Daelim Ind (000210) Company Note. Next chapter of ASEAN and Daelim Ind

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1 Company Note June 7, M rating BUY (Maintain) Daelim Ind (21) Next chapter of ASEAN and Daelim Ind 12M TP W121, from W121, Up/downside +32% Stock Data KOSPI (Jun 5, pt) 1,959 Stock price (Jun 5, KRW) 92, Market cap (USD mn) 2,869 Shares outstanding (mn) Week high/low (KRW) 12,/67,6 6M avg. daily turnover (USD mn) 23.2 Free float / Foreign ownership (%) 76./4.3 Major shareholders (%) Daelim Corporation and 9 others 24. NPS Fund 8.9 Performance 1M 6M 12M Absolute (%) Relative to KOSPI (%p) (3.9) 12MF PER trend 12. (X) 12MF PER (LHS) (KRW) 14, price (RHS) 1. 12, 1, 8. 8, 6. 6, 4. 4, 2. 2,. Jul-8 Jul-9 Jul-1 Jul-11 Jul-12 Source: WISEfn consensus Malaysia s Manjung IPP secured, vision becoming reality Daelim Ind was selected as part of the Malaysian Manjung IPP project. TNB will serve as the developer, and Daelim Ind will be responsible for the USD1.2bn power plant EPC. 1) Despite a stable COGS ratio, concerns over slowing new order growth should fade. Including the new deal, Daelim Ind s overseas order achievement ratio is 35% YTD, or 45% including the Saudi Arabian thermal combined cogeneration plant (USD.7-1.bn), the second highest among Korean builders, trailing only Samsung C&T. 2) Results remain favorable in the ASEAN power market, which management is focusing on as the next growth market. We believe this will ease concerns over low margins in the Middle East and ensure optimal sustainable growth. ASEAN and Daelim Ind In our Jan 15 ASEAN and Daelim Ind report, we forecast valuations would re-rate upwards on diversification into ASEAN and other markets. Management s W8.7trn overseas order target appeared aggressive at the beginning of 213, but it appears within reach. We believe Daelim Ind will be able to balance growth and margins by focusing on LG Chem s Kazakhstan complex (USD2bn) and the Kuwaiti LPG 5 train (USD1bn) in 2H13, while securing 4% of targeted orders from the ASEAN market. We believe the Manjung project is particularly meaningful as management s strategies are gaining traction after winning W2trn in power orders from the market in 212. Daelim Ind is currently participating in 12 power plant bids in the ASEAN market, and should secure at least two more projects (Table 2). Daelim Ind s competitiveness in the ASEAN market has been fueled by several factors. 1) Power plants in the region are mostly coal fired. 2) As ASEAN replaces China as the major production base, the weighting of IPP is growing on increased private funding. 3) Given poor power plant infrastructure, ASEAN clients want operational services in addition to plant construction. Furthermore, bidders prefer high quality Japanese equipment, and Daelim Ind is the best at utilizing the weak JPY to win orders. Of note, core equipment for the Manjung IPP should be procured from Hitachi. Shares normalize with recent rally, re-rating to follow Daelim Ind outperformed the Kospi by 2.4%p in May as shares recovered following a sharp pullback due to the GS E&C earnings shock. While the excessive discount has been resolved, Daelim Ind has yet to reflect the differentiated order strategy and earnings reliability due to solid risk management. Shares trade at 7.x Yr to Sales OP EBT NP EPS % chg EBITDA PE EV/EBITDA PB ROE Kyung ja Lee kyungja.lee@truefriend.com Hyungjun Ahn hyungjoon@truefriend.com Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%) 211A 7, , A 1, , F 1, , F 11, , F 12, , Note: Net profit and EPS are based on figures attributed to controlling interest

2 12MF PE and.7x PB, while we have a target PE of 9.2x and PB of.9x. And, relative valuations are also attractive as major builders trade at an average.9x PB. Furthermore, we believe earnings upside has grown as OP at subsidiaries should grow W8-1bn (previous estimate W6bn) due to the improvements at Daelim Auto over the past three years and increased exports and restructuring at Daelim C&S. Overall, we maintain Daelim Ind as our top pick with a TP of W121,. Table 1. Major builders overseas orders Samsung eng. Hyundai E&C Daelim Ind. GS E&C Daewoo E&C Samsung C&T (USD bn) 1) 211 order ) 212 order achievement ratio 7.8% 14.% 45.7% 44.4% 96.9% 77.1% 73.4% 3) 213 guidance ) YTD order (contract) ) YTD order (incl. secured) Achievement ratio (5 / 3) 14.7% 44.7% 45.% 3.% 1.8% 92.7% 41.2% Source: Company data, Korea Investment & Securities Total Table 2. Daelim Ind s participation in ASEAN power project bids Country Projects Capacity Proposed by Philippines Oagbilao expansion Team energy + Aboitiz Philippines Masinloc 3MW * 2 MPPC Philippines San Gabriel 275MW * 2 First Gen.Corp. Philippines Ilijan CCPP expansion San Miguel Philippines Quezon 5MW EGCO/Meralco Indonesia Sumsel no. 9 6MW * 2 PLN Indonesia Sumsel no. 1 (IPP) 6MW * 1 PLN Vietnam Nam Dinh no. 1 6MW * 2 Taekwang Power Holdings Vietnam Longphu 1 & 2 6MW EVN Vietnam O Mon no. 4 75MW EVN Vietnam Quang Trach no. 1 6MW * 2 PVN Malaysia Manjung CFPP (IPP) 1,MW TNB, Recently awarded Malaysia Kapar (IPP) 1,MW TNB Malaysia Petronas 'Rapid' Petronas Source: Korea Investment & Securities Targeting ASEAN with total solution Daelim Ind s competitiveness in the ASEAN market has been fueled by several factors. 1) Power plants in the region are mostly coal fired, and coal, oil and nuclear plants typically require high technological requirements than gas-fired plants. Furthermore, Hyundai E&C, Daelim Ind and Daewoo E&C are the only domestic builders with experience in these types of plants. 2) The IPP weighting has become significant in ASEAN, and Daelim Ind has gained the design, funding, EPC and O&M capabilities and experience required in the IPP business with the Pochun IPP project. This is why Japanese trading firms that are major IPP developers in the ASEAN region prefer Daelim Ind as an EPC partner. 3) Daelim Ind doubled its O&M workforce on average during the Pochun IPP project, and has thereby internalized its O&M capacity. Going forward, Daelim Ind plans to bolster its ASEAN presence by offering total solutions. The company has already reinforced margins by winning private contracts with O&M deals in the hydrocarbon plant market, such as the Philippine Petron RPM-2 refinery, awarded in 211. The project is contributing substantially to margins, and this method has been adopted only by Daelim Ind. 2

3 Figure 1. Daelim Ind s RMP-2 refinery project tendered by Petron in Philippines Apr 211 Project PRE-CON Service Mar 214 EPC Completion Nov 211 USD2bn EPC Contract Dec 215 Trial/O&M Source: Daelim Ind. Korea Investment & Securities Figure power capacity addition plans in Indonesia, Vietnam and the Philippines (GW) Present capacity Indonesia power sector plan Coal Gas Geothermal Hy dro Diesel Total (GW) Present capacity Vietnam power sector plan Gas Coal Hy dro Pumped storage LNG 7 Total (GW) 15.2 Present capacity Philippines power sector plan -.6 Oil Coal Gas Geothermal Hy dro Total Source: PLN, EVN, National Grid Corp. of the Philippines 3

4 Figure 3. PLN s feedback about suppliers Take advantage of weak JPY to procure Japanese equipment 1) All Japanese companies and funding companies should play significant role in approach to Indonesian government, especially in electricity sectors for EPC, IPP, or PPP projects. 2) Chinese s electricity equipment product is more likely cheaper than Japanese s products, but the quality has likely not yet proven. In fact, we suffer from project completion delay. 3) PLN needs best quality, best price and long lifetime electricity equipment Source: PLN Stable earnings forecast Figure EPS forecast Consensus vs KIS forecast Figure 5. EPS forecast trend Slight earnings revisions 12,4 12,3 (KRW) Consensus KIS 12 1 ( =1) 12,2 8 12,1 6 12, 4 11,9 2 11,8 11,7 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Hyundai E&C Hyundai Dev. Samsung eng. Samsung C&T Daelim Ind. Source: WiseFn, Korea Investment & Securities Source: WiseFn, Korea Investment & Securities Table 3. Valuation (W bn, x) Value Note 1) Operation value 4,2 Construction 3,798 NOPLAT 38 Based on 213 Target multiple 1. Market P/E Petrochemical 222 NOPLAT 37 Based on 213 Target multiple 6. Target multiple 2) Investment securities 112 Construction subsidiaries (368) 4% provision on Samho/Korea Dev. PF YNCC 48 PER 6X applied on 213F equity gain method 3) Net debt -45 Based on 213 Shareholders value (1+2-3) 4,177 Outstanding shares ( ) 34,8 Fair value per share (KRW) 121, Source: Daelim Ind., Korea Investment & Securities 4

5 Company overview & Glossary Daelim Group started out with the establishment of Daelim Industrial in This flagship unit leads the engineering & construction and petrochemical operations. Daelim is ranked 22nd among Korean business groups and consists of 12 affiliates together with organizations devoted educational and cultural pursuits. Group s activities span building & housing construction, civil engineering, industrial facilities, petrochemicals, information & communications, automobiles, education and cultural activities ASEAN: The Association of Southeast Asian Nations is a geo-political and economic organization of ten countries located in Southeast Asia, which was formed on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand. Since then, membership has expanded to include Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam. Its aims include accelerating economic growth, social progress, cultural development among its members, protection of regional peace and stability, and opportunities for member countries to discuss differences peacefully. IPP: IPP stands for Independent Power Producer. Private entity arranges investors, builds power plant, operates plants and sell electric to public to recoup investment 5

6 Balance sheet FY-ending Dec. (W bn) 211A 212A 213F 214F 215F Current assets 7,159 7,292 7,85 7,98 8,14 Cash & cash equivalent 1,325 1,477 1,159 1,36 1,326 Accounts & other receivables 3,313 3,481 3,579 4,31 4,94 Inventory 1,378 1,155 1,187 1,337 1,358 Non-current assets 3,66 3,714 3,735 3,98 3,976 Investment assets 1,6 1,693 1,74 1,96 1,99 Tangible assets 1,635 1,517 1,477 1,435 1,393 Intangible assets Total assets 1,765 11,6 1,82 11,96 12,8 Current liabilities 4,65 4,779 4,42 4,57 4,75 Accounts & other payables 2,572 2,961 2,951 3,324 3,14 ST debt & bond Current portion of LT debt Non-current liabilities 1,478 1,39 1,418 1,564 1,542 Debentures LT debt & financial liabilities Total liabilities 6,127 6,88 5,46 6,71 5,617 Controlling interest 4,417 4,779 5,29 5,725 6,285 Capital stock Capital surplus Capital adjustments Retained earnings 3,623 4,5 4,454 4,989 5,568 Minority interest Shareholders' equity 4,637 4,919 5,36 5,889 6,463 Income statement FY-ending Dec. (W bn) 211A 212A 213F 214F 215F Sales 7,988 1,253 1,54 11,872 12,56 COGS 7,58 9,219 9,367 1,54 7 1,666 Gross profit 93 1,34 1,173 1,326 1,391 SG&A expense Operating profit Financial income Interest income Financial expense Interest expense Other non-operating profit Gains (Losses) in associates, subsidiaries and JV Earnings before tax Income taxes Net profit Net profit of controlling interest Other comprehensive profit (95) (2) (2) (2) (2) Total comprehensive profit Total comprehensive profit of controlling interest EBITDA Cash flow FY-ending Dec. (W bn) 211A 212A 213F 214F 215F C/F from operating (322) 316 (13) Net profit Depreciation Amortization Net incr. in W/C (128) 99 (85) (264) (594) Others (58) (46) (88) C/F from investing (647) (296) (157) (32) 12 CAPEX (32) (156) (16) (13) (9) Decr. in fixed assets Incr. in investment (411) (172) (6) (179) 41 Net incr. in intangible assets (3) (9) (8) (16) (8) Others (129) (96) (14) C/F from financing 19 (331) Incr. in equity 132 Incr. in debts 78 (29) Dividends (2) (19) (19) (19) (19) Others (22) (1) C/F from others (1) Increase in cash (317) Key financial data FY-ending Dec. 211A 212A 213F 214F 215F per share data (KRW) EPS 9,469 1,128 12,179 14,393 15,54 BPS 114, ,8 134, , ,819 DPS Growth (%) Sales growth OP growth NP growth EPS growth EBITDA growth Profitability (%) OP margin NP margin EBITDA margin ROA ROE Dividend yield Stability Net debt (W bn) 285 (418) (45) (119) (11) Debt/equity ratio (%) Valuation (X) PER PBR PSR EV/EBITDA Note: Based on K-IFRS (consolidated) 6

7 Changes to recommendation and price target Company (Code) Date Recommendation Price target Daelim Ind. (21) BUY W168, BUY W128, Hold BUY W121, 18, 16, 14, 12, 1, 8, 6, 4, 2, Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 7

8 Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and 15% Underweight: Expected to give a return of -15% or less Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings. Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sector s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Important Disclosures As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 1 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of Daelim Ind.. There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance. Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for Daelim Ind. in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from Daelim Ind. in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment banking services from Daelim Ind. in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in Daelim Ind. s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of Daelim Ind. shares as of June 7, 213. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analysts covering these companies nor their associates own any shares of as of June 7, 213. Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of Daelim Ind. and is the liquidity provider. Prepared by: Kyungja Lee This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client s judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions. 8