Earnings Review April 30, 2014 GS E&C (006360) Above In line Below 12M rating Hold (Maintain) Earnings direction shifts, now focus on recovery pace Stock Data KOSPI (Apr 29, pt) 1,965 Stock price (Apr 29, KRW) 35,300 Market cap (USD mn) 2,432 Shares outstanding (mn) 71 52-Week high/low (KRW) 40,550/26,600 6M avg. daily turnover (USD mn) 25.6 Free float / Foreign ownership (%) 69.1/19.2 Major shareholders (%) Chang-Su Hur and 15 others 28.9 Valuation 2013A 2014F 2015F PE (x) NM 12.2 13.2 PB (x) 0.5 0.6 0.6 ROE (%) (25.5) 6.0 4.3 EV/EBITDA (x) (4.6) 20.3 10.4 EPS (KRW) (16,711) 2,903 2,671 BPS (KRW) 57,641 61,096 63,449 Performance 1M 6M 12M Absolute (%) 6.6 2.5 30.3 Relative to KOSPI (%p) (8.0) (8.1) 10.2 12MF PB trend What s new: Close to market expectations, GS E&C becoming stable GS E&C posted an operating loss of W18bn in 1Q14, in line with the consensus. Although net losses continued, results are becoming increasingly stable every quarter. Stripping out a W30bn increase in COGS due to accounting changes (deduction from housing division sales to reversal as bad debt provisioning in SG&A entry), COGS-to-sales ratio would have improved sharply from 104.3% in 1Q13 to 96.0% in 1Q14. SG&A expenses should be limited to W100bn, W55bn less than a year ago, even without factoring in the accounting change. Overall, strong cost controls across the company are positive. Pros: Liquidity risk fading Liquidity risk is fading. After the recent sale of Yong-in technical research institute (sale price W61bn, book W59.4bn), GS E&C is planning to sell additional assets, including Parnas Hotel (65% stake, BV W470bn, estimated sale price W600-700bn) in June and Seogyo XI (BV W74.9bn) and Daechi XI (BV W47.7bn) model houses this year. If these assets are sold smoothly, the company should raise W1.3tn in liquidity, including a W552bn increase in capital by issuing new shares. Unstarted PF dropped from W1.38tn in end-2013 to W1.04tn in March on loan rollovers and cash repayments. In addition, the company will start unstarted PF projects from Gimpo Han-river on May, reducing unstarted PF to W700bn by June and W500bn by end-2014. Of note, most of the PF that should have expired in April appears to have been extended without difficulty. Funding conditions are improving for GS E&C via new stock issues and assets disposals. 1.6 (X) (KRW) 12MF PB (L) Price (R) 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 May-09 May-10 May-11 May-12 May-13 Source: WISEfn consensus 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Cons: Net losses continue at civil and power business, tough public market condition in Korea Although GP turned profitable, the civil and power businesses continued to post net gross losses with COGS ratios of 103.7% and 104.6%, respectively, comprised mostly of domestic projects, including Samchuk Green power and several civil projects. The company failed to improve margins through design changes, suggesting the domestic public market is getting tougher. This is a problem for other construction players as well. Conclusion: 0.7x diluted PB after issuing new stocks, success in asset sales key Excluding the possibility of disruptions in future construction work, we believe most predictable losses have already been reflected before issuing new stocks and, Kyung ja Lee 822-3276-6155 kyungja.lee@truefriend.com Hyungjun Ahn 822-3276-4460 hyungjoon@truefriend.com (W bn, %, %p) 1Q14P Change 2014F KIS est. Actual Diff. Consensus QoQ YoY KIS Consensus Sales 1,755 2,041 16.2 2,056 (30.0) 20.5 9,955 9,983 OP (11) (18) NM (20) NM NM 108 72 OP margin (0.6) (0.9) -0.3pt (1.0) 5.1pt 32.3pt 1.1 0.7 EBT (61) (36) NM (47) NM NM 177 91 NP (61) (19) NM (34) NM NM 177 72
thus, concerns over balance sheet cleanliness have faded. Expected PB post rights offering stands at 0.7x, which reflects less liquidity risk, in our view. Downside risks have ebbed, but it is time to examine if there is upside to lift valuations. Only if major assets, including Parnas, are successfully sold, will the company s credit rating improve and earnings begin to recover materially. We believe GS E&C will re-emerge as a long-term buy-and-hold stock, rather than a short-term trade, once there are signals that the current problematic projects, including UAE Ruwais, are finalized without trouble, under the precondition that the asset sales are successfully achieved. Table 1. 1Q14 earnings 1Q13 2Q13 3Q13 4Q13 1Q14P 2Q14F 3Q14F 4Q14F 2013 2014F Sales 1,709 2,285 2,429 3,159 2,041 2,210 2,384 3,320 9,581 9,955 Civil 219 283 376 269 252 251 279 419 1,147 1,201 Plant 471 831 1,085 1,409 890 961 1,108 1,081 3,796 4,040 Power 262 320 349 114 206 219 208 477 1,044 1,110 Building/Housing 693 789 567 1,306 640 764 774 1,326 3,354 3,504 (Domestic) 1,008 1,122 873 1,603 799 847 1,174 1,782 4,606 4,604 (Overseas) 701 1,162 1,556 1,557 1,242 1,363 1,209 1,537 4,976 5,351 COGS ratio (%) 122.8 100.9 99.9 100.2 97.5 94.8 92.9 93.4 104.3 94.4 Civil 113.4 90.3 94.9 95.5 103.7 90.0 90.0 81.8 88.0 90.0 Plant 203.0 120.9 102.0 114.1 94.2 98.0 95.0 96.7 123.2 96.0 Power 99.1 90.9 96.5 129.1 104.6 96.0 96.0 96.9 90.0 98.0 Building/Housing 83.6 89.4 101.2 83.7 96.3 92.0 90.0 93.7 87.5 93.0 (Domestic) 85.0 89.1 96.2 86.2 98.9 92.8 90.6 89.5 119.0 92.0 (Overseas) 177.1 112.4 102.0 114.6 96.5 96.0 95.0 98.0 118.9 96.5 SG&A 155 129 106 132 70 120 120 140 522 450 SG&A ratio % 9.1 5.6 4.4 4.2 3.4 5.4 5.0 4.2 5.4 4.5 OP (544) (150) (103) (139) (18) (4) 50 80 (937) 108 OPM % (31.9) (6.6) (4.2) (4.4) (0.9) (0.2) 2.1 2.4 (9.8) 1.1 EBT (533) (183) (106) (167) (36) 196 0 17 (988) 177 NP (412) (150) (87) (123) (19) 196 0 0 (772) 177 Net dbet 1,556 1,858 2,339 2,381 2,827 2,381 Debt ratio 255.8% 270.0% 264.0% 276.9% 301.7% 276.9% (W bn) 2
Table 2. Overseas projects and cost overruns in 2013 Project Contract Completion Contract Completed Residual Progress ERC Refinery Project Aug-07 Aug-16 2,194 403 1,790 18.4% Ruwais 4th NGL Train Project Jul-09 Feb-14 131 124 7 94.3% Ruwais 4th NGL Project Jul-09 Feb-14 1,221 1,185 35 97.1% Singapore C-913 DTL Aug-09 Jul-15 275 214 61 77.8% (W bn) Cost overrun Ruwais Refinery Expansion Project-PKG 7 Dec-09 Feb-14 632 601 31 95.1% (129) Ruwais Refinery Expansion Project -PKG 2 Dec-09 Feb-14 3,554 3,356 198 94.4% (237) BlackGold Project Aug-10 Jan-14 628 439 190 69.8% (9) Takreer Inter Refinery Pipeline-2 Oct-10 Mar-14 748 593 156 79.2% (128) IPC EVA Project Dec-10 Oct-13 451 439 11 97.5% (165) KNPC NLTF Project Apr-11 Aug-14 599 381 218 63.6% (249) DTL3 C925 Jul-11 Dec-16 179 85 93 47.7% DTL3 C937 Aug-11 Dec-16 221 135 86 61.1% KOC Wara Pressure Maintenance Project Sep-11 Sep-14 468 314 153 67.2% (66) Cilacap RFCC Project Sep-11 Dec-14 618 393 224 63.7% Bapco waste water treatment Oct-10 Jul-13 834 834 0 100.0% (29) Azzour transmission Oct-11 Oct-13 200 81 119 40.4% Fusionopolis 2A-Tower C Nov-11 Feb-15 146 28 119 18.9% Fusionopolis 2A-Tower AB Nov-11 Mar-14 187 110 77 59.0% PP-12 combined-fired power plant May-12 May-15 677 442 235 65.3% UGCC Ethylene Plant Jun-12 Sep-15 671 256 415 38.1% Rabigh II CP4 Jun-12 Jun-15 1,308 278 1,030 21.3% Rabigh Ⅱ Project UO1 Jun-12 Jun-15 603 124 480 20.5% Ng Teng Fong Hospital Jun-12 Jan-15 564 171 393 30.4% HCMC MRT Line1 CP2 Aug-12 Nov-16 338 54 284 16.0% STAR Project(Turkey) May-13 Aug-17 1,156 12 1,143 1.1% Vietnam NSRP Project Jun-13 Nov-16 1,351 51 1,300 3.7% Singapore Marina South Aug-13 Aug-16 577 49 527 8.6% Indonesia Aeonmall BSD City Sep-13 Apr-15 151 10 142 6.4% KLPE PJT Oct-13 Aug-14 1,518 9 1,509 0.6% Table 3. Unstarted PF schedule Project Construction Completion Contract PF Loan Status Han-river central May-14 May-17 568 174 54 Project approved Hwasung Banwol May-14 Feb-16 70 77 Designated as unit 2 planning area Donggyo dong Jan-15 May-17 63 75 Under review of Joint - Committee on Urban Construction Goyang Siksa #2 Mar-15 Dec-17 213 99 Filed application for approval of urban - planning project implementation Pyungtake Chunlwon Implementation of urban Apr-15 May-20 652 356 9 Dongsak planning project approved Yongin Dongbaek May-15 Apr-18 213 64 Project plan changes are - underway Sinbong #2 Nov-15 Oct-18 449 48 Applied for designation 83 as an urban planning area Osan Busandong Sep-15 Oct-18 223 110 Filed application for first 5 phase unit planning project Chungju Bangseo May-16 Jul-18 248 108 Implementation of urban - planning project approved Yangju Baeksuk Nov-16 Nov-19 1,039 237 Applied for designation as 18 an urban planning area Yongin Dongchun #2 Dec-16 Dec-19 223 20 Pushing for changes in 52 development plan (W bn) 3
Table 4. Paid-in capital increase Value 1) Total funding (W bn) 552 2) Expected price (KRW) 27,600 3) New shares 20,000,000 4) Total shares (pre-rights offer) 51,000,000 5) Treasury shares + trust treasury shares 1,439,281 6) Outstanding shares excl. treasury shares 4)-5) 49,560,719 7) Rights offer ratio 3)/4) 39.22% 8) New shares preferentially allocated to members of the ESOP 3)*20% 4,000,000 9) New shares allocated to existing shareholders 3)-8) 16,000,000 10) New shares issued for each existing share held 9)/6) 0.323 Table 5. Rights offer price calculation First offer price={(base price* (1-discount rate)}/{1+(rights offer ratio*discount rate)} Discount rate 20% Rights offer ratio 0.39 Base price (April 21 close, KRW) 37,200 Offer price 27,596 Table 6. Rights issue timetable Event Date Record date for new share allocation April 24 Subscription by ESOP members (scheduled) June 2-3 Subscription by existing shareholders (scheduled) June 2-3 Subscription by public (scheduled) June 9-10 Payment due date June 12 New share delivery (scheduled) June 24 New share listing (scheduled) June 25 4
Balance sheet FY-ending Dec. (W bn) 2012A 2013A 2014F 2015F 2016F Current assets 7,879 8,414 8,547 8,958 8,940 Cash & cash equivalent 1,430 1,866 1,493 1,216 1,213 Accounts & other receivables 4,305 4,475 4,978 5,629 5,617 Inventory 869 499 511 520 519 Non-current assets 3,897 4,013 3,005 2,830 2,831 Investment assets 760 769 629 640 639 Tangible assets 2,254 2,243 1,796 1,599 1,603 Intangible assets 221 195 59 60 60 Total assets 11,776 12,427 11,552 11,787 11,770 Current liabilities 5,361 6,137 5,307 5,551 5,435 Accounts & other payables 2,446 2,736 2,212 2,533 2,528 ST debt & bond 501 702 552 432 402 Current portion of LT debt 552 1,356 1,056 1,026 996 Non-current liabilities 2,486 3,131 2,909 2,779 2,726 Debentures 872 827 307 207 207 LT debt & financial liabilities 699 1,529 1,479 1,429 1,379 Total liabilities 7,847 9,268 8,216 8,330 8,161 Controlling interest 3,628 2,864 3,040 3,160 3,311 Capital stock 255 255 255 255 255 Capital surplus 159 159 159 159 159 Capital adjustments (145) (145) (145) (145) (145) Retained earnings 3,398 2,617 2,793 2,913 3,064 Minority interest 300 295 296 297 298 Shareholders' equity 3,928 3,159 3,336 3,457 3,609 Income statement FY-ending Dec. (W bn) 2012A 2013A 2014F 2015F 2016F Sales 9,569 9,566 9,955 10,13 2 10,111 COGS 8,804 9,945 9,397 9,365 9,305 Gross profit 765 (379) 558 766 806 SG&A expense 589 556 450 500 510 Operating profit 176 (935) 108 266 296 Financial income 228 212 23 20 18 Interest income 51 61 23 20 18 Financial expense 159 244 161 134 124 Interest expense 77 131 161 134 124 Other non-operating profit (67) (35) 200 17 20 Gains (Losses) in associates, subsidiaries and JV 4 10 7 7 7 Earnings before tax 182 (993) 177 176 217 Income taxes 87 (166) 0 43 52 Net profit 95 (827) 177 133 164 Net profit of controlling interest 86 (828) 176 132 163 Other comprehensive profit (19) 67 0 0 0 Total comprehensive profit 76 (760) 177 133 164 Total comprehensive profit of controlling interest 70 (760) 176 132 163 EBITDA 281 (829) 169 325 355 Cash flow FY-ending Dec. (W bn) 2012A 2013A 2014F 2015F 2016F C/F from operating 170 (1,154) (204) (61) 199 Net profit 95 (827) 177 133 164 Depreciation 64 58 60 58 58 Amortization 41 49 1 1 1 Net incr. in W/C (87) (322) (598) (257) (18) Others 57 (112) 156 4 (6) C/F from investing (295) (65) 878 122 (53) CAPEX (64) (177) (63) (61) (62) Decr. in fixed assets 1 155 450 200 0 Incr. in investment 83 (79) 147 (4) 8 Net incr. in intangible assets (6) (19) 135 (2) (1) Others (309) 55 209 (11) 2 C/F from financing 58 1,645 (1,046) (338) (148) Incr. in equity 10 1 0 0 0 Incr. in debts 0 0 (1,045) (325) (135) Dividends (50) (13) 0 0 (12) Others 98 1,657 (1) (13) (1) C/F from others 6 10 0 0 0 Increase in cash (62) 435 (372) (277) (2) Key financial data FY-ending Dec. 2012A 2013A 2014F 2015F 2016F per share data (KRW) EPS 1,744 (16,711) 2,903 2,671 3,298 BPS 72,626 57,641 61,096 63,449 66,410 DPS 250 0 0 250 250 Growth (%) Sales growth 5.7 (0.0) 4.1 1.8 (0.2) OP growth (59.2) 0.0 0.0 146.1 11.1 NP growth (79.6) 0.0 0.0 (24.9) 23.5 EPS growth (79.6) 0.0 0.0 (8.0) 23.5 EBITDA growth (43.1) 0.0 0.0 92.1 9.1 Profitability (%) OP margin 1.8 (9.8) 1.1 2.6 2.9 NP margin 0.9 (8.7) 1.8 1.3 1.6 EBITDA margin 2.9 (8.7) 1.7 3.2 3.5 ROA 0.8 (6.8) 1.5 1.1 1.4 ROE 2.3 (25.5) 6.0 4.3 5.1 Dividend yield 0.5 0.0 0.0 0.7 0.7 Stability Net debt (W bn) 872 2,048 1,411 1,353 1,221 Debt/equity ratio (%) 71.2 143.9 104.9 91.9 84.3 Valuation (X) PE 30.4 NM 12.2 13.2 10.7 PB 0.7 0.5 0.6 0.6 0.5 PS 0.3 0.2 0.2 0.2 0.2 EV/EBITDA 14.3 (4.6) 20.3 10.4 9.1 Note: Based on K-IFRS (consolidated) 5
Changes to recommendation and price target Company (Code) Date Recommendation Price target GS E&C (006360) 05-03-12 BUY W158,000 06-14-12 BUY W128,000 10-28-12 BUY W95,000 11-11-12 BUY W64,000 02-07-13 Hold - 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 6
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 GS E&C. 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 E&C in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from GS E&C in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intend to seek compensation for investment banking services from GS E&C in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in GS E&C s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. owns over 1% of GS E&C shares as of April 30, 2014. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analyst/analysts who prepared this report nor their associates own any shares of the company/companies covered in this report as of April 30, 2014. Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of GS E&C 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