February 5, 213 Company Report (342 KS) Machinery Construction business needs to get back on track 4Q review: Revenues of W2.9tr (+4.1% YoY), OP of W168.6bn (+9.2% YoY) (DHIC) posted 4Q revenues of W2.9tr (+4.1% YoY), an operating profit of W168.6bn (+9.2% YoY), and a net loss of W219.1bn (turning to loss YoY), missing both our estimates and the market consensus. 4Q OP margin edged up.3%p YoY and.7%p QoQ to 5.8%. Revenues were not far off our projections, but margins were still disappointing in what is normally considered a strong season. We attribute overall weakness in margins to: 1) slower-than-expected revenue growth (9.1%) at the firmês largest business (power generation), and 2) the global economic slowdown, which caused top-line contraction at the construction and Doosan Power Systems (DPS) units, as well as the more profitable casting & forging unit. Non-operating profit was hit by Doosan E&CÊs substantial provisioning, which led to equity-method losses of W382.7bn. Net financing costs stood at W39.2bn, while the strengthening of the won resulted in F/X gains of W2.6bn. It all comes down to construction announced it will inject net cash of W55.5bn and transfer its heat recovery system generator (HRSG) business (estimated at W371.6bn, including W7bn in other assets) to Doosan E&C. DHIC will receive shares of Doosan E&C, essentially putting DHICÊs stake in Doosan E&C at over 8%. We see these extraordinary measures as painful but necessary actions to remove uncertainties over Doosan E&C, which have persistently held back DHICÊs share performance. We expect the capital injection will put to rest one of the largest downside risks to the stock, but other than that we see no notable change regarding DHIC. The only difference would be accounting adjustments; overall operations and organization remain intact. We thus believe valuations for DHIC should (for the most part) remain unchanged. In the end, we believe DHICÊs share performance will come down to whether Doosan E&CÊs major businesses can get back on their feet. We do not expect uncertainties over Doosan E&C to resurface for a while, but we will monitor operating trends in construction more closely than before. Maintain Buy, but Lower TP to W6, We maintain our Buy call on DHIC, but trim our target price by 7.7% to W6,. We have adjusted down our 213 earnings and asset-value projections in light of last yearês weak orders and the recent HRSG asset swap. Our valuation is based on the sum of the operating value of DHICÊs legacy businesses and its ownership stakes in subsidiaries (Doosan E&C, Doosan Infracore, and Doosan Engine) as percentages of their market caps. We expect the financial support to Doosan E&C will boost DHICÊs operating earnings and enterprise value; thus, we see upside risks to the companyês stock going forward.. Daewoo Securities Co., Ltd. Ki-jong Sung +822-768-3263 kijong.sung@dwsec.com Ryan Kang +822-768-365 ryan.kang@dwsec.com Buy (Maintain) Target Price (12M, W) 6, Share Price (2/4/13, W) 42,85 Expected Return (%) 4. EPS Growth (13F, %) 1,37.8 Market EPS Growth (13F, %) 18.1 P/E (13F, x) 9.9 Market P/E (13F, x) 9.3 KOSPI 1,953.21 Market Cap (Wbn) 4,536 Shares Outstanding (mn) 16 Avg Trading Volume (6D, ') 51 Avg Trading Value (6D, Wbn) 22 Dividend Yield (13F, %) 1.8 Free Float (%) 42.8 52-Week Low (W) 39,9 52-Week High (W) 78,3 Beta (12M, Daily Rate of Return).91 Price Return Volatility (12M Daily, %, SD) 2. Foreign Ownership (%) 13.5 Major Shareholder(s) Doosan et al. (41.27%) Treasury shares (15.88%) Price Performance (%) 1M 6M 12M Absolute -12.7-3.9-4.8 Relative -9.8-36.5-39.8 Earnings & Valuation Metrics FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 12/1 7,929 516 6.5 1,252 11,831 746 2,32 3.9 7.3 2.3 17. 12/11 8,496 57 6.7 275 2,596 682 518 5.7 25.1 1.8 15. 12/12P 9,627 526 6.2 33 39 795 158.7 146.4 1.3 1.1 12/13F 9,492 595 6.2 46 4,347 796 458 9.6 9.9 1.2 9.5 12/14F 9,967 633 6.4 492 4,649 832 457 9.7 9.2 1.1 8.9 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, estimates 12 11 1 9 8 7 6 5 4 Share price KOSPI 1/12 5/12 9/12 1/13 Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.
February 5, 213 213 revenues and OP to come in at W9.5tr and W593.3bn For 213, DHIC is expected to record revenues of W9.5tr (- 1.4% YoY), operating profit of W593.3bn (-.3% YoY), and net profit of W442.3bn. The company is unlikely to show revenue growth in 213, as it: 1) won new orders of only W5.8tr in 212 (vs. annual target of W1.8tr), and 2) plans to transfer its HRSG business to Doosan E&C. However, operating profit will likely fall only modestly in light of order backlogs of W18.7tr (which will take two years to deliver). The growth of DHICÊs power business should slow in 213, while its industrial business unit is projected to show an earnings recovery thanks to a sharp increase in new orders last year. Earnings at the casting & forging business unit, which used to display high margins, is projected to deteriorate on weak orders. The DPS unit is likely to exhibit earnings improvement thanks to higher orders, but only to a modest degree on intensified competition. We revised down our 213-214 earnings forecasts for DHIC to reflect: 1) sluggish orders in 212, 2) the transfer of the HRSG business, and 3) the cash injection into Doosan E&C. Table 1. 4Q12 earnings review (Wbn, %) 4Q11 3Q12 4Q12P Growth Actual KDB Daewoo Consensus YoY QoQ Revenues 2,787 2,196 2,92 3,24 3,188 4.1 32.2 Operating profit 154 113 169 193 178 9.2 49.1 OP margin 5.5 5.1 5.8 6.4 5.6 Pretax profit 76 41-329 175 125 TTR TTR Net profit 61 33-219 139 95 TTR TTR Note: Figures are based on consolidated K-IFRS Source: Company data, FnGuide, estimates Table 2. Earnings forecast revisions (Wbn, W, %) Previous Revised % change 212P 213F 214F 212P 213F 214F 212P 213F 214F Comments Revenues 9,749 9,586 1,65 9,627 9,492 9,967-1.2-1. - Reflects 4Q12 earnings, HRSG business -1. transfer, and cash injection Operating profit 613 633 674 595 593 633-2.9-6.2-6.1 Pretax profit 492 617 716-12 582 632 TTR -5.7-11.7 Net profit 373 469 537 15 442 474-96. -5.7-11.7 EPS (W) 3,64 4,543 5,184 39 4,347 4,649 OP margin 6.3 6.6 6.7 6.1 6.2 6.4 Net margin 4. 5. 5.5.2 4.7 4.8 Source: Company data, Table 3. Quarterly earnings forecasts (Wbn, W, %) 212 213F 4Q12P growth 1Q 2Q 3Q 4QP 1QF 2QF 3QF 4QF QoQ YoY 211 212P 213F Revenues 2,72 2,456 2,196 2,93 2,51 2,383 2,25 2,853 32.2 4.1 8,496 9,627 9,492 Operating profit 142.7 17.4 113.1 168.6 114.3 158. 123. 198. 49.1 9.2 526 595 593 Pretax profit 113.6 162.2 41.3-329.5 111.5 155.1 12.2 195.2 TTR TTR 86-12 582 Net profit 84.2 116.7 32.9-219.1 84.7 117.9 91.3 148.3 TTR TTR 262 15 442 OP margin 6.6 6.9 5.1 5.8 5.6 6.6 5.6 6.9 6.2 6.2 6.2 Net margin 4.1 4.8 1.5-7.5 4.1 4.9 4.1 5.2 3.1.2 4.7 Note: Figures are based on consolidated K-IFRS / Source: Company data, 2
February 5, 213 Table 4. Earnings breakdown by business unit (Wbn, %) 212 213F Annual 1Q 2Q 3Q 4QP 1QF 2QF 3QF 4QF 212P 213F Revenues 2,72 2,456 2,196 2,93 2,51 2,383 2,25 2,853 9,627 9,492 Power 1,215 1,442 1,299 1,692 1,188 1,389 1,261 1,664 5,647 5,51 Industrial 244 31 29 327 28 319 263 37 1,81 1,233 Casting & forging 19 137 132 148 11 116 18 118 526 443 Construction 133 162 149 158 1 136 156 162 62 553 DPS, etc. 371 414 48 578 383 422 416 54 1,77 1,761 Operating profit 143 17 113 169 114 158 123 198 595 593 Power 148 176 111 143 95 13 15 163 577 1,856 Industrial -7-6 2 8 6 1 6 11-3 -5 Casting & forging 6 2 7 1 6 9 6 9 25 572 Construction -12-11 -11-1 -4-5 -6-6 -44-67 DPS, etc. 2 9 5 25 12 15 12 22 4 5 Revenue growth Power 58. 43. 24.8 9.2-2.2-3.7-2.9-1.7 29.3-2.6 Industrial 86.6 19.9-21.4 1.2 15. 6. 26. 13. 14.5 14. Casting & forging -7.6-2.9-2.6-12.8-8. -15. -18. -2. -11.8-15.7 Construction -31.5-24.4-8.3-16.9-25. -16.2 4.9 2. -2.9-8.1 DPS, etc. -16.1-2.2 7.4 -.6 3.1 2. 2.1-6.5-3. -.5 OP margin 6.6 6.9 5.1 5.8 5.6 6.6 5.6 6.9 6.2 6.3 Power 12.2 12.2 8.5 8.4 8. 9.3 8.3 9.8 1.2 33.7 Industrial -2.8-2..8 2.4 2. 3.1 2.1 3. -.3 -.4 Casting & forging 5.8 1.5 5. 6.4 5.5 7.8 6. 7.3 4.7 128.9 Construction -9. -6.5-7.4-6.5-4. -4. -4. -4. -7.3-19.8 DPS, etc..4 2.2 1.2 4.2 3.2 3.5 3. 4. 2.3 2.9 Notes: Doosan E&CÊs earnings are not included in 1Q11 figures; however, they are included in 211 data Source: Company data, Table 5. Valuation (Wbn, x) Operating value 213F EBITDA 796 EV/EBITDA 8.6 EV 6,846 Fair value - 1 6,846 Value of subsidiaries Doosan Infracore Market cap 2,6 Fair value - 2 Value of 44.8% stake 1,165 Doosan Engine Revenues 118 Fair value - 3 Market cap 53 Value of 42.7% stake 226 Doosan E&C Market cap 56 Fair value - 4 Value of 72.8% stake 48 Others -5 3 Net debt - 6 3,35 Interest bearing debt 3,8 Cashable assets (Total cash) 45 Treasury stock value 714 Total enterprise value 1+2+3+4+5-6 6,38 Shares outstanding 1,477 Fair price (Won) 6,21 Source: Company data, 3
February 5, 213 Valuation comparison We compared DHICÊs valuations with those of its peers. Most of the companyês competitors are overvalued against the market. Table 6. Valuation comparison ROE (%) P/E (x) P/B (x) EV/EBITDA (x) 12 13F 12 13F 12 13F 12 13F DHIC.7 9.6 146.4 9.9 1.3 1.2 1.1 9.5 Mitsubishi Heavy 4.4 6. 29.7 21.9 1.3 1.2 9.9 8.7 Toshiba 1.4 1. 9.6 11.2.8.8 4.6 4.5 Siemens 15.7 18.6 12.9 1.5 1.1 1. 8.5 7.1 GE 13.5 14.3 13.5 12.4 1.8 1.7 18.3 16.4 IHI 8.9 9.1 15.2 14.2 1.3 1.2 8. 6.7 Areva 2.9 4.6 32.6 15.7.9.9 9.3 8. Avg. 9.3 1.4 18.9 14.3 1.2 1.1 9.8 8.6 Source: Bloomberg, Figure 1. P/E-ROE of DHIC vs. global peers (213F) (P/E, x) 25 Figure 2. P/B-ROE of DHIC vs. global peers (213F) (P/B, x) 2. Mitsubishi GE 2 15 Areva IHI 1.5 1. Mitsubishi IHI DHIC Siemens 1 DHIC Toshiba GE Siemens.5 Areva Toshiba 5 (ROE, %). (ROE, % ) 5 1 15 2 5 1 15 2 Source: Bloomberg, Source: Bloomberg, Figure 3. P/E band Figure 4. P/B band (Market cap,wbn) 2, 4.x (Market cap,wbn) 2, 4.3x 15, 15, 2.3x 1, 2.x 1, 15.x 1.3x 5, 1.x 5,.8x 5.x.3x 1 2 3 4 5 6 7 8 9 1 11 12 13 F 1 2 3 4 5 6 7 8 9 1 11 12 13F Source: Source: 4
February 5, 213 Figure 5. Annual earnings trends Figure 6.. Annual earnings breakdown by business unit (Wbn) (%) (%) Power Industrial Casting/forging Construction DPS, etc. 25, Revenues (L) 1 1 OP margin (R) 2, 8 8 15, 6 6 1, 4 4 5, 2 2 6 7 8 9 1 11 12P 13F 8 9 1 11 12P 13F Source: Company data, Source Company data, Figure 7. Quarterly earnings trends Figure 8. Quarterly earnings breakdown by business unit (Wbn) (%) (%) Power Industrial Casting/forging Construction DPS, etc. 3,5 Revenues (L) 1 1 OP margin (R) 2,8 8 8 2,1 6 1,4 6 4 7 2 4 1Q11 3Q11 1Q12 3Q12 1Q13F 3Q13F 1Q11 3Q11 1Q12 3Q12 1Q13F 3Q13F Source: Company data, Source: Company data, Figure 9. DHICÊs 213 new order target Figure 1. New order trends (Wbn) 14, (Wbn) 16, Power Industrial Casting/forging Construction DPS, etc. 12, Backup 1, 1,81 5,147 12, 8, 1,3 6, 4, 1,43 1,264 3,475 Backup 7,943 8, 2, 2,581 4, 13년 213 계획 On-hand DPS; Equipment EPC new order target casting/forging Backup projects 1 11 12 Source: Source: 5
February 5, 213 (342 KS/Buy/TP: W6,) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12P 12/13F 12/14F (Wbn) 12/11 12/12P 12/13F 12/14F Revenues 8,496 9,627 9,492 9,967 Current Assets 5,264 7,134 6,831 6,679 Cost of Sales 7,251 8,214 8,16 8,52 Cash and Cash Equivalents 783 1,891 1,78 1,512 Gross Profit 1,245 1,413 1,386 1,465 AR & Other Receivables 2,837 3,389 3,246 3,39 SG&A Expenses 743 818 793 832 Inventories 458 558 522 528 Operating Profit (Adj) 526 595 593 633 Other Current Assets 849 963 949 997 Operating Profit 57 589 593 633 Non-Current Assets 8,326 8,381 8,556 8,764 Non-Operating Profit 291-61 -11-1 Investments in Associates 3,826 3,898 4,18 4,158 Net Financial Income 164 156 171 151 Property, Plant and Equipment 2,69 2,725 2,725 2,733 Net Gain from Inv in Associates 55 92 12 14 Intangible Assets 1,158 1,199 1,257 1,39 Pretax Profit 861-12 582 632 Total Assets 13,589 15,515 15,387 15,443 Income Tax 119-27 14 158 Current Liabilities 6,76 7,43 6,529 6,467 Profit from Continuing Operations 741 15 442 474 AP & Other Payables 3,151 3,466 3,36 3,469 Profit from Discontinued Operations -48 Short-Term Financial Liabilities 2,345 2,966 2,566 2,366 Net Profit 262 15 442 474 Other Current Liabilities 581 612 63 633 Controlling Interests 275 33 46 492 Non-Current Liabilities 2,716 3,824 3,935 3,812 Non-Controlling Interests -13-18 -18-18 Long-Term Financial Liabilities 1,797 2,151 2,151 1,851 Total Comprehensive Profit 138-85 342 374 Other Non-Current Liabilities 662 1,356 1,47 1,524 Controlling Interests 178-69 358 39 Total Liabilities 8,792 1,868 1,464 1,28 Non-Controlling Interests -41-16 -16-16 Controlling Interests 4,771 4,637 4,929 5,185 EBITDA 682 795 796 832 Capital Stock 529 529 529 529 FCF (Free Cash Flow) 518 158 458 457 Capital Surplus 884 885 885 885 EBITDA Margin (%) 8. 8.3 8.4 8.4 Retained Earnings 3,553 3,522 3,915 4,273 Operating Profit Margin (%) 6.2 6.2 6.3 6.4 Non-Controlling Interests 26 1-6 -22 Net Profit Margin (%) 3.2.3 4.9 4.9 Stockholders' Equity 4,797 4,647 4,923 5,164 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12P 12/13F 12/14F 12/11 12/12P 12/13F 12/14F Cash Flows from Op Activities 137 697 787 777 P/E (x) 25.1 146.4 9.9 9.2 Net Profit 262 15 442 474 P/CF (x) 15.2 2.6 6.9 6.6 Non-Cash Income and Expense 531 861 353 358 P/B (x) 1.8 1.3 1.2 1.1 Depreciation 143 153 15 142 EV/EBITDA (x) 15. 1.1 9.5 8.9 Amortization 37 47 52 58 EPS (W) 2,596 39 4,347 4,649 Others -566-617 1 1 CFPS (W) 4,291 2,198 6,257 6,532 Chg in Working Capital -563-155 131 12 BPS (W) 36,93 34,444 36,647 38,577 Chg in AR & Other Receivables -394-584 142-63 DPS (W) 75 75 75 Chg in Inventories 44-14 36-6 Payout ratio (%) 24.3. 14.5 13.6 Chg in AP & Other Payables 241 165-16 18 Dividend Yield (%) 1.2. 1.8 1.8 Income Tax Paid -92-24 -14-158 Revenue Growth (%) 7.2 13.3-1.4 5. Cash Flows from Inv Activities -1,22-357 -227-222 EBITDA Growth (%) -8.6 16.6.1 4.6 Chg in PP&E -258-214 -15-15 Operating Profit Growth (%) 1.4 3.3.8 6.7 Chg in Intangible Assets -81-11 -11-11 EPS Growth (%) -78.1-88.1 1,37.8 6.9 Chg in Financial Assets -45 39 Accounts Receivable Turnover (x) 2.5 3.3 3.1 3.3 Others -818-72 33 38 Inventory Turnover (x) 16.2 19. 17.6 19. Cash Flows from Fin Activities 351 767-672 -822 Accounts Payable Turnover (x) 2.9 3.3 3.2 3.3 Chg in Financial Liabilities 628 999-4 -5 ROA (%) 1.7.1 2.9 3.1 Chg in Equity -49 ROE (%) 5.7.7 9.6 9.7 Dividends Paid -67-67 -67-134 ROIC (%) 9.7 14.3 1.3 1.9 Others -161-165 -25-189 Liability to Equity Ratio (%) 183.3 233.8 212.6 199.1 Increase (Decrease) in Cash -734 1,18-111 -268 Current Ratio (%) 86.6 11.3 14.6 13.3 Beginning Balance 1,518 783 1,891 1,78 Net Debt to Equity Ratio (%) 63. 62.3 52.9 45.9 Ending Balance 783 1,891 1,78 1,512 Interest Coverage Ratio (x) 3. 3.2 2.9 3.4 Source: Company data, estimates 6
February 5, 213 Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. Stock Ratings Industry Ratings Buy Relative performance of 2% or greater Trading Buy Relative performance of 1% or greater, but with volatility Hold Relative performance of -1% and 1% Sell Relative performance of -1% Overweight Fundamentals are favorable or improving Neutral Fundamentals are steady without any material changes Underweight Fundamentals are unfavorable or worsening (W) 12, 1, 8, 6, 4, 2, 2/11 8/11 2/12 7/12 1/13 * Ratings and Target Price History (Share price (----), Target price (----), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analystês estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. 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 and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the AnalystÊs 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. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted 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 Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. ( 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 from sources believed to be reliable and in good faith, but such information has not been independently verified and 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. If this report is 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. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. 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