Daewoo E&C (047040) Company Note. Asia conference feedback; Contrarian thinking

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1 Company Note February 10, 2012 Daewoo E&C (047040) 12M rating BUY (Maintain) 12M TP W17,000 from W17,000 Up/downside +45% Stock Data KOSPI (Feb 8, pt) 2,004 Stock price (Feb 8, KRW) 11,750 Market cap (USD mn) 4,264 Shares outstanding (mn) Week high/low (KRW) 15,550/7,980 6M avg. daily turnover (USD mn) 8.8 Free float / Foreign ownership (%) 46.6/7.0 Major shareholders (%) The Korea Development Bank and 3 others 51.5 KumHo Industrial Co.,Ltd and 3 others 22.4 Performance 1M 6M 12M Absolute (%) (17.3) Relative to KOSPI (%p) (14.1) 12MF PBR trend 3.0 (X) 12MF PBR (LHS) (KRW) 30,000 price (RHS) , , , , , Source: WISEfn consensus Asia conference feedback; Contrarian thinking Contrarian growth strategy attracts investors interest Daewoo E&C (Daewoo) attended the KIS Asia Conference on Feb 7-8. Long-term investors were still interested in Daewoo despite the recent stock rally. Daewoo s main marketing points were 1) a strategy focused on power plant and oil & gas markets in Africa, 2) the pursuit of development projects in conjunction with KDB and 3) successful expansion of new housing supply in Korea during a market downturn by targeting niche areas such as small to midsize homes and officetels. These marketing points are contrarian strategies that differ greatly from how domestic peers operate. Some investors were concerned about the valuation but the consensus was the lofty multiples are justified given the company s improved fundamentals and strong earnings turnaround. The stock provides an opportunity to buy at a high PE and take profit at a low PE as the multiple will drop rapidly from 17.7x in 2012 to 12.5x in We maintain BUY and TP W17,000 (historical avg. 12MF PB 1.8x). Focusing on Africa and international oil company (IOC) markets Builders margins continue to be a concern on tougher competition in the Middle East (ME) hydrocarbon market. While domestic peers have been focusing on the ME downstream market, Daewoo has pursued Africa. With an earnings turnaround in 2011, Daewoo can now be more aggressive at looking for work in Africa. While Nigeria and Morocco are Daewoo s main markets, it hopes to penetrate upstream and power plant markets in other resource-rich nations such as South Africa and Mozambique in As governments have tight control over projects in Africa, there is significant risk and a positive relationship with governments is essential. As such, IOCs (clients that actually tender EPC projects) in Africa put greater weight on track record than costs, which leads to robust margins for builders relative to other regions. IOCs demand for regional experience puts up a high entry barrier for new builders who only recently knocked on Africa s door. With a strong track record in the continent, Daewoo should achieve its 2012 new overseas order target of USD6.4bn, up from USD4.8bn in The 2012 overseas sales are expected to jump 35% YoY to W3.3trn as well. Win-win strategy with KDB Daewoo s synergy with Korea Development Bank (KDB) is growing. KDB plans to take over W310bn of Daewoo s PF guarantee balance in 1H12 and another W690bn in 2H12. This will shift the guarantee provider from Daewoo to KDB and the bank will receive commissions from the developers. Developers will then enjoy PF financial cost savings on KDB s healthy credit, which should ultimately boost Kyungja Lee kyungja.lee@truefriend.com Yongsok Song songyongsok@truefriend.com Yr to Sales OP EBT NP EPS % chg EBITDA P/E EV/EBITDA P/B ROE Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%) 2009A 7, (59.6) A 6,780 (362) (1,070) (764) (2,378) NM (245) NM (25.5) 1.6 (23.9) 2011P 7, NM F 7, F 9, Note: Net profit and EPS are figures attributed to controlling interest

2 the overall profitability of projects. Furthermore, Daewoo s strength in infrastructure EPC makes the company a great partner for KDB that is looking to gain share in the global public-private partnership (PPP) market. Daewoo and KDB are jointly working to win coal-fired independent power plant projects in Croatia (EUR800mn) and South Africa (USD2.5bn) in KDB s global network of 14 offices worldwide will provide greater project information and opportunities for Daewoo. Previous owner Kumho limited Daewoo s operations in the past but the new owner KDB is now boosting Daewoo s operations and efficiency. Appendix: Nigeria s Gas Revolution Nigeria experienced a decrease in oil & gas project tenders in the past three to four years. However, the election of President Jonathan Goodluck in May 2011 has set the stage for greater oil & gas investment in the Brass region where his hometown is located. In 2011, Goodluck released the Gas Revolution plan targeting to expand gas production and develop downstream industries. The plan proposes to invest USD25bn and create 600,000 jobs. The new president s iron will for investment is quickly resulting in deregulation of the oil & gas industries. In early 2012, the Nigerian government abolished its oil subsidy program worth USD8bn p.a., and promised to inject the savings to the economy. This should open up greater opportunities for Daewoo, which has won around 27% of its new overseas orders from Nigeria in the past. Nigeria s oil & gas projects Already awarded IOC projects / BRASS LNG EPC to be awarded soon Projects that signed MOUs when 'Gas Revolution' plan was released (Chevron) Excravos Gas Plant (Nagarjuna-India) Fertilizer Plant 2 fertilier plants (USD2.5bn) (Natpet-Saudi) Petrochem Plant Petrochemical complex (USD3.5bn) Jonathan Goodluck (NNPC+ENI+ConocoPhilips+Total) BRASS LNG 1) Onshore (USD5.8bn / Daewoo + Saipem and Hyundai E&C + Hyundai Hvy consortiums competiting) 2) Offshore (Saipem likely to win) 3) Subsea (Saipem private contract) (Agip+Oando) Gas Plant Gas plant (USD3bn) (ExxonMobil) East Area NGL (Shell) Bonny On/Offshore Pipeline Source: ICAK, Korea Investment & Securities Background of Nigeria s President Jonathan Goodluck President Jonathan Goodluck Nigeria s 14 th president (hometown in the Brass region) - Feb 2010: Jonathan Goodluck steps in for ill President Umaru Yar Adua - May 2010: Goodluck sworn in after Yar Adua s death - May 2011: Formally re-elected as president Release of Gas Revolution plan in early Expand gas production to develop downstream industries - Invest USD25bn in total and create 600,000 jobs Iron will for investment and economic development - Deregulate oil & gas industries and tackle corruption - USD8bn p.a. oil subsidy program abolished (savings will be injected to the economy) - Aggressive at attracting foreign investment Source: News, Korea Investment & Securities 2

3 Balance sheet FY-ending Dec. (W bn) 2009A 2010A 2011P 2012F 2013F Current assets 5,020 5,139 4,953 5,184 6,066 Cash & cash equivalents Accounts & other receivables 3,052 3,084 3,199 3,570 4,307 Inventory Non-current assets 4,114 4,420 4,565 5,002 5,857 Investment assets 2,736 2,840 2,945 3,287 3,966 Tangible assets Intangible assets Total assets 9,134 9,558 9,518 10,186 11,923 Current liabilities 3,511 3,135 3,811 4,260 5,516 Accounts & other payables 1,717 1,705 1,768 1,973 2,381 ST debt & bonds 1, Current portion of LT debt Non-current liabilities 2,486 3,021 2,197 2,176 2,303 Debentures 1,104 1, LT debt & financial liabilities Total liabilities 5,996 6,156 6,008 6,436 7,819 Controlling interest 3,066 3,317 3,495 3,727 4,072 Capital stock 1,629 2,078 2,078 2,078 2,078 Capital surplus Capital adjustments (124) (110) (110) (110) (110) Retained earnings 1, ,185 1,530 Minority interest Shareholders' equity 3,138 3,403 3,583 3,820 4,170 Income statement FY-ending Dec. (W bn) 2009A 2010A 2011P 2012F 2013F Sales 7,108 6,780 7,032 7,848 9,470 Gross profit SG&A expenses Other operating gains Operating profit 240 (362) Financial income Interest income Financial expenses Interest expenses Other non-operating profit (165) (294) (52) (16) (19) Gains (Losses) in associates, subsidiaries and JV 131 (191) Earnings before tax 162 (1,070) Income taxes 58 (303) Net profit 104 (761) Net profit of controlling interest 99 (764) Other comprehensive profit Total comprehensive profit 104 (761) Total comprehensive profit of controlling interest 99 (764) EBITDA 373 (245) Cash flow FY-ending Dec. (W bn) 2009A 2010A 2011P 2012F 2013F C/F from operations 140 (167) 1, Net profit 104 (761) Depreciation Amortization Net incr. in W/C (165) (337) Others (40) C/F from investing 93 (574) (161) (375) (646) Capex (274) (138) (162) (142) (144) Decr. in fixed assets Incr. in investment 383 (476) (49) (305) (637) Net incr. in intangible assets 0 2 (8) (15) (26) Others (53) C/F from financing (136) 545 (820) (377) (124) Incr. in equity 13 1, Incr. in debt (62) (461) (820) (336) (82) Dividends (80) (18) 0 (41) (41) Others (7) (1) 0 0 (1) C/F from others Increase in cash 97 (194) 93 (131) 77 Key financial data FY-ending Dec. 2009A 2010A 2011P 2012F 2013F Per-share data (KRW) EPS 310 (2,378) BPS 9,804 8,226 8,653 9,212 10,042 DPS Growth (%) Sales growth 7.8 (4.6) OP growth (33.1) NM NM NP growth (59.7) NM NM EPS growth (59.6) NM NM EBITDA growth (19.3) NM NM Profitability (%) OP margin 3.4 (5.3) NP margin 1.4 (11.3) EBITDA margin 5.2 (3.6) ROA 1.1 (8.1) ROE 3.1 (23.9) Dividend yield Stability Net debt (W bn) 2,326 2,071 1,228 1, Debt/equity ratio (%) Valuation (x) PER 41.3 NM PBR PSR EV/EBITDA 17.3 (25.5) Note: K-IFRS (consolidated) 3

4 Changes to recommendation and price target Company (Code) Date Recommendation Price target Daewoo E&C (047040) BUY W13, BUY W17,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 4

5 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 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 Daewoo Engineering & Construction. 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 Daewoo Engineering & Construction in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from Daewoo Engineering & Construction 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 Daewoo Engineering & Construction in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in Daewoo Engineering & Construction s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of Daewoo Engineering & Construction shares as of February 9, 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 February 9, Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of Daewoo Engineering & Construction 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. 5