders are
entering another chapter that requires them to work on more engineering-centric
products and deal with local content requirements. SHI is leading this transition.
Figure 10: SHI – Quarterly earnings trend
K-IFRS consolidated
(KRW bn, %)
1Q13
2Q13
3Q13
4Q13
1Q14E
2Q14E
3Q14E
4Q14E
2013
2014E
2015E
Sales
3,888
3,798
3,576
3,573
3,716
3,716
3,716
3,598
14,835
14,748
14,834
COGS
3,275
3,326
3,167
3,269
3,280
3,261
3,286
3,104
13,038
12,930
12,942
Gross profit
613
472
408
304
436
456
431
495
1,797
1,817
1,892
SG&A
173
186
203
322
205
212
212
222
883
851
861
Operating profit
440
286
206
-18
231
243
219
273
914
966
1,031
Non-OP items
-57
1
13
-52
0
0
0
0
-95
0
0
Pre-tax profit
383
288
219
-70
231
243
219
273
819
966
1,031
Income tax
83
72
50
-18
53
56
50
63
187
222
237
300
215
169
-52
178
187
168
210
632
744
794
GPM
15.8%
12.4%
11.4%
8.5%
11.7%
12.3%
11.6%
13.8%
12.1%
12.3%
12.8%
OPM
11.3%
7.5%
5.8%
-0.5%
6.2%
6.5%
5.9%
7.6%
6.2%
6.5%
6.9%
NPM
7.7%
5.7%
4.7%
-1.5%
4.8%
5.0%
4.5%
5.8%
4.3%
5.0%
5.3%
21.6%
25.1%
22.9%
25.7%
23.0%
23.0%
23.0%
23.0%
22.8%
23.0%
23.0%
Net profit
Profit margin
Effective tax rate
Source: Company, Standard Chartered Research estimates
We are 3% above market consensus
However, we expect SHI’s earnings visibility to improve throughout 2014. LNGrelated products (LNG carrier and LNG-FPSO) are the key drivers of 2014 and SHI is
the leader in this space. However, falling contribution from drillship (its most lucrative
product) should stabilise SHI's earnings at the 6% level, in our view.
Figure 11: Our estimates versus consensus
2014E
Our est. Consensus
Sales
2015E
Diff (%)
Our est. Consensus
Diff (%)
14,748
14,713
+0.2%
14,834
15,124
-1.9%
OP
966
934
+3.4%
1,031
1,015
+1.6%
NP
744
711
+4.6%
794
765
+3.8%
Source: Bloomberg consensus, Standard Chartered Research estimates
17 April 2014
5
Equity Research l Korea shipbuilding
Compelling valuations, but not enough to make a significant move
We do not see a large downside risk to SHI’s share price, given its cheap valuation.
The stock has already priced in the slowdown in offshore drilling rig demand and the
growing competition in the drillship space. In terms of EV/EBITDA, globally, SHI is
the cheapest stock in the space.
That said, we believe that SHI’s valuations do not justify a strong positive movement.
We may find better entry points in the next 3-6 months, once the company releases
its group audited results and addresses the uncertainty surrounding its offshore
production facilities, especially Ichthys CPF.
17 April 2014
6
Equity Research l Korea shipbuilding
Hyundai Heavy Industries
In-Line rating
Price target: KRW 200,000
We remain bearish on HHI
We believe HHI’s 1H14 earnings should disappoint the market, due mainly to
shipbuilding (both commercial vessel and offshore). The delay in production facility
shipment (particularly Goliath FPSO) should lead to higher man-hours, resulting in
lower profitability, in our view.
Moreover, we expect another leg down in HHI’s 2H14 earnings, due mainly to its
onshore plant business, amid weak pick-up in shipbuilding profitability. The company
won two major power plant orders in Saudi Arabia in 2013: Jeddah South (2,400MW
oil-fired) in 2012 and Shuqaiq (2,640MW oil-fired).
Figure 12: HHI – Quarterly earnings trend
K-IFRS consolidated
(KRW bn, %)
1Q13
2Q13
3Q13
4Q13
1Q14E
2Q14E
3Q14E
4Q14E
2012
2013
2014E
2015E
Sales
13,143
13,091
13,138
14,816
14,008
13,646
13,448
15,087
54,974
54,188
56,189
57,838
COGS
12,132
12,030
12,438
14,333
13,229
12,724
12,835
14,217
50,331
50,933
53,004
54,033
Gross profit
1,011
1,061
700
483
780
922
613
870
4,643
3,255
3,184
3,805
SG&A
633
772
478
570
601
680
552
688
2,650
2,453
2,521
2,648
Operating profit
378
289
222
-87
179
242
60
182
1,993
802
663
1,157
Non-OP items
-31
-197
-216
-214
-64
-67
-71
-74
-557
-658
-277
-290
Pre-tax profit
347
92
7
-301
115
174
-10
108
1,436
144
387
867
Income tax
27
25
19
-73
28
42
-2
26
415
-2
93
208
320
67
-12
-228
87
132
-8
82
1,021
146
294
659
GPM
7.7%
8.1%
5.3%
3.3%
5.6%
6.8%
4.6%
5.8%
8.4%
6.0%
5.7%
6.6%
OPM
2.9%
2.2%
1.7%
-0.6%
1.3%
1.8%
0.4%
1.2%
3.6%
1.5%
1.2%
2.0%
NPM
2.4%
0.5%
-0.1%
-1.5%
0.6%
1.0%
-0.1%
0.5%
1.9%
0.3%
0.5%
1.1%
Effective tax rate
7.7%
27.0%
n.m.
24.2%
24.2%
24.2%
24.2%
24.2%
28.9%
-1.4%
24.0%
24.0%
Net profit
Profit margin
Source: Company, Standard Chartered Research estimates
We are 29% behind market consensus
We believe HHI’s earnings need to be revised down further. The earnings gap to
consensus can expand once the labour cost hike gets through.
Figure 13: Our estimates versus consensus
2014E
Our est. Consensus
Sales
2015E
Diff (%)
Our est. Consensus
Diff (%)
56,189
56,163
+0.0%
57,838
58,956
-1.9%
OP
663
940
-29.4%
1,157
1,650
-29.9%
NP
279
504
-44.6%
659
1,078
-38.9%
Source: Bloomberg for consensus, Standard Chartered Research estimates
LNG-related products (LNG carrier and LNG-FPSO) are the key drivers for 2014;
however, in our view, HHI lacks competitiveness in these products compared with its
Korean competitors. The company still maintains a positive stance on commercial
vessels, but a labour cost hike will significantly impact its profitability (due to a higher
labour cost portion).
17 April 2014
7
Equity Research l Korea shipbuilding
Figure 14: Global shipbuilding valuations
(USD mn)
Ticker
Market cap (USD mn)
Price target (LC)
Rating
DSME
SHI
HHI
Kawasaki
Mitsui
Mitsubishi
KEP
SMM
042660 KS
010140 KS
009540 KS
7012 JP
7003 JP
8058 JT
KEP SP
SMM SP
5,657
6,858
15,220
6,050
1,747
30,001
16,233
6,831
42,000
42,000
200,000
NA
NA
NA
10.91
4.60
OP
OP
IL
NR
NR
NR
IL
IL
2013
13,983
13,552
49,505
13,076
5,829
199,843
10,302
4,582
2014E
14,609
13,845
52,750
13,759
6,459
213,852
11,912
5,738
2015E
16,313
14,295
55,739
14,490
7,071
219,905
NA
5,958
2013
403
835
733
420
242
1,439
1,445
495
2014E
631
907
623
656
175
1,962
1,655
633
2015E
874
993
1,157
767
173
2,154
NA
655
2013E
678
1,107
1,636
961
397
3,738
1,656
601
2014E
860
1,185
1,562
1,112
326
4,643
1,889
758
2015E
1,109
1,279
2,151
1,256
321
4,989
NA
799
2013
152
578
287
313
-84
3,531
1205
443
2014E
352
698
262
354
100
4,318
1334
552
2015E
521
765
659
462
81
4,217
NA
568
OPM
2013
2.9
6.2
1.5
3.2
4.2
0.7
14.0
10.8
(%)
2014E
4.3
6.5
1.2
4.8
2.7
0.9
13.9
11.0
2015E
5.4
6.9
2.0
5.3
2.4
1.0
NA
11.0
Sales
OP
EBITDA
NP
PER
2013
34.5
13.7
54.5
20.2
-21.4
8.7
13.4
15.4
(x)
2014E
15.7
9.6
58.1
17.0
17.3
7.1
12.1
12.3
2015E
10.9
9.0
27.1
13.1
21.4
7.3
NA
12.1
PBR
2013
1.4
1.5
1.0
1.9
1.0
0.8
2.0
2.9
(x)
2014E
1.2
1.1
1.0
1.7
0.9
0.7
1.9
2.5
2015E
1.2
1.1
1.0
1.5
0.9
0.6
NA
2.2
ROE
2013
3.3
11.0
1.6
9.5
-4.8
9.4
15.5
21.0
(%)
2014E
7.5
11.9
1.6
10.3
5.2
9.7
16.2
23.0
2015E
11.1
12.2
3.6
12.3
4.2
8.5
NA
20.8
EV/EBITDA
2013
15.6
9.0
23.4
10.3
6.5
19.3
11.6
10.0
(x)
2014E
12.2
6.6
25.6
10.9
6.0
20.2
9.8
7.7
2015E
9.8
6.0
20.5
10.9
5.8
20.3
NA
7.3
Source: Bloomberg consensus, Standard Chartered Research estimates
17 April 2014
8
Equity Research l Korea shipbuilding
Figure 15: DSME – PBR band chart
DSME
x1.3
Figure 16: DSME – EV/backlog band chart
x0.7
x1.6
x1.0
x1.9
DSME
x0.21
60,000
x0.16
x0.31
15,000
50,000
12,000
Source: Company, Standard Chartered Research estimates
Source: Company, Standard Chartered Research estimates
Figure 17: SHI – PBR band chart
Figure 18: SHI – EV/backlog band chart
x1.1
x2.0
x1.4
x2.3
SHI
x0.21
60,000
15,000
50,000
12,000
EV (KRW bn)
40,000
30,000
20,000
2014
2013
2012
6,000
Source: Company, Standard Chartered Research estimates
Source: Company, Standard Chartered Research estimates
Figure 19: HHI – PBR band chart
Figure 20: HHI – EV/backlog band chart
60,000
50,000
400,000
40,000
2014
2013
2012
2011
2014
2013
2012
2011
2010
2009
2001
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0
2003
0
2002
10,000
2001
100,000
2008
20,000
2007
200,000
x0.4
x0.86
30,000
2006
300,000
x0.30
x0.7
2005
EV (KRW bn)
500,000
Source: Company, Standard Chartered Research estimates
HHI
x0.6
2004
x1.2
x2.4
2003
600,000
x0.8
x2.0
2002
HHI
x1.6
2010
2009
2008
2007
2006
2005
2004
2001
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2003
0
0
Share price (KRW)
x0.18
x0.28
3,000
10,000
17 April 2014
2011
x0.15
x0.25
9,000
2002
Share price (KRW)
SHI
x1.7
2010
2009
2008
2007
2006
2001
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
0
2004
0
2003
3,000
2002
10,000
2005
6,000
2004
20,000
9,000
2003
30,000
2002
EV (KRW bn)
40,000
2001
Share price (KRW)
x0.11
x0.26
Source: Company, Standard Chartered Research estimates
9
Equity Research l Korea shipbuilding
Daewoo Shipbuilding & Marine Engineering (042660 KS)
Income statement (KRW bn)
Year-end: Dec
Sales
Gross profit
SG&A
Other income
Other expenses
EBIT
Net interest
Associates
Other non-operational
Exceptional items
Pre-tax profit
Taxation
Minority interests
Exceptional items after tax
Net profit
Cash flow statement (KRW bn)
2011
13,903
1,634
(545)
0
0
1,089
17
(71)
(37)
0
998
(349)
(686)
0
(38)
2012
14,058
1,136
(650)
0
0
486
(20)
1
(202)
0
265
(89)
(222)
0
(46)
2013
15,305
1,028
(587)
0
0
441
(52)
11
(72)
0
327
(85)
(85)
0
157
2014E
15,562
1,313
(641)
0
0
672
(40)
(2)
6
0
636
(191)
(80)
0
365
2015E
16,928
1,590
(683)
0
0
907
(40)
(2)
6
0
871
(261)
(80)
0
529
Net profit adj.
EBITDA
(31)
1,461
(38)
788
166
742
375
916
540
1,150
EPS (KRW)
EPS adj. (KRW)
DPS (KRW)
Avg fully diluted shares (mn)
(199)
(163)
247
191
(240)
(199)
247
191
820
867
500
191
1,908
1,960
500
191
2,766
2,823
500
191
Year-end: Dec
Cash
Short-term investments
Accounts receivable
Inventory
Other current assets
Total current assets
2011
542
430
4,943
752
951
7,618
2012
267
453
3,882
1,198
1,361
7,160
2013
383
279
6,467
1,182
1,753
10,063
2014E
1,252
287
5,985
1,179
1,782
10,486
2015E
892
287
6,046
1,270
1,938
10,433
PP&E
Intangible assets
Associates and JVs
Other long-term assets
Total long-term assets
6,504
123
19
2,396
9,042
6,219
133
61
2,549
8,962
6,211
139
92
1,984
8,426
5,938
133
90
2,043
8,204
5,938
133
90
2,043
8,204
16,660
16,122
18,489
18,690
18,637
Short-term debt
Accounts payable
Other current liabilities
Total current liabilities
2,776
6,340
404
9,520
2,972
4,904
296
8,173
3,370
5,616
314
9,300
3,370
6,195
319
9,885
3,370
6,391
347
10,108
Long-term debt
Convertible bonds
Deferred tax
Other long-term liabilities
Total long-term liabilities
1,601
0
378
659
2,638
2,470
0
332
593
3,395
3,575
0
293
542
4,410
3,158
0
293
558
4,009
2,958
0
293
558
3,809
12,158
11,568
13,710
13,894
13,918
Shareholders’ funds
Minority interests
4,502
0
4,554
0
4,779
0
4,796
0
4,719
0
Total equity
4,502
4,554
4,779
4,796
4,719
16,660
16,122
18,489
18,690
18,637
3,836
191
5,175
191
6,562
191
5,277
191
5,437
191
Balance sheet (KRW bn)
Total assets
Total liabilities
Total liabilities and equity
Net debt (cash)
Year-end shares (mn)
Year-end: Dec
EBIT
Depreciation & amortisation
Net interest
Tax paid
Changes in working capital
Others
Cash flow from operations
2011
1,089
372
63
(349)
(843)
715
1,046
2012
486
302
(20)
(89)
(1,338)
(1,283)
(1,942)
2013
441
302
(20)
(85)
(2,232)
(278)
(1,872)
2014E
672
244
(40)
(191)
1,039
(172)
1,552
2015E
907
244
(40)
(261)
(83)
(243)
523
Capex
Acquisitions & Investments
Disposals
Others
Cash flow from investing
(100)
0
0
215
115
(100)
0
0
92
(9)
(100)
0
0
92
(9)
(104)
0
0
(67)
(171)
(104)
0
0
(67)
(171)
Dividends
Issue of shares
Change in debt
Other financing cash flow
Cash flow from financing
(95)
0
(1,080)
(57)
(1,232)
(47)
0
1,443
280
1,676
(47)
0
1,443
601
1,997
(96)
0
(417)
0
(512)
(96)
0
(617)
0
(712)
(71)
0
946
(275)
0
(2,042)
116
0
(1,972)
869
0
1,449
(360)
0
420
Change in cash
Exchange rate effect
Free cash flow
Financial ratios and other
Year-end: Dec
Operating ratios
Gross margin (%)
EBITDA margin (%)
EBIT margin (%)
Net margin adj. (%)
Effective tax rate (%)
Sales growth (%)
Net income growth (%)
EPS growth (%)
EPS growth adj. (%)
DPS growth (%)
2011
2012
2013
2014E
2015E
11.8
10.5
7.8
-0.2
35.0
6.7
nm
nm
nm
-50.0
8.1
5.6
3.5
-0.3
33.7
1.1
nm
nm
nm
0.0
6.7
4.9
2.9
1.1
26.0
8.9
nm
nm
nm
102.5
8.4
5.9
4.3
2.4
30.0
1.7
132.7
132.7
126.2
0.0
9.4
6.8
5.4
3.2
30.0
8.8
45.0
45.0
44.0
0.0
Efficiency ratios
ROE (%)
ROCE (%)
Asset turnover (x)
Op. cash/EBIT (x)
Depreciation/capex (x)
Inventory days
Accounts receivable days
Accounts payable days
-0.9
16.0
0.9
1.0
2.9
22.1
124.2
123.7
-1.0
6.4
0.9
-4.0
3.0
27.5
114.6
158.8
3.4
5.1
0.9
-4.2
3.0
30.4
123.4
134.5
7.6
7.5
0.8
2.3
2.3
30.2
146.0
151.3
11.1
10.5
0.9
0.6
2.3
29.1
129.7
149.8
Leverage ratios
Net gearing (%)
Debt/capital (%)
Interest cover (x)
Debt/EBITDA (x)
Current ratio (x)
85.2
61.3
9.3
2.6
0.8
113.6
68.5
3.1
6.2
0.9
137.3
75.6
2.9
8.3
1.1
110.0
74.1
5.6
7.4
1.1
115.2
74.2
7.6
5.6
1.0
Valuation
EV/sales (x)
EV/EBITDA (x)
EV/EBIT (x)
PER (x)
PER adj. (x)
PBR (x)
Dividend yield (%)
0.7
6.7
9.0
nm
nm
1.0
0.7
0.7
12.3
20.0
nm
nm
1.1
0.9
0.8
15.6
26.3
36.5
34.5
1.4
1.7
0.7
12.2
16.6
16.1
15.7
1.2
1.6
0.7
9.8
12.5
11.1
10.9
1.2
1.6
Source: Company, Standard Chartered Research estimates
17 April 2014
10
Equity Research l Korea shipbuilding
Samsung Heavy Industries (010140 KS)
Income statement (KRW bn)
Year-end: Dec
Sales
Gross profit
SG&A
Other income
Other expenses
EBIT
Net interest
Associates
Other non-operational
Exceptional items
Pre-tax profit
Taxation
Minority interests
Exceptional items after tax
Net profit
Cash flow statement (KRW bn)
2011
13,392
1,763
(681)
77
0
1,160
(71)
(32)
0
0
1,056
(299)
0
0
757
2012
14,489
1,935
(729)
(17)
0
1,189
56
(0)
(181)
0
1,063
(252)
0
0
811
2013
14,835
1,797
(883)
0
0
914
(259)
0
164
0
819
(187)
0
0
632
2014E
14,748
1,817
(851)
0
0
966
14
0
(14)
0
966
(222)
0
0
744
2015E
14,834
1,892
(861)
0
0
1,031
14
0
(14)
0
1,031
(237)
0
0
794
Net profit adj.
EBITDA
757
1,532
811
1,491
632
1,211
744
1,262
794
1,327
EPS (KRW)
EPS adj. (KRW)
DPS (KRW)
Avg fully diluted shares (mn)
3,277
3,279
469
231
3,513
3,515
469
231
2,738
2,738
500
231
3,219
3,221
500
231
3,435
3,437
500
231
Year-end: Dec
Cash
Short-term investments
Accounts receivable
Inventory
Other current assets
Total current assets
2011
806
565
3,986
540
3,527
9,424
2012
929
293
5,033
699
3,322
10,276
2013
818
1,677
5,809
842
1,571
10,717
2014E
1,366
1,727
5,267
835
1,562
10,757
2015E
1,683
1,727
4,945
835
1,571
10,761
PP&E
Intangible assets
Associates and JVs
Other long-term assets
Total long-term assets
5,408
86
0
1,495
6,990
5,278
38
6
1,037
6,359
5,254
137
6
1,313
6,710
5,435
131
6
1,352
6,924
5,435
131
6
1,352
6,924
Total assets
16,414
16,635
17,427
17,681
17,685
Short-term debt
Accounts payable
Other current liabilities
Total current liabilities
1,684
4,982
3,873
10,539
925
4,664
3,545
9,133
1,679
5,538
2,227
9,444
1,679
5,388
2,214
9,281
1,679
5,177
2,227
9,082
100
0
29
1,102
1,231
814
0
43
981
1,839
1,258
0
15
865
2,138
862
0
15
891
1,768
862
0
15
891
1,768
11,770
10,972
11,581
11,049
10,851
Shareholders’ funds
Minority interests
4,644
(0)
5,283
380
5,846
(0)
6,474
158
6,524
311
Total equity
4,644
5,663
5,846
6,632
6,835
16,414
16,635
17,427
17,681
17,685
978
231
810
231
2,119
231
1,175
231
858
231
Balance sheet (KRW bn)
Long-term debt
Convertible bonds
Deferred tax
Other long-term liabilities
Total long-term liabilities
Total liabilities
Total liabilities and equity
Net debt (cash)
Year-end shares (mn)
Year-end: Dec
EBIT
Depreciation & amortisation
Net interest
Tax paid
Changes in working capital
Others
Cash flow from operations
2011
1,160
372
106
(548)
696
(740)
1,046
2012
1,189
302
(18)
(173)
(1,646)
(1,080)
(1,427)
2013
914
297
8
0
388
(405)
1,202
2014E
966
296
8
0
395
(205)
1,460
2015E
1,031
296
8
0
114
(220)
1,230
Capex
Acquisitions & Investments
Disposals
Others
Cash flow from investing
(100)
0
0
261
115
(100)
0
0
272
(9)
(100)
0
0
(1,383)
(1,973)
(100)
0
0
(50)
(402)
(100)
0
0
(50)
(402)
Dividends
Issue of shares
Change in debt
Other financing cash flow
Cash flow from financing
(108)
0
(1,080)
389
(799)
(108)
0
1,443
224
1,559
(115)
0
1,198
(422)
660
(115)
0
(396)
0
(511)
(115)
0
(396)
0
(511)
362
0
946
123
0
(1,527)
(110)
0
1,102
547
0
1,360
317
0
1,130
Change in cash
Exchange rate effect
Free cash flow
Financial ratios and other
Year-end: Dec
Operating ratios
Gross margin (%)
EBITDA margin (%)
EBIT margin (%)
Net margin adj. (%)
Effective tax rate (%)
Sales growth (%)
Net income growth (%)
EPS growth (%)
EPS growth adj. (%)
DPS growth (%)
2011
2012
2013
2014E
2015E
13.2
11.4
8.7
5.7
28.3
2.3
-14.8
-14.8
-14.8
0.3
13.4
10.3
8.2
5.6
23.7
8.2
7.2
7.2
7.2
0.1
12.1
8.2
6.2
4.3
22.8
2.4
-22.1
-22.0
-22.1
6.6
12.3
8.6
6.5
5.0
23.0
-0.6
17.6
17.6
17.6
0.0
12.8
8.9
6.9
5.3
23.0
0.6
6.7
6.7
6.7
0.0
Efficiency ratios
ROE (%)
ROCE (%)
Asset turnover (x)
Op. cash/EBIT (x)
Depreciation/capex (x)
Inventory days
Accounts receivable days
Accounts payable days
17.9
19.6
0.8
0.9
2.9
17.1
127.0
117.6
16.3
17.8
0.9
-1.2
3.0
18.0
113.6
140.2
11.4
11.8
0.9
1.3
2.9
21.6
133.4
142.8
12.1
11.8
0.8
1.5
2.9
23.7
137.1
154.2
12.2
12.1
0.8
1.2
2.9
23.6
125.6
149.0
Leverage ratios
Net gearing (%)
Debt/capital (%)
Interest cover (x)
Debt/EBITDA (x)
Current ratio (x)
21.1
30.4
5.4
1.5
0.9
14.3
23.2
44.2
1.2
1.1
36.2
36.8
1.2
2.1
1.1
17.7
30.3
36.7
2.2
1.2
12.6
29.5
39.1
1.9
1.2
Valuation
EV/sales (x)
EV/EBITDA (x)
EV/EBIT (x)
PER (x)
PER adj. (x)
PBR (x)
Dividend yield (%)
0.8
6.8
8.9
11.5
11.5
1.4
1.2
0.7
6.3
7.9
10.5
10.5
1.7
1.3
0.7
8.4
11.1
13.7
13.7
1.5
1.3
0.6
6.6
8.6
9.6
9.6
1.1
1.6
0.5
6.0
7.8
9.0
9.0
1.1
1.6
Source: Company, Standard Chartered Research estimates
17 April 2014
11
Equity Research l Korea shipbuilding
Hyundai Heavy Industries (009540 KS)
Income statement (KRW bn)
Year-end: Dec
Sales
Gross profit
SG&A
Other income
Other expenses
EBIT
Net interest
Associates
Other non-operational
Exceptional items
Pre-tax profit
Taxation
Minority interests
Exceptional items after tax
Net profit
Cash flow statement (KRW bn)
2011
53,712
6,927
(2,391)
0
0
4,536
(52)
(148)
(247)
(212)
3,876
(1,133)
(184)
0
2,559
2012
54,974
4,643
(2,650)
0
0
1,993
(214)
(369)
(987)
1,013
1,436
(415)
(36)
0
984
2013
54,188
3,255
(2,453)
0
0
802
(202)
(189)
1,903
(2,169)
144
2
168
0
314
2014E
56,189
3,184
(2,521)
0
0
663
(274)
(3)
0
0
387
(93)
(15)
0
279
2015E
57,838
3,805
(2,648)
0
0
1,157
(333)
(3)
0
0
821
(208)
(31)
0
582
2,559
5,473
984
3,000
314
1,790
279
1,664
582
2,151
33,671
33,671
7,000
76
12,951
12,951
4,000
76
4,132
4,132
4,000
76
3,673
3,673
4,000
76
7,662
7,662
4,000
76
Year-end: Dec
Cash
Short-term investments
Accounts receivable
Inventory
Other current assets
Total current assets
2011
1,610
2,310
9,745
6,478
2,290
23,076
2012
1,108
3,531
11,270
6,191
3,178
25,279
2013
1,337
5,527
13,418
6,129
2,844
29,254
2014E
2,276
8,340
14,047
5,579
3,305
33,547
2015E
2,393
12,584
14,460
5,688
3,443
38,567
PP&E
Intangible assets
Associates and JVs
Other long-term assets
Total long-term assets
15,565
2,324
973
7,063
25,924
15,556
2,297
851
5,290
23,995
15,713
2,286
662
5,290
23,951
13,561
2,186
659
4,501
20,907
14,098
2,086
656
3,899
20,739
Total assets
49,001
49,273
53,205
54,454
59,307
22,229
15,016
(11,754)
25,491
19,106
11,523
(8,455)
22,174
21,377
13,016
(7,876)
26,516
22,449
13,949
(7,495)
28,902
21,855
13,855
(5,462)
30,247
2,938
0
1,340
1,055
5,334
6,309
0
979
1,071
8,358
5,221
0
889
1,549
7,659
6,620
0
915
2,100
9,636
8,764
0
943
3,040
12,747
Total liabilities
30,824
30,532
34,175
38,538
42,995
Shareholders’ funds
Minority interests
18,177
0
18,741
0
19,030
0
15,916
0
16,312
0
Total equity
18,177
18,741
19,030
15,916
16,312
Total liabilities and equity
49,001
49,273
53,205
54,454
59,307
Net debt (cash)
Year-end shares (mn)
23,557
76
24,307
76
25,262
76
26,793
76
28,226
76
Net profit adj.
EBITDA
EPS (KRW)
EPS adj. (KRW)
DPS (KRW)
Avg fully diluted shares (mn)
Balance sheet (KRW bn)
Short-term debt
Accounts payable
Other current liabilities
Total current liabilities
Long-term debt
Convertible bonds
Deferred tax
Other long-term liabilities
Total long-term liabilities
Year-end: Dec
EBIT
Depreciation & amortisation
Net interest
Tax paid
Changes in working capital
Others
Cash flow from operations
2011
4,536
938
70
0
(3,449)
(5,040)
504
2012
1,993
1,007
(606)
0
(5,849)
(5,853)
(3,459)
2013
802
989
(525)
0
488
700
1,965
2014E
663
1,000
(652)
0
498
1,319
2,330
2015E
1,157
994
(748)
0
(665)
510
1,913
Capex
Acquisitions & Investments
Disposals
Others
Cash flow from investing
(1,627)
0
0
260
(1,367)
(1,090)
0
0
281
(809)
(1,053)
0
0
(1,996)
(3,049)
(1,431)
0
0
(2,024)
(3,455)
(1,431)
0
0
(3,643)
(5,074)
Dividends
Issue of shares
Change in debt
Other financing cash flow
Cash flow from financing
(429)
(50)
1,059
14
594
(245)
(216)
3,776
451
3,766
(245)
168
1,016
373
1,313
(245)
0
2,745
(436)
2,064
(245)
0
3,496
27
3,278
(269)
0
(1,123)
(502)
0
(4,549)
229
0
913
939
0
899
117
0
482
Change in cash
Exchange rate effect
Free cash flow
Financial ratios and other
Year-end: Dec
Operating ratios
Gross margin (%)
EBITDA margin (%)
EBIT margin (%)
Net margin adj. (%)
Effective tax rate (%)
Sales growth (%)
Net income growth (%)
EPS growth (%)
EPS growth adj. (%)
DPS growth (%)
2011
2012
2013
2014E
2015E
12.9
10.2
8.4
4.8
29.2
43.8
-38.4
-38.4
-38.4
109.1
8.4
5.5
3.6
1.8
28.9
2.3
-61.5
-61.5
-61.5
-42.9
6.0
3.3
1.5
0.6
-1.4
-1.4
-68.1
-68.1
-68.1
0.0
5.7
3.0
1.2
0.5
24.0
3.7
-11.1
-11.1
-11.1
0.0
6.6
3.7
2.0
1.0
25.3
2.9
108.6
108.6
108.6
0.0
Efficiency ratios
ROE (%)
ROCE (%)
Asset turnover (x)
Op. cash/EBIT (x)
Depreciation/capex (x)
Inventory days
Accounts receivable days
Accounts payable days
14.9
20.5
1.1
0.1
0.5
44.9
67.8
118.8
5.3
7.9
1.1
-1.7
0.8
45.9
69.8
96.2
1.7
3.0
1.1
2.5
0.8
44.1
83.1
87.9
1.6
2.5
1.0
3.5
0.6
40.3
89.2
92.8
3.6
4.2
1.0
1.7
0.6
38.1
89.9
93.9
Leverage ratios
Net gearing (%)
Debt/capital (%)
Interest cover (x)
Debt/EBITDA (x)
Current ratio (x)
129.6
107.0
15.7
4.5
0.9
129.7
93.8
5.1
8.4
1.1
132.7
99.7
2.5
14.5
1.1
168.3
113.8
1.8
16.7
1.2
173.0
105.4
2.5
13.9
1.3
Valuation
EV/sales (x)
EV/EBITDA (x)
EV/EBIT (x)
PER (x)
PER adj. (x)
PBR (x)
Dividend yield (%)
1.0
9.7
11.8
11.8
11.8
1.1
1.8
0.8
14.7
22.1
20.5
20.5
1.0
1.5
0.8
23.4
52.2
54.4
54.4
1.0
1.8
0.8
25.6
64.2
56.5
56.5
1.0
1.9
0.8
20.5
38.0
27.1
27.1
1.0
1.9
Source: Company, Standard Chartered Research estimates
17 April 2014
12
Equity Research l Korea shipbuilding
Disclosures appendix
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard
Chartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, ”SCB”)
and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES.
Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and
attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other
subject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views
contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
Where “disclosure date” appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the
date of the report, unless otherwise stated.
Recommendation and price target history for Samsung Heavy Industries
KRW
55,000
1
48,600
3
2
42,200
35,800
29,400
23,000
May-11
Date
Aug-11
Nov-11
Recommendation
Feb-12
Price target
May-12
Date
1 10 Oct 13 OUTPERFORM
55,000 2 7 Jan 14
Source: FactSet prices, SCB recommendations and price targets
Aug-12
Nov-12
Recommendation
Feb-13
May-13
Price target
OUTPERFORM
50,000
Aug-13
Date
3 27 Jan 14
Nov-13
Feb-14
Recommendation
May-14
Price target
OUTPERFORM
47,000
Recommendation and price target history for Hyundai Heavy Industries
KRW
538,000
465,600
393,200
320,800
1
2
248,400
176,000
May-11
Date
1 10 Oct 13
Aug-11
Nov-11
Recommendation
Feb-12
Price target
IN-LINE
280,000
May-12
Date
2 31 Oct 13
Aug-12
Nov-12
Recommendation
Feb-13 May-13
Price target
IN-LINE
Aug-13
Date
Nov-13
Feb-14 May-14
Recommendation
Price target
260,000
Source: FactSet prices, SCB recommendations and price targets
Recommendation and price target history for Daewoo Shipbuilding & Marine Engineering
KRW
47,850
42,290
1
36,730
31,170
25,610
20,050
May-11
Date
Aug-11
Recommendation
Nov-11
Feb-12
Price target
May-12
Date
Aug-12
Nov-12
Recommendation
Feb-13
May-13
Price target
Aug-13
Date
Nov-13
Recommendation
Feb-14
May-14
Price target
1 10 Oct 13 OUTPERFORM
45,000
Source: FactSet prices, SCB recommendations and price targets
Recommendation Distribution and Investment Banking Relationships
% of covered companies
currently assigned this rating
% of companies assigned this rating with which SCB has provided
investment banking services over the past 12 months
OUTPERFORM
54.4%
12.7%
IN-LINE
35.4%
11.5%
UNDERPERFORM
As of 31 March 2014
10.2%
7.7%
17 April 2014
13
Equity Research l Korea shipbuilding
Research Recommendation
Terminology
OUTPERFORM (OP)
IN-LINE (IL)
UNDERPERFORM (UP)
Definitions
The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months
The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next
12 months
The total return on the security is expected to underperform the relevant market index by 5% or more over the next 12 months
SCB uses an investment horizon of 12 months for its price targets.
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17 April 2014
14
Equity Research l Korea shipbuilding
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