Shipbuilding update. Visibility to improve soon. Jae-won Lee. KOREA Shipbuilding. Order momentum slowing, but high-margin orders holding up

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1 Sector Report Shipbuilding update Jae-won Lee July 18, 211 KOREA Shipbuilding Company Rating TP (W) Hyundai Heavy BUY 67, DSME BUY 55, Order receipts at each company Company (US$mn) Order receipts As of Jul 211 Achieve 211 target ment Hyundai Heavy 11,7 12,2 95.9% Samsung Heavy 14,1 12, 117.5% DSME 7,127 13, 54.8% Hyundai Mipo 1,16 3,3 33.5% STX 1,213 4,3 28.2% Hanjin Heavy (+Subic) 53 1,5 35.3% Note: Hyundai orders is based on those at the shipbuilding and offshore divisions Source: Company data, Tong Yang Sec Visibility to improve soon Order momentum slowing, but high-margin orders holding up As of early July, shipbuilding new orders are diverging between the big three (Hyundai Heavy, Samsung Heavy, DSME) and the others (Hyundai Mipo, STX, Hanjin). As of end-1h11, Hyundai Heavy at US$11.7bn (95.9% of its 211 guidance), Samsung US$14.1bn (117.5%), and DSME US$7.1bn (54.8%); vs Mipo at US$1.1bn (33.5%), STX US$1.2bn (28%), and Hanjin US$5.3bn (Yeongdo and Subic combined, 35.3%). Going into 3Q, order momentum at the big three is slowing, especially due to weak containership demand. However, fundamentals remain firm for LNG carriers, drillships, and offshore oil production facilities. In particular, we expect LNG carriers and offshore oil production facilities to drive demand, contributing to 2H11~212 earnings. Overall, conditions look better for the bigger players. Macro uncertainties should lift soon How the Greek fiscal crisis unfolds should be important for the shipbuilding sector s fundamentals, but in any case, a Greek default would likely have limited impact on the private sector given that the country s biggest creditors are the IMF and ECB. Also, Italy is highly unlikely to default given its high GDP and low private debt level. Europe s problems are unlikely to significantly dampen the financial markets or shipbuilders. As for the US, we continue to believe the US economic slowdown will be shortlived, caused by oil price hikes and Japan s earthquake. We think the US economy will rebound in 2H on consumption recovery. In addition, oil prices are stabilizing and production facilities in Japan are being rebuilt. And in China, tightening measures will likely be scaled back as inflation peaks out. 2Q results to be solid Shipbuilders earnings upcycle should continue into 2Q11, even two years after it began in 1H9. We expect 2Q results to show higher sales vs 1Q given that: 1) high-margin orders won during 27~28 still account for some 7% of order backlogs; and 2) utilization rates rose from 85.3% in 1Q11 to 9.2% in 2Q11. Focus on the big three Shipbuilder share prices have declined 3% on average since June, but we do not view this as an ongoing trend. Demand for high-margin ships is solid, and uncertain macroeconomic conditions (eg, European fiscal crisis) are expected to stabilize from September August. We continue to prefer bigger names over smaller ones. Hyundai Heavy and DSME are our top picks for their attractive valuations. Tong Yang Research

2 Shipbuilding update 1. Order momentum slow, but high-margin orders hold up As of early July, shipbuilding new orders are diverging between the big three (Hyundai Heavy, Samsung Heavy, DSME) and the others (Hyundai Mipo, STX, Hanjin). The big three have achieved a high percentage of their guidance: as of end-1h11, Hyundai was at US$11.7bn (95.9% of its 211 full-year target), Samsung at US$14.1bn (117.5%), and DSME at US$7.1bn (54.8%). DSME s order performance has been relatively weak, but is expected to pick up in 2H11. Meanwhile, the small three have a long way to go: Hyundai Mipo has received orders worth US$1.1bn (33.5%), STX US$1.2bn (28%), and Hanjin US$5.3bn (Yeongdo and Subic combined, 35.3%). Although order momentum at the big three is slowing in 3Q, high-margin order momentum remains strong and there are high expectations for orders in 4Q11~212. While demand for containerships is weak due to the decline in shipping rates, the markets for LNG carriers, drillships, and offshore oil production facilities are robust. We expect demand for LNG carriers to increase going forward. So far this year, 27 vessels have already been ordered worldwide, and we expect an even stronger wave or orders in 212. Given the LNG projects in development with production initiation targets in 214~215 alone, we expect about 5 LNG carriers to be ordered in 212. Moreover, offshore oil and gas production facilities should also contribute to 2H11 earnings. Offshore plants for the Wheatstone LNG and Ichthys LNG Projects look promising in 2H11, and bigger players, in particular, are likely to benefit. While the small three depend on product carriers and mid- to large containerships, these markets have yet to show strong recovery. In containerships, the big three benefited from European shippers boom in ultra-large ships in 1H11, but general market conditions for containerships have yet to improve, which does not bode well for the small three shipbuilders. Order receipts Company (US$mn) Order receipt As of Jul target Achievement Hyundai Heavy 16,832 16,613 2,796 7,13 11,7 12,2 95.9% Samsung Heavy 21,24 15,522 2,1 9,7 14,1 12, 117.5% DSME 19,22 11,46 3,47 9,42 7,127 13, 54.8% Hyundai Mipo 6,341 4, ,27 1,16 3,3 33.5% STX 7,39 5,862 1,6 3,26 1,213 4,3 28.2% Hanjin Heavy (incl Subic) 3,686 2,13-1, ,5 35.3% Source: Tong Yang Securities 2 Tong Yang Securities Inc.

3 Sector Report LNG carrier order placement (U S$bn) LNG ship order value (LHS) (vess els ) 12 LNG ship order amount (RHS) E 212E 213E 214E Source: Clarkson, Tong Yang Securities 2 1 LNG projects worldwide Project name (region) Country Liquefaction facility capacity (mn tpa) Completion Planned Abadi Indonesia Australia Pacific LCSG Australia Bonaparte Australia Brass Nigeria ~218 Browse Australia 1.2 Delta Caribe (CIGMA) Venezuela Donggi (Sulawesi) Indonesia Fisherman's Landing LCSG Australia 3. Gladstone-Santos LCSG (GLNG) Australia Gladstone-Shell LCSG Australia 1.5 Queensland Curtis LCSG (QCLNG) Australia Ichtys Australia Kitimat Canada Liquid Niugini Papua New Guinea Olokola (Ok-LNG) Nigeria Prelude Australia 2.5 Scarborough Australia 212 Shtokman Russia 216 Sunrise Australia Wheatstone Australia 7.3 Under Construction Angola Angola Gorgon Australia Iran (NIOC) Iran Pluto Australia PNG Papua New Guinea Total liquefaction capacity of facilities to be completed by given year Source: Media reports, Tong Yang Securities Tong Yang Securities Inc. 3

4 Shipbuilding update Offshore plant projects in bidding process (US$mn) Type Owner Competitor Purpose Amount Selection Note Oil FPSO Total (France) Hyundai, Samsung, Technip-led consortium, Jurong-led consortium Egina Project (Nigeria) 2, Not decided 2, bbl/d Oil FPSO Dana (UK) Samsung-Teekay, Cosco-Sevan Western Isles (UK) block development 6 Not decided 3,~4, bbl/d LNG FPSO Inpex (Japan) Samsung-led consortium, Hyundai-led consortium, Chiyoda, Saipem LNG FPSO for Abadi field (Indonesia) Under 4,9 Not decided DSME, Hyundai-led consortium, LNG FPSO Inpex (Japan) Samsung-led consortium Ichthys LNG Project (Australia) - 4Q11 DSME-Technip, Hyundai-EoS, Offshore Inpex (Japan) Samsung-Mustang Ichthys LNG Project (Australia) - 4Q11 Offshore Total (France) Hyundai, Samsung, DSME, other Moho Nord (Congo) - Not decided Hyundai, Samsung, DSME, Saipem, Offshore Chevron (US) McDermott Block B (Vietnam) 4,3 Not decided 12,-tpa tension-leg wellhead platform (TLWP) Offshore platform/fso, other facility Offshore Chevron (US) DSME Wheatstone LNG Project (Australia) 1,3 3Q11 Only DSME in negotiations Offshore Chevron (US) Hyundai, Samsung, DSME, Saipem Block (Angola) - Not decided Offshore Nexen (Can) Hyundai, Samsung, DSME, other Golden Eagle (UK) 31~42 Not decided To select multiple bidders Note: Projects in red are likely to select winner(s) in 2H11 Source: Tong Yang Securities 2. When will macro fluctuations ease? Currently, macroeconomic fluctuations such as the European financial crisis and the US economic slowdown are weighing on shipbuilders fundamentals and investment sentiment. These two issues are ultimately unlikely to hurt the shipbuilding industry, but uncertainties will probably persist into July~August. 1) European financial crisis unlikely to hit shipbuilding industry hard Since early May, a series of credit rating downgrades had fueled fears of a Greek default, but then, as a Greek tightening bill passed on Jun 29 and the fifth eurozone- IMF bailout was executed, fears of a Greek default seemed to fade. Now, however, with respect to the so-called French plan, as credit rating agencies say that rolling over matured loans is equivalent to a default, this is reigniting Greek default concerns. Moreover, Greece s spillover into Italy is adding to the European financial crisis. First of all, future developments regarding Greece s sovereign debt issue will hinge on when and how it is readdressed. However, it should be noted that even if Greece announces a default, this should have limited repercussions for private financial markets, as the IMF and ECB are the largest holders of Greece s sovereign debt. Moreover, Italy, a big economy with small private debt, is unlikely to fall into a default. Thus, Greece s financial crisis is unlikely to have much impact on the private financial markets or the shipbuilders. 4 Tong Yang Securities Inc.

5 Sector Report 2) US economic slowdown still seen as blip US June employment indicators released last week brought a shock to the market, adding to concerns about the future US economic landscape. An economic slowdown could have an adverse impact on the marine transport market (in particular, it could extend the container market downturn). However, we maintain our view that the US economic slowdown is a blip caused by oil price spikes coupled with the aftermath of Japan s quake, and that in 2H the US economy will regain momentum on a revival in consumer spending. Previously, rising oil prices dampened consumption and Japan s quake caused production setbacks and employment slowdown. Recently, however, the rise in oil prices is leveling off and Japanese production lines are being restored rapidly. Furthermore, in 2H, China should show positive developments. China s easing of monetary tightening (as inflation has peaked) coupled with government-led housing projects should contribute substantially to global economic recovery. Greek financial crisis developments Date Details Note May 9, 211 S&P cuts Greece s credit rating Cuts by two notches from BB- to B May 21, 211 Fitch cuts Greece s credit rating Cuts by three notches from BB+ to B+ Jun 2, 211 Moody s cuts Greece s credit rating Downgrades to Caa1, raises possibility of default Jun 14, 211 S&P cuts Greece s credit rating Downgrades from B to CCC Jun 19, 211 Eurozone finance ministers meet Defers EUR12.bn subsidy for Greece until Jul 3, unveils terms/conditions for 2nd bailout Jun 23, 211 EU summit talks Approves Greece s financial reform proposals, encourages bill to pass in parliament Jun 29, 211 Greece s tightening bill passes To raise EUR28.bn by 215 through austerity measures and increased tax revenues, meeting requirements of 5th eurozone/imf bailout Jul 3~8, 211 Eurozone/IMF provide Greek bailout 5th eurozone/imf bailout: euro zone EUR8.7bn, IMF EUR3.2bn Jul 4, 211 S&P/Fitch warn that Greek rollover would be seen as default Credit rating agencies openly oppose French method (Of Greek debt maturing by 213, 3% to be paid back in cash, 5% rolled over as 3-year debt, and 2% paid in form of eurozone-guaranteed fund securities) Jul 11, 211 Italy s financial crisis surfaces Italy s debt-to-gdp stands at 12%, increasing possibility of financial crisis Jul 14, 211 Fitch cuts Greece s credit rating Trims by three notches from B+ to CCC, just before a default rating Jul 14, 211 Jul 15, 211 Eurozone emergency summit talks fail Results of EU bank stress tests Decides to hold summit as Greece s woes spill over into Italy, but summit fails as Germany opposes Source: Press release compiled by Tong Yang Securities Tong Yang Securities Inc. 5

6 Shipbuilding update US jobs indicator: employment growth plunges (' people) 3 P rivate non-farm payroll growth (LHS) 2 US price indicator: inflation fears ease as oil price falls (% ) (% ) 6 US CPI y-y (LHS) 12 WTI y-y (RHS) Jan-1 May-1 Sep-1 Jan-11 May-11 Source: Datastream, Tong Yang Securities -4 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Source: Datastream, Tong Yang Securities -8 Japan: utilization enters recovery China prices: inflationary pressure eases on lower grain (% ) Japan's manufacturing utilization rate (% ) (% ) Chinese CPI y-y (LHS) 1 Chinese grain price (RHS) Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Source: Datastream, Tong Yang Securities Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Source: Datastream, Tong Yang Securities Tong Yang Securities Inc.

7 Sector Report 3. 2Q results to be mostly solid, except for Hanjin Heavy Shipbuilders earnings upcycle should continue into 2Q11, even two years after it began in 1H9. We expect 2Q results to show higher sales vs 1Q given that: 1) highmargin orders won during 27~28 still account for some 7% of order backlogs; and 2) utilization rates rose from 85.3% in 1Q11 to 9.2% in 2Q11. Plate costs, up from Apr 211, should affect earnings from 3Q, and so 2Q margins should stay intact. Operating margins should not change much: Hyundai Heavy (consolidated) from 13.5% in 1Q11 to 12.5% in 2Q11E; DSME (non-consolidated) from 11.3% to 1.6%; Samsung (non-consolidated) from 1.5% to 9.6%; and Mipo (consolidated) from 12.7% to 12.8%. Meanwhile, Hanjin Heavy s 2Q earnings likely deteriorated q-q, as margins at both construction and the Subic shipyard businesses should decline q-q, with strikes at the Yeongdo shipyard ending in late-june. Consolidated operating margin likely plunged from 6.8% in 1Q to 1.7% in 2Q. (Our figure for operating profit is adjusted operating profit (IFRS-based operating profit minus other operating income.) Shipbuilding production index (quarterly average) Shipbuilding utilization index (quarterly average) (% ) 6 Shipbuilding production index (original index, RHS) y-y (LHS) q-q (LHS) (pt) 24 (% ) Q5 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 1Q5 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 Tong Yang Securities Inc. 7

8 Shipbuilding update 2Q11 forecast Q11E E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE % y-y % q-q Hyundai IFRS non-consol Sales 5,36.4 5, , , ,36.3 6, , , , ,25.3 OP , ,695.8 Pre-tax 1, , ,73. 1, , , ,714.9 NP , , ,955.5 OPM (%) IFRS consolidated Sales 12, , , , ,73.6 5,26.4 OP 1,71.9 1, ,35.1 1, , Pre-tax 1,837. 1, , , , NP 1, , ,9.4 1, , OPM (%) Samsung IFRS non-consol Sales 3,33.4 3,34.8 3, , ,5.2 3, , , , ,816.2 OP ,199.5 Pre-tax ,149. 1,24.5 NP OPM (%) DSME IFRS non-consol Sales 2,77.3 2, , ,57.7 3,51.7 3,76.5 2,9. 3, , ,263.4 OP ,11.1 1,145.5 Pre-tax ,24.3 1,182.8 NP OPM (%) Mipo IFRS non-consol Sales ,43.3 1,4.6 1, , , ,7.3 OP Pre-tax NP OPM (%) IFRS consolidated Sales 1,27.9 1, ,76.7 1, , ,574.1 OP Pre-tax NP OPM (%) Hanjin IFRS non-consol Sales , ,16.2 OP Pre-tax TTR RR NP TTR RR OPM (%) IFRS consolidated Sales ,19.2 2,741. OP Pre-tax NP OPM (%) Note: NP = net profit from controlling interest; OP= adjusted operating profit = reported operating profit - other operating income TTR = turn to red; RR = remain in red Source: Tong Yang Securities 8 Tong Yang Securities Inc.

9 Sector Report 4. Focus on big three Shipbuilder share prices have declined 3% on average since June, while the market has edged up 1.2%. By stock, Hyundai Heavy dipped 4.1%, DSME 7%, and STX 11.5%, while Samsung added 2%, Mipo 1.7%, and Hanjin 2.3%, although they are not markedly outperforming the market. Volatility rose for Hyundai and STX on the issue of the potential acquisition of Hynix, and for Hanjin due to the strike, but in general, slowing order flows and growing macro uncertainties had the biggest impact on recent share performance. However, we do not see this as an ongoing trend. Demand for high-margin ships is solid and uncertain macro conditions (eg, European fiscal crisis) are expected to stabilize from September. We continue to prefer bigger names over smaller ones, with the shipbuilding business environment still favorable for the big names. Hyundai and DSME are our top picks for their attractive valuations. Valuation Rating Target price Current price Upside Market cap % of mkt cap P/E P/B ROE (Wbn) 29 1P 11E 12E 29 1P 11E 12E 29 1P 11E 12E Hyundai BUY 67, 463, 44.7% 35, % Samsung BUY 55, 47, 17.% 1, % DSME BUY 55, 41,3 33.2% 7,94.4.7% Mipo HOLD 18, 176, 2.3% 3,52..3% Hanjin BUY 48, 34,3 39.9% 1, % Source: Tong Yang Securities Tong Yang Securities Inc. 9

10 Shipbuilding update Hyundai Heavy Industries (954 KS) ratings and target price history (W) 8, 7, C urrent pric e Target price 6, 5, 4, 3, 2, 1, Jul-9 Dec-9 May-1 Oct-1 Mar-11 Date Rating TP (W) 21/4/14 BUY 29, 21/7/14 BUY 32, 21/11/22 BUY 5, 211/1/1 BUY 6, 211/4/11 BUY 6, 211/6/7 BUY 67, 211/7/18 BUY 67, Source: Tong Yang Securities Disclosures & disclaimers This research report has been prepared for informational purposes only; it does not constitute an offer or a solicitation of an offer to buy or sell any securities or other financial instruments. The information and data contained in this report have been obtained from sources we consider reliable; however, we make no representation that the information provided in this report is accurate or complete, and it should not be relied on as such. The recipient of this report should use his/her independent judgment regarding the sale or purchase of any securities or financial instruments mentioned herein. We disclaim any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is for our clients only. It is copyrighted material and may not be reproduced, transmitted, quoted, or distributed in any manner without the prior written consent of Tong Yang Securities Inc. As of the publication date of this report, Tong Yang Securities Inc. does not own a stake in excess of 1%, nor does it have any interest whatsoever, in the subject company (ies). The material contained herein was not disclosed by Tong Yang Securities Inc. to any institutional investors or third parties prior to its publication. As of the date of publication of this report Tong Yang Securities Inc. is an issuer and liquidity provider for equity linked warrants backed by the shares of the subject company. The analyst (s) of this report or the analyst (s) spouse does not have any financial interest in the securities of the subject company (ies) mentioned herein, nor financial interest of any nature related to the subject company (ies) (including without limitation, whether it consists of any option, right, warrant, future, long or short position), as of the publication date of this report. Analyst certification I/We, as the research analyst/analysts who prepared this research report, do hereby certify that the views expressed in this report accurately reflect my/our personal views about the subject securities discussed in this report. Stock and sector ratings Stock ratings include an Investment Rating (Buy, Hold, Sell) as well as a Volatility Risk Rating (High, Low) that are based on the expected absolute return of a stock over the next 6-12 months. - Buy: Low Risk if a stock is expected to return 1% or more; High Risk if a stock is expected to return 2% or more - Hold: Low Risk if a stock is expected to return between -1 and +1%; High Risk if a stock is expected to return between -2 and +2% - Sell: Low Risk if a stock is expected to decline by 1% or more; High Risk if a stock is expected to fall by 2% or more Sector ratings suggest 6 to 12 - month forward investment weighting of a given sector compared to its market capitalization weighting. - Overweight: Investment weighting is higher than the market capitalization weighting - Neutral: Investment weighting is equal to the market capitalization weighting - Underweight: Investment weighting is lower than the market capitalization weighting 1 Tong Yang Securities Inc.

11 Sector Report DSME (4266 KS) ratings and target price history (W) 6, C urrent price Target price 5, 4, 3, 2, 1, Jul-9 Dec-9 May-1 Oct-1 Mar-11 Date Rating TP (W) 29/11/25 BUY 23, 21/4/14 BUY 25, 21/7/14 BUY 25, 21/11/22 BUY 39, 211/1/1 BUY 44, 211/2/1 BUY 48, 211/6/7 BUY 55, 211/7/18 BUY 55, Source: Tong Yang Securities Disclosures & disclaimers This research report has been prepared for informational purposes only; it does not constitute an offer or a solicitation of an offer to buy or sell any securities or other financial instruments. The information and data contained in this report have been obtained from sources we consider reliable; however, we make no representation that the information provided in this report is accurate or complete, and it should not be relied on as such. The recipient of this report should use his/her independent judgment regarding the sale or purchase of any securities or financial instruments mentioned herein. We disclaim any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is for our clients only. It is copyrighted material and may not be reproduced, transmitted, quoted, or distributed in any manner without the prior written consent of Tong Yang Securities Inc. As of the publication date of this report, Tong Yang Securities Inc. does not own a stake in excess of 1%, nor does it have any interest whatsoever, in the subject company (ies). The material contained herein was not disclosed by Tong Yang Securities Inc. to any institutional investors or third parties prior to its publication. As of the date of publication of this report Tong Yang Securities Inc. is an issuer and liquidity provider for equity linked warrants backed by the shares of the subject company. The analyst (s) of this report or the analyst (s) spouse does not have any financial interest in the securities of the subject company (ies) mentioned herein, nor financial interest of any nature related to the subject company (ies) (including without limitation, whether it consists of any option, right, warrant, future, long or short position), as of the publication date of this report. Analyst certification I/We, as the research analyst/analysts who prepared this research report, do hereby certify that the views expressed in this report accurately reflect my/our personal views about the subject securities discussed in this report. Stock and sector ratings Stock ratings include an Investment Rating (Buy, Hold, Sell) as well as a Volatility Risk Rating (High, Low) that are based on the expected absolute return of a stock over the next 6-12 months. - Buy: Low Risk if a stock is expected to return 1% or more; High Risk if a stock is expected to return 2% or more - Hold: Low Risk if a stock is expected to return between -1 and +1%; High Risk if a stock is expected to return between -2 and +2% - Sell: Low Risk if a stock is expected to decline by 1% or more; High Risk if a stock is expected to fall by 2% or more Sector ratings suggest 6 to 12 - month forward investment weighting of a given sector compared to its market capitalization weighting. - Overweight: Investment weighting is higher than the market capitalization weighting - Neutral: Investment weighting is equal to the market capitalization weighting - Underweight: Investment weighting is lower than the market capitalization weighting Tong Yang Securities Inc. 11

12 Shipbuilding update Tong Yang Securities International Network Seoul Head Office Tong Yang Securities Building 185 Euljiro 2-ga, Jung-gu Seoul, Korea Tel: Corporate website: Research Center Tong Yang Securities Building #23-8 Yeoido-dong Youngdeungpo-gu, Seoul, Korea Tel: Hong Kong Tong Yang Securities Hong Kong Limited Unit 328-9, 32/F, Alexandra House 18 Chater Road, Central, Hong Kong Tel: New York 15 East 52nd Street 25th Floor New York NY 122, U.S.A. Tel: Tokyo , Shin-Kokusai Building Maronouchi, Chiyoda-ku Tokyo, Japan 1-5 Tel: Ho Chi Minh Suite 295, Saigon Trade Center 37 Ton Dou Thang Street District 1, Ho Chi Minh City, Vietnam Tel: Manila Tong Yang Savings Bank Ground Floor, Chantham House 116 Valero Corner, Herrera Street Salcedo Village, Makati City Metro Manila, Philippines Tel: Phnom Penh #138, Norodom Boulevard Sangkat Tonle Bassac Khan Chamkarmorn Phnom Penh, Cambodia Tel: Tong Yang Securities Inc.