Company Brief / Construction April 2, 212 12M rating BUY (Maintain) 12M TP W158, from W158, Up/downside +67% Stock Data KOSPI (Apr 18, pt) 2,5 Stock price (Apr 18, KRW) 94,6 Market cap (USD mn) 4,386 Shares outstanding (mn) 51 52-Week high/low (KRW) 134,5/74,1 6M avg. daily turnover (USD mn) 32. Free float / Foreign ownership (%) 66.6/34.8 Major shareholders (%) Chang-Su Hur and 17 others 3.4 National Pension Service (NPS) 8.2 Performance 1M 6M 12M Absolute (%) (7.7) 4.3 (23.1) Relative to KOSPI (%p) (6.2) (4.7) (16.9) 12MF PE trend (x) 25. 2. 15. 1. 12MF PBR (LHS) price (RHS) (KRW) 2, 15, 1, April blossom USD3.3bn construction starts and USD5.6bn order flow in 2Q What GS E&C needs most is earnings visibility. The start of the delayed USD2.2bn Egyptian Refining Company (ERC) project in May will spur growth. When construction starts, the 213F PE will drop from 8.7x to 8.2x. In 2Q12, GS E&C will start work on the USD1.1bn Nghi Son refinery in Vietnam. Also in 2Q12, the firm will receive bidding results for 1) UAE s USD3.2bn Carbon Black refinery, 2) Saudi Arabia s USD9mn PP12 power plant and 3) USD1.5bn (or more) Petro Rabigh phase II. As such, GS E&C is ready to ride the momentum of USD3.3bn in construction starts and USD5.6bn order flow in 2Q12 alone. Market diversification more crucial than gaining share The steady market share expansion in the Middle East (ME) downstream industry since 25 will not be enough for Korean builders to achieve sustainable growth. 212 will be a transitional period for the builders undergoing diversification to differentiate themselves. As the weak order inflow over the past two years gave GS E&C a chance to learn about pioneering new markets, it is ready to deliver results in 212. GS E&C s main forte is its various affiliates that will help the advance on new markets. 1) GS Energy securing UAE oil fields should provide an upstream catalyst. 2) Former affiliate LG Chem s petrochemical complex in Kazakhstan should lead to orders. 3) The refiner GS Caltex s heavy oil upgrade (HOU) projects in Korea should generate orders while the ME refinery market shifting to HOU technology delivers additional orders. Through regional diversification, GS E&C could expand the portion of non-me projects in its 212 overseas orders to 4% from the past three-year average of 24%. 5.. 27 28 29 21 211 Source: WISEfn consensus 5, After a lull, big upswing expected in 2Q12 In the long-term, GS E&C is moving in the right direction after many trials and errors to diversify its market base. As materializing results should push a strong rally in 2Q12, we maintain BUY and TP of W158, (SotP). A surprise upside could be found in the USD15bn Clean Fuel refinery in Kuwait for which the bidding schedule might be advanced from 213 to Jul 212. While this project is not included in the 212 order target, it may provide the biggest momentum boost if tendered in 212. Kyungja Lee 822-3276-6155 kyungja.lee@truefriend.com Yongsok Song 822-3276-6184 songyongsok@truefriend.com 21A 211A 212F 213F 214F Sales (W bn) 8,42 9,52 9,91 1,824 11,772 OP (W bn) 633 598 577 689 718 EBT (W bn) 556 564 59 713 757 NP of controlling int. (W bn) 397 424 444 536 569 EBITDA (W bn) 682 661 638 75 78 Net debt (W bn) (641) (63) (126) (226) (319) OP margin (%) 7.5 6.6 5.8 6.4 6.1 ROE (%) 11.6 11.6 11.4 12.5 12. Dividend yield (%).9 1.1 1. 1.1 1.3 EPS (KRW) 8,3 8,563 8,964 1,828 11,5 chg. (% YoY) 4.9 6.6 4.7 2.8 6.2 BPS (KRW) 71,244 74,846 81,61 9,66 98,894 DPS (KRW) 1, 1, 1, 1,1 1,4 PE (x) 14.4 1.8 1.6 8.7 8.2 PB (x) 1.6 1.2 1.2 1.1 1. EV/EBITDA (x) 7.9 7.2 7.6 6.3 6.
April blossom We maintain BUY and TP of W158, (SotP). GS E&C was one of the biggest large-cap decliners over the past two months. The stock is expected to make a strong rebound in 2Q12 on 1) earnings upside backed by the groundbreaking for delayed projects, 2) upcoming refinery tenders, the company s major target market and 3) mid to long-term growth potential via new market expansion geared toward energy projects. TP valuation (W bn, KRW, x) 1) Operating value 6,654 Base NOPLAT Target multiple 2) Investment assets 1,237 SOC securities Value Remarks 459 212-213F avg. 14.5 Major builders target multiple 43 Investment securities 87 3) Net debt (126) 212F Shareholders value (1+2-3) 8,18 Outstanding shares ( ) 51, Value per share (KRW) 158, Source: Korea Investment & Securities Premium given individually; after-tax basis What GS E&C needs most is earnings visibility. The groundbreaking for the delayed USD2.2bn ERC refinery in May should give rise to strong growth for the builder. From the project, GS E&C should gain USD3mn in advanced receipts in May and ~W5~7bn p.a. in OP until 216. The earnings have not yet been factored in our estimates but if priced in, the 213F EPS would rise 7% and drive down the 213F PE to 8.2x. The overseas backlog to sales ratio is a good indicator of mid to long-term growth potential. GS E&C currently has the second highest ratio after Samsung C&T (including USD4bn UK IGCC project). Revised earnings when ERC project starts (x) 213F 214F 215F 216F 1) Sales growth 5.1% 5.6% 5.1% 5.6% 2) EPS growth 7.% 6.9% 6.5% 7.3% PE at current estimates 8.7 8.2 7.9 7.8 PE when ERC project is priced in 8.2 7.7 7.4 7.2 Source: Korea Investment & Securities Market diversification more crucial than gaining share The sustainable market share expansion geared toward the ME downstream industry since 25 will not be enough for Korean builders to achieve robust growth in future. 212 will be a transitional period for the builders undergoing diversification to differentiate themselves from rivals. The past two years marked by weak order inflow was a learning period for GS E&C to familiarize itself with market diversification. We believe the builder took this opportunity to build up confidence about securing long-term growth drivers. Considering a two-to-three years learning curve to pioneer a new market, GS E&C should be able to deliver visible results in 212. A great deal of momentum will be unleashed in 2Q12 alone. In addition to the ERC refinery, construction will start for the USD1.1bn Nghi Son refinery in Vietnam. Commencement of a project for which execution was uncertain is a stronger momentum builder than new orders because it enhances earnings visibility. In terms of new orders in 2Q12, GS E&C will receive bidding results for the USD3.2bn Carbon Black refinery in the UAE for which the EPC value was bumped up from the initial USD1.5bn. GS E&C is also expected to win orders worth USD1.5bn from the Petro Rabigh phase II in Saudi Arabia. The final bid results will be announced after Apr 3, the due date to validate commercial bid participation. As for the PP12 power plant worth USD9mn, GS E&C is to be officially named as the lowest bidder. As such, GS E&C should start undertaking projects worth USD3.3bn and win orders worth USD5.6bn in 2Q12 alone. Meanwhile, LG Chem is expected to issue tenders for its USD4bn petrochemical complex in Kazakhstan in Jul 212, a year ahead of schedule. Thus, GS E&C will be able to achieve its full-year overseas order target of USD9bn in 212. In particular, the non-me projects should represent more than 4% of the overseas orders in 212. The portion of non-me orders averaged 24% of the company s total overseas orders for the past three years. Overseas backlog-to-sales ratio (212) (x) Samsung C&T GS E&C Hyundai E&C Daewoo E&C Daelim Ind. Samsung Eng. 5. 3.8 3.1 2.5 2.4 2.1 Note: 1) IGCC/CCS included for Samsung C&T 2) Considered Hyundai E&C s stake in Hyundai Eng. (72.6%) Source: Company data, Korea Investment & Securities 2
Major Korean builders ME plant market share and countries penetrated (since 2) 16 12 8 4 (USD bn) (%) ME plant market (LHS)? 35 Major builders' m/s (RHS) 3 25 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 12F 2 15 1 5 GS E&C would gain a sharper competitive edge in the ME refinery market that is currently shifting to HOU technology. Key potential projects with current and former affiliates AREA 2 AREA 3 AREA 1 3 25 2 15 1 5 28 Hyundai E&C 26 26 GS E&C Daewoo E&C No. of countries for new orders post-2 24 Samsung C&T Source: MEED Projects, ICAK, Korea Investment & Securities 22 Samsung Eng. 9 Daelim Ind. GS E&C s main forte lies in its various affiliates that will help the builder advance on new markets. First, GS Energy secured oil fields in the UAE in Mar 212 that should lead to upstream tenders in 213. Second, although the former affiliate LG Chem s petrochemical complex in Kazakhstan will use an open bidding process, GS E&C has a better chance of winning orders. Third, GS E&C should continue to receive orders from GS Caltex to build HOU facilities for the refiner. Backed by the track record from the projects, Reserve: 57mn barrels (two onshore and one offshore drilling areas) Ownership: ADNOC 6%, Korea National Oil Corp. 34%, GS Energy 6% Remarks: Promising drilling areas could be discovered through further exploration of nearby regions Atyrau special economic zone LG Chem petrochem complex - EPC value: USD4bn - Capacity: Ethylene 84, tonnes - Capacity: PE 8, tonnes Source: GS E&C, MEED, Korea Investment & Securities Key overseas projects to materialize in 212 (USD bn) Country Project Amount Current status Egypt ERC refinery 2.2 Construction to start in May Vietnam Nghi Son refinery 1.1 Currently requested escalation; Construction to start in 2Q12 Saudi Arabia PP12 power plant.9 To be officially named as the lowest bidder in Apr Saudi Arabia Petro Rabigh phase II petrochemical 1.5 Result to be announced after Apr 3 Venezuela Gas plant 1. Expected to receive order within 2Q12 Kazakhstan LG Chem petrochemical complex (ethylene cracker/polyethylene) 4. JV with European builder; Bidding in Jul, one year head of schedule UAE Carbon Black refinery 3.2 Scaled up from USD1.5bn; Bidding to close Apr 23 Source: Company data, Korea Investment & Securities GS E&C is a builder with steady growth that was on a temporary break Note: The ERC project that was worth USD2.1bn at the time of order receipt has increased to USD2.2bn / Source: Company data, Korea Investment & Securities 3
Big 2Q12 rally after trials and errors Overall, the company is moving in the right direction, despite going through many trials and errors to diversify its business portfolio. We believe the effort will pay off with a big rally in 2Q12. In Mar, we visited GS E&C s construction site for the GS Caltex no. 4 HOU facility and it is worth recalling the following comment by GS E&C s COO: We must move on to the offshore (plant) segment rather than onshore, to the upstream (oil & gas production and refining facilities) segment rather than downstream (final oil & gas products) and to the brownfield (upgrade facilities) segment rather than greenfield (new facilities). The statement means we must view the builder s business strategy as a means to expand its presence in high value-added markets. Changes to recommendation and price target Company (Code) Date Recommendation Price target GS E&C (636) 7-19-1 Hold W9, 11-4-1 BUY W124, 1-7-11 BUY W158, 18, 16, 14, 12, 1, 8, 6, 4, 2, Apr-1 Aug-1 Dec-1 Apr-11 Aug-11 Dec-11 Apr-12 A surprise upside may be found in Kuwait s Clean Fuel refinery. The country is reviewing tenders for the New Refinery (a greenfield oil refinery) and the Clean Fuel refinery (an upgrade complex). Tenders for the two projects (each worth USD15bn) are expected to be issued in 213. However, there is talk that the Clean Fuel project could start the bidding process earlier in Jul 212. Although the market sees earlier-thanexpected Clean Fuel project tender unlikely and the project is not even included in GS E&C s 212 order target, it may provide the biggest momentum boost if tendered in 212. 4
Balance sheet FY-ending Dec. (W bn) 21A 211A 212F 213F 214F Current assets 7,644 7,782 7,483 7,953 8,446 Cash & cash equivalents 1,494 1,488 1,436 1,47 1,413 Accounts & other receivables 4,3 4,366 3,982 4,288 4,578 Inventory 419 495 58 555 64 Non-current assets 3,42 3,316 3,44 3,519 3,637 Investment assets 541 593 626 684 744 Tangible assets 2,348 2,195 2,21 2,24 2,28 Intangible assets 61 54 59 64 7 Total assets 11,46 11,99 1,887 11,472 12,83 Current liabilities 5,668 5,346 4,755 4,865 4,939 Accounts & other payables 3,9 3,5 2,745 2,947 3,161 ST debt & bonds 64 549 529 59 56 Current portion of LT debt 251 249 24 232 231 Non-current liabilities 1,67 1,794 1,826 1,864 1,948 Debentures 349 744 694 644 639 LT debt & financial liabilities 119 234 239 244 247 Total liabilities 7,275 7,141 6,581 6,73 6,886 Controlling interest 3,55 3,735 4,8 4,511 4,962 Capital stock 255 255 255 255 255 Capital surplus 161 16 16 16 16 Capital adjustments (84) (82) (82) (82) (82) Retained earnings 3,72 3,42 3,814 4,295 4,795 Minority interest 221 223 226 231 235 Shareholders' equity 3,771 3,958 4,36 4,742 5,197 Income statement FY-ending Dec. (W bn) 21A 211A 212F 213F 214F Sales 8,42 9,52 9,91 1,824 11,772 Gross profit 1,13 1,29 1,118 1,284 1,43 SG&A expenses 536 634 511 565 65 Other operating gains 4 23 (3) (3) (35) Operating profit 633 598 577 689 718 Financial income 113 28 338 344 351 Interest income 47 51 49 49 51 Financial expenses 188 257 41 367 35 Interest expenses 73 41 46 84 82 Other non-operating profit 68 32 24 Gains (Losses) in associates, subsidiaries and JV (2) 15 18 15 15 Earnings before tax 556 564 59 713 757 Income taxes 15 136 142 173 183 Net profit 46 427 447 54 574 Net profit of controlling interest 397 424 444 536 569 Other comprehensive profit (7) (194) (5) (5) (5) Total comprehensive profit 335 233 397 49 524 Total comprehensive profit of controlling interest 328 23 394 486 519 EBITDA 682 661 638 75 78 Cash flow FY-ending Dec. (W bn) 21A 211A 212F 213F 214F C/F from operations 257 (482) 248 312 312 Net profit 46 427 447 54 574 Depreciation 48 62 6 6 6 Amortization 1 1 1 1 1 Net incr. in W/C (451) (977) (286) (322) (357) Others 253 5 26 33 34 C/F from investing (178) 18 (177) (218) (221) Capex (1) (51) (71) (67) (64) Decr. in fixed assets 8 11 5 3 Incr. in investment (59) (1) (64) (93) (95) Net incr. in intangible assets (14) (2) (6) (6) (7) Others (13) 16 (41) (55) (55) C/F from financing (14) 364 (123) (123) (85) Incr. in equity Incr. in debt (73) (73) (31) Dividends (42) (51) (49) (49) (54) Others (62) 415 (1) (1) C/F from others (8) 5 Increase in cash (33) (6) (52) (29) 5 Key financial data FY-ending Dec. 21A 211A 212F 213F 214F Per-share data (KRW) EPS 8,3 8,563 8,964 1,828 11,5 BPS 71,244 74,846 81,61 9,66 98,894 DPS 1, 1, 1, 1,1 1,4 Growth (%) Sales growth 1.6 7.5 9.4 9.3 8.8 OP growth 3.7 (5.5) (3.5) 19.4 4.3 NP growth 4.9 6.6 4.7 2.8 6.2 EPS growth 4.9 6.6 4.7 2.8 6.2 EBITDA growth 4.1 (3.1) (3.4) 17.5 4. Profitability (%) OP margin 7.5 6.6 5.8 6.4 6.1 NP margin 4.7 4.7 4.5 4.9 4.8 EBITDA margin 8.1 7.3 6.4 6.9 6.6 ROA 3.9 3.9 4.1 4.8 4.9 ROE 11.6 11.6 11.4 12.5 12. Dividend yield.9 1.1 1. 1.1 1.3 Stability Net debt (W bn) (641) (63) (126) (226) (319) Debt/equity ratio (%) 39.9 5. 44.2 38.6 34.6 Valuation (x) PE 14.4 1.8 1.6 8.7 8.2 PB 1.6 1.2 1.2 1.1 1. PS.7.5.5.4.4 EV/EBITDA 7.9 7.2 7.6 6.3 6. Note: K-IFRS (consolidated) 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 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 GS 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 GS Engineering & Construction in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from GS 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 GS Engineering & Construction in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in GS Engineering & Construction s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of GS Engineering & Construction shares as of April 2, 212. 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 April 2, 212. Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of GS Engineering & Construction and is the liquidity provider. Korea Investment & Securities Co., Ltd. is the liquidity provider of single-stock futures and options underlying GS Engineering & Construction shares as of April 2, 212. 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.
HEAD OFFICE CHUN SOO LIM, Executive Vice President, Head of Global Institutional Group (cslim@truefriend.com +822 3276 58) PAUL CHUNG, Sales Trading (pchung@truefriend.com +822 3276 5843) 27-1 Yoido-dong, Youngdeungpo-ku, Seoul 15-745, Korea Toll free: US 1 866 258 2552 HK 8 964 464 SG 8 8211 32 Fax: 822 3276 5681~3 Telex: K2296 NEW YORK DONG KIM, Managing Director (dkim@kisamerica.com +1 212 314 681) ELAINE LIM, Head of Sales (Elaine@kisamerica.com +1 212 314 686) JU KIM, Sales (jukim@kisamerica.com +1 212 314 683) Korea Investment & Securities America, Inc. 135 Avenue of the Americas, Suite 111 New York, NY 119 Fax: 1 21 592 149 HONG KONG DANIEL KIM, Managing Director, Head of HK Sales (daniel.kim@kisasia.com +852 253 895) SANGME LEE, Merchandising Director (sangme.lee@kisasia.com +852 253 891) DAN SONG, Sales (dan.song@kisasia.com, +822-3276-5621) JUN HWAN KIM, Sales (jun.kim@kisasia.com, +852-253-8912) Korea Investment & Securities Asia, Ltd. Suite 221-2, Jardine House 1 Connaught Place, Central, Hong Kong Fax: 852-253-1516 SINGAPORE SUNG NAMGOONG, Managing Director, Head of Singapore Sales (snamgoong@truefriend.com +65 651 561) ALEX JUN, Sales (alex.jun@truefriend.com +65 651 562) Korea Investment & Securities Singapore Pte Ltd 1 Raffles Place, #43-4, One Raffles Place Singapore 48616 Fax: 65 651 5617 LONDON JJ MOON, Managing Director (jamesmoon@kiseurope.com +44 27 65 2765) MINGOO KANG, Sales (mingookang@kiseurope.com, +44 27 65 276) Korea Investment & Securities Europe, Ltd. 2nd Floor, 35-39 Moorgate London EC2R 6AR Fax: 44-27-236-4811 Telex: 8812237 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. While all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. This report is provided solely for the information of professional investors who are expected to make their own investment decisions without undue reliance on this report and the company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is not intended for the use of private investors. 212. All rights reserved. No part of this report may be reproduced or distributed in any manner without permission of Korea Investment & Securities Co.,Ltd.