Samsung Engineering (028050)

Transcription

1 Company Note August 19, M rating Hold (Maintain) Samsung Engineering (028050) Visiting Houston, the most promising market Stock Data KOSPI (Aug 16, pt) 1,920 Stock price (Aug 16, KRW) 86,800 Market cap (USD mn) 3,118 Shares outstanding (mn) Week high/low (KRW) 210,500/68,000 6M avg. daily turnover (USD mn) 35.8 Free float / Foreign ownership (%) 72.4/26.4 Major shareholders (%) CheIl Industries Inc and 9 others 20.0 National Pension Service (NPS) 9.6 Performance 1M 6M 12M Absolute (%) 21.2 (45.2) (55.9) Relative to KOSPI (%p) 18.3 (42.2) (54.0) 12MF PER trend 20.0 (X) 12MF PER (LHS) (KRW) 300, price (RHS) , , , , , Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Source: WISEfn consensus US Dow project scheduled to be completed in October We visited Samsung Engineering s Houston US subsidiary and other companies in the US to monitor their strategies to penetrate the market and current conditions (notes on other US subsidiaries upcoming). The company disclosed its Dow construction project, its biggest concern, should be complete by October. Construction was delayed eight months from the target date due to differences between the client and Samsung Engineering in terms of management. The client managed the EPC contractors as cost + fee type, while the project was previously agreed upon as a lump sum turnkey type (LSTK, Page.2). Contention peaked in early 2013, and currently the project is in the test phase, and is being delivered to the client incrementally. Although the demanding nature of the project means we need to wait until the confirmation of completion, we believe risks have eased substantially. US, hottest market in the world Currently, the US hydrocarbon market is booming for the first time in 20 years as gas feed prices dropped to USD3/mmbtu (USD2/mmbtu in the Middle East). Tenders of ethylene mega complexes (USD3bn/complex) have increased, and seven mega projects of 15 scheduled have been tendered. US EPC companies resource shortages should worsen in 2014 as the front-end equipment design (FEED) phase is completed and detailed designs begin. In the US, sellers bargaining power will be on par with that of the buyer. Most orders were being awarded as cost + fee type and in 2011, when Samsung Engineering won the Dow construction order, the company accepted the LSTK type, which was unusual in the US market and disadvantageous for Samsung Engineering, since this was the first time the company won a project in the US (Page 3). Sasol EPC project expected, ongoing efforts to enter US market Samsung Engineering won the ethylene FEED order awarded by Sasol in April. Unlike the Middle East (ME), where EPC starts six months after FEED, in the US, EPC negotiations begin during the middle of FEED and immediately transfers to EPC upon completion of FEED. For this complex, four companies have won FEED orders separately. Fluor (US) won ethylene/utility/integration, Toyo (Japan) low density polyethylene, Mitsui (Japan) high density polyethylene and Samsung Engineering the ethylene oxide/ethylene glycol package. Fluor should be responsible for most of the construction to meet local labor regulations. The Japanese companies and Samsung Engineering will likely be responsible for engineering and procurement. Kyung ja Lee kyungja.lee@truefriend.com Hyungjun Ahn hyungjoon@truefriend.com Yr to Sales OP EBT NP EPS % chg EBITDA PE EV/EBITDA PB ROE Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%) 2011A 9, , A 11, , F 11,268 (205) (217) (202) (5,469) 0.0 (131) NM (29.5) 1.9 (12.4) 2014F 9, , F 9, , Note: Net profit and EPS are based on figures attributed to controlling interest

2 Downside risk to fade, turnaround from 2014 Samsung Engineering suffered losses when it first entered Saudi Arabia in 1999 after winning a butane plant order. But the company gained a solid foothold in the ME market by winning the propane dehydration and polypropylene plant orders. Similarly, we believe the company is now undergoing a trial period before its fullfledged entry to a major market. In addition, downside risk appears to be fading sharply, and the company appears to be recovering from its 2Q13 plunge in earnings. However, Samsung Engineering must meet the following conditions to justify current valuations: 1) no new cost overruns from 3Q13, 2) complete the Dow project without problem, and 3) make meaningful progress in the US market. We will upgrade the company to BUY once these signals are visible. Dow project, identifying the problem Samsung Engineering does not have authority to run the Dow project. Instead, Dow s internal engineering team runs the project even though the order was awarded as an LSTK. As a result, when minor problems occurred in resources every piece of equipment was rejected and assembly was disapproved, resulting in considerable construction delays. In addition, the project is located in Freeport, Texas, where a defense industrial base is located. This slowed the timely transportation of resources. We believe Samsung Engineering won the project as an LSTK type, which was unusual in the US, as Mitsui, Dow Chemical s partner in the project, was familiar with LSTK type, but more so as Samsung Engineering had to make concessions to enter the US market for the first time. But, as Dow has a reputation as one of the most challenging customers in the US, successful completion of the project should facilitate Samsung Engineering s penetration of the US market. Figure 1. Dow chemical complex in Freeport, Texas Dow Chemical industrial complex (Samsung engineering chlorine project) Justin Hust Sanctuary for wild animals Freeport defense industrial base Source: Google With most promising year ahead in the US, Korea builders must ride the cycle In the US, ethylene complex orders have been awarded for seven projects, half of the total scheduled. And, the US market should become even more robust in 2014, on: 1) the start of detailed designs for ongoing projects, after completion of FEED, and 2) scheduled bids for the remaining projects. As such, engineering, procurement and construction (EPC) providers may face labor shortages, and US 2

3 firms should utilize a selective order-taking strategy out of huge opportunities. Korean builders, including Samsung Engineering, may not be able to take advantage of their entry into the US, unless they secure opportunities in As such, Samsung Engineering is focusing on the Sasol project s EPC switch. We believe the hydrocarbon plant boom, which has led to the construction of basic petrochemical complexes, such as ethylene, should also gradually expand to fertilizer and downstream plants. In contrast, the upstream oil/gas plants and refinery projects will likely be slower in the US given less sustainable production than the ME and the subsequent lower economic efficiency. (Of note, we believe the US hydrocarbon plant market will trigger a market squeeze in the ME or Latin America.) We will cover the details of this issue in the following updates. Reasons to enter the US, how it differs from the ME Chinese builders have further ramped up operations in the ME and emerging markets. As such, Korean EPC providers must secure the US as a core market. Given competitive shale gas feedstock prices, few other markets should be able to compete with the US in terms of sustainability or scale. We believe a fundamental difference between the ME and US tenders is that the ME is based on the national strategy rather than economic potential, while the US focuses solely on commercial viability. And, these differences determine the pace of projects. While it takes six month to a year for a ME project to complete FEED and to tender EPC deals, US projects occasionally shift to the EPC step during the FEED process to minimize opportunity costs. As most US projects have cost plus fee arrangement, these deals can be cancelled at any time according to economic conditions. As such, it is important for an EPC provider to select economically viable, and thereby sustainable projects. Table 1. Ethylene complex tenders or construction in-progress in the US Tendered by Project Location Completion Capacity (mn/lbs) Dow Chem. New Ethylene cracker US Gulf Coast ,200 Lyondell Basell US ethylene PE expansion Texas ,950 CP Chem NAO expansion Cedar Bayou, TX ,300 Sasol Ethane cracker and derivatives plant Lake Charles, LA ,300 Exxon Mobil Chem. Haldor Topsoe, Inc. Bayport Bayport, TX ,300 Geraskem/Idesa Braskem, Grupo JV's LDPE plant Coatzacoalcos, Mexico ,200 Shell Chem. US Appalachian p-chem project Monaca, PA ,200 Formosa Point Comfort plant expansion Point Comfort, TX ,200 Westlake Chem. Petro 2 ethylene unit expansion Louisiana and Kentucky Nova Chem. Corunna new plant expansion Corunna, ON Ineos Chocolate Bayou ethylene plant expansion Chocolate Bayou, TX Source: Google Turning failure into an asset Samsung Engineering has called the US a land of opportunity that offers at least three chances. The company said that business owners are asked how they would improve projects based on what they have learned from failure rather than simply focusing on the failure itself. We note that companies like Bechtel, JGC and Chiyoda also made massive losses when they first entered the market. To penetrate the crucial US market by using failure as a learning experience, smooth risk control must be achieved. Although Samsung Engineering is unlikely to be profitable in 2013, we believe the downside risk has been easing considerably from 3Q13. 3

4 Figure 2. Samsung Engineering s overseas projects Maaden Smelter Port Facility SULB Steel Mill Project Skikda Refinery Project Dow-Mitsui Falcon Project Ma'aden Aluminum Cast House Borouge 3 LDPE Wasit Cogen. & Steam Shaybah NGL Power Generation Ma'aden Aluminum Rolling Mill Ma'aden Alumina Refinery Steam UAE Shah Gas Takreer Carbon Black Yanbu Power&Desalination Jan-13 Nov-13 Sep-14 Jul-15 May-16 Mar-17 Source: Samsung engineering, Korea Investment & Securities 4

5 Balance sheet FY-ending Dec. (W bn) 2011A 2012A 2013F 2014F 2015F Current assets 4,157 4,188 4,684 3,795 3,553 Cash & cash equivalent Accounts & other receivables 2,723 3,108 3,606 2,852 2,698 Inventory Non-current assets 1,032 1,486 1,567 1,479 1,448 Investment assets Tangible assets Intangible assets Total assets 5,189 5,674 6,251 5,274 5,001 Current liabilities 3,645 3,554 4,448 3,369 2,769 Accounts & other payables 3,482 3,078 3,219 2,459 2,326 ST debt & bond , Current portion of LT debt Non-current liabilities Debentures LT debt & financial liabilities Total liabilities 3,875 3,934 4,718 3,605 2,992 Controlling interest 1,351 1,739 1,533 1,668 2,007 Capital stock Capital surplus Capital adjustments (285) (285) (285) (285) (285) Retained earnings 1,358 1,771 1,569 1,709 2,052 Minority interest (37) Shareholders' equity 1,313 1,740 1,533 1,669 2,008 Income statement FY-ending Dec. (W bn) 2011A 2012A 2013F 2014F 2015F Sales 9,298 11,440 11,268 9,836 9,304 COGS 8,219 10,153 11,043 9,183 8,328 Gross profit 1,079 1, SG&A expense Operating profit (205) Financial income Interest income Financial expense Interest expense Other non-operating profit 91 (13) Gains (Losses) in associates, subsidiaries and JV Earnings before tax (217) Income taxes (14) Net profit (203) Net profit of controlling interest (202) Other comprehensive profit (65) (4) (4) (4) (4) Total comprehensive profit (207) Total comprehensive profit of controlling interest (207) EBITDA (131) Cash flow FY-ending Dec. (W bn) 2011A 2012A 2013F 2014F 2015F C/F from operating 38 (193) (569) Net profit (203) Depreciation Amortization Net incr. in W/C (620) (864) (405) Others (34) (23) (16) C/F from investing 228 (180) (103) (5) (5) CAPEX (267) (215) (68) (70) (70) Decr. in fixed assets Incr. in investment Net incr. in intangible assets (9) (12) (5) 0 (2) Others (6) (11) (61) C/F from financing (108) (450) (724) Incr. in equity Incr. in debts (16) (450) (724) Dividends (92) (111) (111) 0 0 Others C/F from others (7) (10) Increase in cash 151 (124) 14 (57) (21) Key financial data FY-ending Dec. 2011A 2012A 2013F 2014F 2015F per share data (KRW) EPS 13,892 14,173 (5,469) 3,781 10,292 BPS 40,887 50,606 45,441 48,823 57,297 DPS 3,000 3, ,000 Growth (%) Sales growth (1.5) (12.7) (5.4) OP growth NP growth EPS growth EBITDA growth Profitability (%) OP margin (1.8) NP margin (1.8) EBITDA margin (1.2) ROA (3.4) ROE (12.4) Dividend yield Stability Net debt (W bn) (707) (122) (376) Debt/equity ratio (%) Valuation (X) PER NM PBR PSR EV/EBITDA (29.5) Note: Based on K-IFRS (consolidated) 5

6 Changes to recommendation and price target Company (Code) Date Recommendation Price target Samsung Engineering (028050) BUY W330, BUY W260, Hold - 350, , , , , ,000 50,000 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug

7 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 10 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 Samsung Engineering. 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 Samsung Engineering in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from Samsung Engineering 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 Samsung Engineering in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in Samsung Engineering s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of Samsung Engineering shares as of August 19, 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 August 19, Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of Samsung Engineering 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. 7