Earnings Review November 15, 213 12M rating BUY (Maintain) 12M TP W13, from W13, Dongsung Finetec (335) Full-bore turnaround Above In line Below Up/downside +2% Stock Data KOSPI (Nov 14, pt) 1,968 Stock price (Nov 14, KRW) 1,8 Market cap (USD mn) 273 Shares outstanding (mn) 27 52-Week high/low (KRW) 11,65/6,56 6M avg. daily turnover (USD mn) 2.9 Free float / Foreign ownership (%) 61.5/5.6 Major shareholders (%) DongSung Holdings and 2 others 38.5 Valuation 212A 213F 214F PER (x) 19.9 18.3 1.9 PBR (x) 2.7 3.2 2.5 ROE (%) 14.6 19.4 26. EV/EBITDA (x) 15.7 13.7 8.4 EPS (KRW) 376 589 995 BPS (KRW) 2,747 3,336 4,332 Performance 1M 6M 12M Absolute (%) 9.8 21.6 4.3 Relative to KOSPI (%p) 12.4 21.7 36.4 12MF PER trend What s new: Earnings above estimates Dongsung Finetec s (Finetec) 3Q13 earnings beat our expectations. Sales reached W112.4bn (+51.1% YoY) and OP W8.7bn (-1% YoY), surpassing our figures by 7.7% and 14.1%, respectively. In particular, OPM improved substantially to 7.7% from 3.5% in 1Q13 and 3.7% in 2Q13 backed by greater insulation materials sales and a better sales mix. As such, we believe turnaround momentum has started to build up. Pros: Greater insulation materials sales and better sales mix bolstered profitability Finetec s 3Q13 OPM gained big ground as the insulation materials business saw bigger sales and its sales mix improved simultaneously. Finetec booked an estimate-beating W18bn in sales of high-margin products supplied to Hyundai Heavy Industries Gorgon project. Accordingly, OPM spiked QoQ 4.%p to 7.7% in 3Q13. In addition, Finetec started generating sales of reinforced polyurethane foam (R-PUF, a new core insulation material) to Daewoo Shipbuilding & Marine Engineering (DSME) from 3Q13, which helped bolster the sales mix. Although Gorgon project sales are expected to shrink in 4Q13, DSME s sales portion should grow and Finetec would be able to maintain its currently robust margins. We believe OPM will gradually slope upward in 214 as the company starts to recognize sales related to Samsung Heavy Industries Prelude FLNG project from 1H14. 3. (X) 12MF PER (LHS) (KRW) price (RHS) 25. 2. 15. 1. 5.. Dec-8 Dec-9 Dec-1 Dec-11 Dec-12 Source: WISEfn consensus 12, 1, 8, 6, 4, 2, Cons: Gas cylinder division again made a loss; Part of the business to be sold in 4Q13 Finetec s gas cylinder division continued to spill red ink in 3Q13 with an operating loss of W1.6bn. The company plans to sell the compressed natural gas (CNG) segment in 4Q13 and the specialty container segment in 1H14. If the disposal of the gas cylinder division proceeds as planned, non-insulation division s OPM should stabilize and lead to company-wide better profitability. Conclusion: Earnings turnaround, robust orders, new product certification to be confirmed in 4Q13 We maintain BUY and a TP of W13, at 13.5x 12MF PE (mid-cycle). OPM started a full-bore turnaround from 3Q13 and should remain solid. The ship insulation business received YTD 213 orders worth W255bn and anticipates a Richard Park, CFA 822-3276-6175 richard.park@truefriend.com Chulhee Cho 822-3276-6189 chulhee.cho@truefriend.com (W bn, %, %p) 3Q13P Change 213F KIS est. Actual Diff. Consensus QoQ YoY KIS Consensus Sales 15.5 112.4 6.6 14.4 18.7 51.1 46.4 395.9 OP 7.5 8.7 15.6 7.6 147.7 (1.) 23.8 24.5 OP margin 7.1 7.7.6 7.3 4. (5.2) 5.9 6.2 EBT 6.5 7.7 17.9 NA 489.3 (1.) 17.7 NA NP 5.1 7.7 5.1 5.5 596.1 (4.5) 15.9 15.8
Dongsung Finetec (335) further W5bn+ during the remainder of the year, including membranes and pipe insulation. As such, orders would remain steady with annual sales climbing to new highs in 213 as well. In particular, R-PUF certification by Gaztransport & Technigaz (GTT, France-based marine engineering firm) should be finalized sometime between end-november and early-december. Accordingly, the new product effect should lead to greater market share and better margins for orders from 2H14 at the earliest. Table 1. Earnings (W bn, %) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13F 211 212 213F 214F Sales 38.2 5.1 74.4 76.7 9.8 94.7 112.4 18.6 177.6 239.4 46.4 42.1 Insulation 11.2 2.5 37.4 46.2 67. 64.2 83.3 76. 57.6 115.3 29.4 311.6 Ships 1.9 18.7 36.2 45.1 64.8 61.9 81.8 73.9 49.8 11.7 282.4 32.8 Onshore transport.4 1.8 1.2 1.2 2.2 2.3 1.5 2.1 7.8 4.6 8. 8.8 Non-insulation 26.9 29.6 37. 3.5 23.8 3.5 29.1 32.6 12.1 124.1 116. 18.5 PU systems 5. 6.3 11.3 1.1 6.1 8.3 8.1 1.2 22.6 32.6 32.6 33.9 Panels 12.7 14.5 14.3 1.6 7.7 13.6 13.5 14.6 41.8 52. 49.4 51.4 Fire fighting systems 1.5 1.4 1.7 2.5 1.2 1.6 1.3 1.5 7.1 7. 5.6 5.9 Refrigerants 3.7 3.6 3.1 2.9 2.9 3.2 3.5 4. 17.7 13.2 13.6 14.3 Gas cylinders 4.1 3.9 6.6 4.6 6. 3.7 2.7 2.3 3.8 19.2 14.8 3. OP 1.8 1.2 9.6.5 3.2 3.5 8.7 8.4 (1.7) 15.5 23.8 39.2 OPM 4.7 2.3 12.9.7 3.5 3.7 7.7 7.7 (1.) 6.5 5.9 9.3 Note: KIS estimates for annual OPM of insulation and non-insulation from 212 Source: Korea Investment & Securities Figure1. Order receipts on a steady rise 36 34 32 3 28 26 24 22 (W bn) Insulation (ships) orders 2 211 212 213F 214F 215F 2
Dongsung Finetec (335) Figure2. Quarterly earnings OPM turnaround in 3Q13 Figure3. Annual earnings OPM to soar in 214 (W tn) Sales (L) (%) 15 15 OPM (R) (W tn) Sales (L) (%) 6 1 OPM (R) 12 12 5 8 4 9 9 6 3 6 6 2 4 3 Loss in high-pressure gas cylinder inventory obsolescence 3 1 Poor OPM due to fewer orders at insulation business 2 1Q12 3Q12 1Q13 3Q13 1Q14F 3Q14F 29 21 211 212 213F 214F Figure4. Finetec s R-PUF specs: 27mm,.1% BOR Figure5. 12MF PE band 2, (KRW) 16, 12, 8, 18x 16x 14x 12x 1x 4, Jan- Jan-3 Jan-6 Jan-9 Jan-12 Company overview & Glossary As a cryogenic insulation materials maker, Finetec dominates the domestic insulation materials market with Hankuk Carbon. Finetec s operations are largely divided between insulation (ships, onshore transport) and other (non-insulation) materials. As the other materials business generates steady sales with no significant changes, company-wide earnings hinge a lot on ship insulation business conditions. Of note, there was a gap in orders after the boom in LNG carrier tenders from Qatar during the mid-2s. But since 211, domestic shipbuilders have been enjoying strong order momentum for LNG carriers and accordingly, the insulation materials industry is approaching a second golden age. Cryogenic insulation materials: Used in low-temperature environments to prevent heat influx; Usually require materials to be waterproof or moisture resistant; Finetec s insulation materials are used in storage tanks installed in LNG carriers that transport gas at a temperature of -162 C Reinforced polyurethane foam (R-PUF): High-density foam reinforced with fiberglass used to protect storage tanks from impact caused by wind and waves Insulation panel: Actual insulation materials made from R-PUF used in an LNG carrier s cargo containment system Pipe insulation: Materials encasing pipes and used to prevent LNG vaporization; Widely used in FLNG-related facilities as well 3
Dongsung Finetec (335) Balance sheet FY-ending Dec. (W bn) 211A 212A 213F 214F 215F Current assets 68 161 183 189 196 Cash & cash equivalents 2 4 14 15 15 Accounts & other receivables 38 59 61 63 65 Inventory 26 89 93 97 1 Non-current assets 141 136 136 145 153 Investment assets 5 5 4 5 5 Tangible assets 128 124 125 133 141 Intangible assets 2 2 3 3 3 Total assets 29 297 319 334 35 Current liabilities 16 214 218 29 198 Accounts & other payables 21 36 37 38 39 ST debt & bonds 74 135 155 125 9 Current portion of LT debt 1 3 Non-current liabilities 38 8 14 15 15 Debentures 3 LT debt & financial liabilities Total liabilities 144 223 233 224 213 Paid-in capital 14 14 14 14 14 Capital surplus 43 43 43 43 43 Capital adjustments Retained earnings 9 18 34 61 91 Shareholders' equity 65 74 9 117 147 Income statement FY-ending Dec. (W bn) 211A 212A 213F 214F 215F Sales 178 239 46 42 437 COGS 164 25 351 348 361 Gross profit 13 34 56 72 75 SG&A expenses 15 19 32 33 34 Operating profit (2) 16 24 39 41 Financial income 1 2 2 Interest income 1 2 2 Financial expenses 7 8 7 6 5 Interest expenses 7 8 7 6 5 Other non-operating profit (1) 2 Gains (Losses) in associates, subsidiaries and JV Earnings before tax (9) 1 18 34 38 Income taxes () 2 8 8 Net profit (9) 1 16 27 3 Other comprehensive profit () (1) Total comprehensive profit (1) 9 16 27 3 EBITDA 6 23 31 47 5 Cash flow FY-ending Dec. (W bn) 211A 212A 213F 214F 215F C/F from operations 12 (42) 34 51 57 Net profit (9) 1 16 27 3 Depreciation 8 8 7 8 9 Amortization Net incr. in W/C 1 (63) 9 16 18 Others 3 3 2 C/F from investing (8) (1) (17) (18) Capex (2) (4) (8) (16) (17) Decr. in fixed assets 1 Incr. in investment 2 (3) () () Net incr. in intangible assets () () (2) () () Others (1) (1) (1) (1) C/F from financing (12) 52 (1) (3) (35) Incr. in equity Incr. in debt (12) 52 (1) (3) (35) Dividends Others C/F from others () () Increase in cash 2 14 4 4 Key financial data FY-ending Dec. 211A 212A 213F 214F 215F Per-share data (KRW) EPS (345) 376 589 995 1,14 BPS 2,418 2,747 3,336 4,332 5,436 DPS Growth (%) Sales growth (2.1) 34.8 69.8 3.4 3.9 OP growth.. 53.5 64.4 5.7 NP growth.. 56.8 69. 1.9 EPS growth.. 56.7 69. 1.9 EBITDA growth (67.9) 265.3 35.1 5.3 6.6 Profitability (%) OP margin (1.) 6.5 5.9 9.3 9.5 NP margin (5.2) 4.2 3.9 6.4 6.8 EBITDA margin 3.6 9.7 7.7 11.2 11.5 ROA (4.2) 4. 5.2 8.2 8.7 ROE (13.3) 14.6 19.4 26. 22.6 Dividend yield..... Stability Net debt (W bn) 112 158 135 14 68 Debt/equity ratio (%) 174.3 222.8 172.4 17.1 61.5 Valuation (x) PE NM 19.9 18.3 1.9 9.8 PB 1.5 2.7 3.2 2.5 2. PS.6.8.7.7.7 EV/EBITDA 35.2 15.7 13.7 8.4 7.2 Note: K-IFRS (non-consolidated) 4
Dongsung Finetec (335) Changes to recommendation and price target Company (Code) Date Recommendation Price target Dongsung Finetec (335) 9-24-13 NA - 1-17-13 BUY W13, 14, 12, 1, 8, 6, 4, 2, Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 5
Dongsung Finetec (335) 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 Dongsung Finetec. 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 Dongsung Finetec in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from Dongsung Finetec 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 Dongsung Finetec in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in Dongsung Finetec s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of Dongsung Finetec shares as of November 15, 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 November 15, 213. Prepared by: Richard Park 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. 6