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Changes in the ME and financial market
Issues in the ME: Aged facility upgrades and jobs creation The plant project market in the Middle East (ME) should bottom out in 4Q13. As a majority of the ME’s plants were built in the 1970s, there is a growing need for upgrades to respond to 1) tighter environmental regulations, 2) competition from shale gas and new plants in other regions and 3) increasing use of heavy oil as a feedstock. The ME’s strategy to respond to the changes is demonstrated in the Ras Tanura clean fuel and aromatics refinery projects now up for tenders. The ME must prepare for greater production of unconventional resources and to diversify industries for jobs creation. Thus, for the time being, new projects will likely be centered on infrastructure works in industrial clusters. After two straight years of negative growth, tenders from the ME & North Africa (MENA) region should grow 8% in 2013 and 11% in 2014. We expect to see a meaningful recovery of the downstream projects in the ME in 2015 as the financial burden will ease on the pay-down of large-scale project financing (PF). Major changes: Better financial market and eased competition We forecast a gradual recovery for the ME market because of better financial market conditions and solid oil prices. The PF market in the ME shrank from USD23bn in 2011 to USD8.5bn in 2012 amid the debt crisis in Europe. We can see investment capacity is improving at some European banks that were major lenders in the PF market. For example, Société Générale recently reported earnings growth. A wider range of capital sources is also noteworthy with money providers from the ME and North America and export-import banks claiming a bigger presence in the PF market. PF in the ME should pick up to USD25bn in 2013. Competition has eased from European rivals thanks to the strong EUR. As such, we expect to see market share go up for Korean builders. Not everyone will benefit: Companies with rapid M/S recovery While stable businesses focusing on infrastructure projects appear rewarding in 1H13, it will be better to buy firms specializing in hydrocarbon plants in the ME in 2H13. But there are risks. 1) Given the slow pace of economic recovery, it is difficult to expect another big upcycle in the ME market anytime soon. 2) Many Korean builders are forecast to report operating losses in 2H13. As such, we believe not every builder will enjoy benefits from the approaching upcycle, and thus remain Neutral. The most important virtue to reap benefits would be a competitive edge in engineering, procurement and construction (EPC) works, backed by in-house design ability. Daelim Industrial (Daelim) has this virtue and thus remains our top pick. We lift TP by 10% for Daelim. Hyundai Engineering & Construction (Hyundai E&C) remains our second pick on maximizing synergies with Hyundai Engineering.
PF market in the ME shrank amid the eurozone debt crisis but sees sign of recovery
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2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F
0
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60
70
GCC + Egy pt PF market (R)
MENA tender market (L)
(USD bn) (USD bn)Tenders in ME decreased on weak PF market due to
Europe economic crisis, but hav e improv ed recently
Source: MEED Projects, MEED Insight, Infrastructure Journal, Korea Investment & Securities
Sector Report / Construction
Construction
September 26, 2013
Neutral (Maintain)
Company Rating TP (KRW)
Daelim Industrial BUY 133,000 (↑)
Hyundai E&C BUY 75,000
Samsung C&T BUY 79,000
Samsung Engineering BUY 111,000
GS E&C Hold -
Hyundai Development Hold -
Daewoo E&C Hold -
Sector performance (12M)
0
500
1,000
1,500
2,000
2,500
Sep-12 Dec-12 Mar-13 Jun-13 Sep-13
-30
-25
-20
-15
-10
-5
0
Rel.to KOSPI (%p, RHS)
Construction & Engineering sector index (p, LHS )
(p) (%p)
Source: WICS provided by WISEfn
Kyunga ja Lee
822-3276-6155
Hyungjun Ahn
822-3276-4460
Sector report focus
� What is the report about?
• Examine the Middle East’s (ME) plant market as there are
recovery signals such as Saudi Arabia’s recent announcement to
invest USD70bn in a downstream complex and the UAE starting
bids for the first package of the Tacaamol chemicals complex
• Examine changes in the Korean and global EPC players’
strategies after heated competition in the ME during 2011-
2012 and the possibility of Koreans regaining market share
� Key assumptions and valuation
• Assuming large builders’ overseas orders jump 28.3% YoY to
USD48.5bn in 2013; This would equal 85.4% of each
company’s guidance
• We expect 2013 overseas orders to grow YoY due to volume from
non-ME markets such as South & Central America and ASEAN
countries in 1H13; Moreover, we expect the ME market (a
conventional market for Korean players) to recover in 2H13
• Although the ME market is currently passing a bottom, a big
upcycle is unlikely given the slow economic recovery; As many
builders still need to control problem backlogs, companies well
able to regain market share backed by technological
capabilities stand to benefit
• Such beneficiaries include Daelim Industrial and Hyundai E&C;
We also look forward to a comeback by Samsung Engineering
over the long-term if it can straighten out problem sites
Anticipated 2013 overseas orders by builder (USD mn)
Samsung
Engineering Hyundai
E&C Daelim
Industrial GS E&C
Daewoo E&C
Samsung C&T
2011 orders 6.0 5.2 5.8 5.9 5.3 5.2
2012 orders 8.5 10.5 3.2 4.0 6.2 5.4
% of 2012 target 70.8% 104.0% 45.7% 44.4% 96.9% 77.1%
1) 2013 guidance 13.0 11.4 8.0 6.0 7.4 11.0
2) YTD contracts 3.7 5.5 4.0 2.3 2.2 11.4
3) Incl. secured YTD contracts
7.5 9.4 5.1 4.8 4.6 13.7
% of 2013 target (3/1) 57.4% 82.5% 63.8% 80.0% 62.2% 124.6%
5) 2013F (2+4) 6.5 10.0 6.0 6.0 6.0 14.0
% of 2013F target (5/1) 50.0% 87.7% 75.0% 100.0% 81.1% 127.3%
� Sensitivity & scenario analysis
• If 2013 overseas orders are 10% less than assumptions, 2014
OP would be 3.6% less than previous estimates for Hyundai
E&C, 5.6% for Samsung C&T, 4.9% for GS E&C, 4.0% for
Daelim Industrial, 3.6% for Daewoo E&C and 11.0% for
Samsung Engineering
� Risks/opportunities
• Sharp economic downturn and oil price drop may lead joint
ventures to withdraw investment and the financial sector to
become risk averse, leading to fewer ME projects
� Sector highlights
1) ME needs to upgrade existing plants
• As plants in the ME were mostly built during the 1970-80s,
they are in dire need of modernization; Notable examples
include Kuwait’s Clean Fuels Project (CFP) and Saudi Arabia’s
Ras Tanura Clean Fuels and Aromatics complex
• Due to stricter environmental regulations, new plants that recently
started coming on-stream across the globe, the emergence of
shale gas and changes to feedstock (greater weighting of heavy
oil), there is an urgent need to invest in Brownfield (upgrade)
projects rather than Greenfield (new) projects
2) Establishment of industry clusters for jobs creation and
economic conditions to become long-term variables
• Many ME countries have announced plans to invest in
refinery-linked downstream complexes to pursue diversity;
Plans should accelerate from 2015 and onward after
infrastructure projects are tendered
3) Better financial market conditions and high oil prices to
stimulate the ME plant market
• Due to the sharp oil price drop in 2012, Europe’s financial
players exited the ME’s PF market; But given that earnings
have been recently improving at some European banks and
ECAs, and ME funds have been gaining strength, the PF
market should recover from the bottom in 2012
• Tight oil and shale gas have great potential given their ample
reserves; But given the lack of economic feasibility, they are
unlikely to trigger a decline in oil prices
Orders receipts and share in ME plant market
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25
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2001
2002
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2007
2008
2009
2010
2011
2012
2013F
0%
5%
10%
15%
20%
25%Major builders' plant orders in ME (L)
Major builders' M/S in ME plant market (R)
(USD bn)
Source: MEED Projects, company data, Korea Investment & Securities
� Peer comparison
• Given the stronger EUR compared to 2012, some EPC
companies in Europe are suffering from profitability erosion
like those in Korea; As such, an irrational competitive
environment similar to 2012 is unlikely to materialize in 2013
• As Japanese firms are focusing on North America’s LNG and
ethylene markets, they are unlikely to compete directly with
Korean players (see Table. 5 for valuations)
I. Investment summary ............................................................................................................................................................... 2
Bottoming out ME market
Weak earnings power vs. better fundamentals to win orders
Pick Daelim Industrial and Hyundai E&C if reconsidering ME plays
II. ME bottoms out ............................................................................................................................................................................ 8
Key words are aged plants and unemployment
Key word 1. Need to modernize facilities
Key word 2. Industrial cluster building activity to peak in 2015, economy is the key
2-1) Saudi Arabia: Infrastructure investment through 2014
2-2) UAE’s first downstream project tender
2-3) Kuwait and Oman waking from slumber?
III. Changes in the market .................................................................................................................................................... 20
Change 1. Financial market turning for the better; PF market to regain the 2011 level
Change 2. Solid oil prices and controlled progress of unconventional resources development
IV. Changes at companies ................................................................................................................................................... 25
Back to basics: Engineering competitiveness
Path that Korean EPC firms must tread
Competitor analysis: European players in a similar plight, desperate to clear away bad orders
Competitor analysis: Japanese builders focused on US market
Glossary ...................................................................................................................................................................................................... 32
Top picks ....................................................................................................................................................33
Daelim Industrial (000210)
Hyundai E&C (000720)
Contents
Construction
2
I. Investment summary
Bottoming out ME market
The plant market in the MENA region peaked in 2010 but then started to decline
and shrank 17% YoY in 2012. Hoping to widen its industrial foundation, the ME has
been investing but it was mainly focused on energy infrastructure such as power
plants and upstream projects. In contrast, hydrocarbon plant projects, a major
market for Korean EPC players, were left in limbo. As companies vied for limited
opportunities, it led to cutthroat competition and earnings shocks at Korean
builders and some European players as well.
Meanwhile, a recovery sign was detected in the ME at the beginning of 2H13.
Project tenders (YTD) from the region picked up YoY for the first time in July. And
tenders from the MENA region should grow 8.2% YoY in 4Q13 given the Jizan
integrated gasification combined-cycle (IGCC) project and the Ras Tanura clean
fuel and aromatics upgrade in Saudi Arabia, and the upstream projects in Iraq.
Nonetheless, overall tenders should be less than a year ago in 2012 but we
believe the ME plant market is currently passing a bottom as increasingly more
projects will likely be offered for bid in 1H14. We have two questions: Which
projects are up for bid and what spurs the ME to resume the delayed projects?
In the ME, the well of new projects is unlikely to dry up. Basically, jobs creation is
an important issue in the ME countries so that ruling parties/families can hold onto
power. As part of the efforts, each country has lowered their economy’s
dependence on oil exports and pursued industrial diversification. For example,
Saudi Arabia recently awarded contracts worth USD22bn to build a metro system
in Riyadh. At first thought, it appears the country has no reason to spend so much
on a subway system given its large oil reserves. From a larger perspective,
building the metro is part of the country’s long-term road map toward widening the
industrial base.
As such, the ME countries need to continue investment for industrial diversification
as it will lead to jobs creation. Meanwhile, it is the economy that determines the
timing and scale of projects. While numerous downstream plants will be
established in the ME’s industrial clusters, production from the plants cannot be
fully absorbed within the region. Therefore, it is essential to invite multinational
chemical firms as a joint investor or global financial institutions as a provider of
project financing. We forecast the ME’s project tenders market will eventually turn
for the better given 1) a likely economic recovery, 2) less volatile oil prices and 3)
better financing conditions.
As we studied the possibility of orders for each project from a bottom-up approach,
we found that the ME countries face some pressing issues. 1) As a majority of the
plants in the region were built in the 1970s, there is a growing need for upgrades
(so-called brownfield investment) to respond to global environmental regulations
and restore the competitiveness of existing facilities. The Ras Tanura clean fuel
and aromatics project scheduled for tender in October is a good example. 2) The
long-term plan to build industrial clusters for jobs creation becomes more visible.
Recently, Saudi Arabia announced its plan to investment USD70bn to build a
downstream complex. The UAE issued a tender for the first package of the
Tacaamol chemicals complex although the project has been adrift since 2010.
Certainly, orders for the downstream complexes will likely be witnessed in earnest
in 2015 and onward after infrastructure investment shows some progress and the
economic recovery materializes.
After peaking in 2010,
ME projects shrank
through 2012
ME recovery sign
detected in 2H13;
Although at a slow pace,
the market is bottoming
out
ME countries are in
pressing need to create
jobs for political
reasons: ME projects
will not likely decline
fast
ME countries have
reasons to spend;
Timing and scale will
hinge on economy and
financial market
conditions
In the ME, upgrading
aged facilities and
issuing tenders for
infrastructure projects
are essential
Construction
3
In conclusion, we forecast the ME’s investment will be centered on existing plant
upgrades along with upstream and power plant projects that are essential to build
industrial clusters. Each Korean builder is bidding for lucrative projects worth
USD2bn-5bn and the results will come in 4Q13. Factoring in orders already
secured but not yet signed, at this point the Korean firms have achieved 77.6% of
their full-year overseas order target. The achievement rate should climb further if
Korean builders can regain substantial market share in tenders scheduled in 4Q13.
Table 1. Major builders’ overseas orders and expected achievement (W bn)
Samsung
Engineering Hyundai E&C
Daelim Industrial
GS E&C Daewoo E&C Samsung C&T Total
2011 order receipts 6.0 5.2 5.8 5.9 5.3 5.2 33.4
2012 order receipts 8.5 10.5 3.2 4.0 6.2 5.4 37.8
2012 achievement 70.8% 104.0% 45.7% 44.4% 96.9% 77.1% 73.4%
1) 2013 guidance 13.0 11.4 8.0 6.0 7.4 11.0 56.8
2) YTD order receipts (contract base) 3.7 5.5 4.0 3.8 2.0 11.4 30.6
3) YTD order receipts (Incl. secured) 6.5 8.9 5.1 4.8 4.6 13.7 44.1
YTD achievement (3/1) 50.0% 78.1% 63.8% 80.0% 62.2% 124.6% 77.6%
4) 2H13F orders won 2.8 4.5 2.0 2.2 4.0 2.6 17.9
5) 2013F order receipts (2+4) 6.5 10.0 6.0 6.0 6.0 14.0 48.5
2013F achievement (5/1) 50.0% 87.7% 75.0% 100.0% 81.1% 127.3% 85.4%
Source: Company data, Korea Investment & Securities
Figure 1. MENA projects, PF market and Korea’s major builder market share
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MENA tender market (L)
(USD bn) (USD bn)Tenders in ME decreased on weak PF market due to
Europe economic crisis, but hav e improv ed recently
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Number of PF to expire in GCC region(# of PF)
PF should be repaid mostly in 2015, easing f inancial burden
Tender market should be most promising in 2015 on cy clical basis
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2013
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0%
5%
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25%Major builders' plant orders in ME (L)
Major builders' M/S in ME plant market (R)
(USD bn)
Source: MEED Projects, Company data, Korea Investment & Securities
Project tenders will be
centered on plant
upgrades and industrial
cluster infrastructure
through 2014
Construction
4
Weak earnings power vs. better fundamentals to win orders
The Korean EPC firms’ fundamentals to generate profit eroded substantially after
heated competition in the ME during 2010-2011. Thus, the Korean firms have
changed their order-taking strategy to widen their target markets to non-ME
regions and focus on profitable projects. At this point, major Korean builders
appear to have achieved 77.6% (incl. orders secured but not signed) of their full-
year overseas order target, while the ME projects’ portion fell 15.1%p YoY to
31.8% in 1H13. For GS E&C, where the earnings shock was most severe, more
than 72% of overseas orders will likely be generated in Turkey, Kazakhstan and
Southeast Asia in 2013.
As such, we believe major builders are reducing their heavy exposure to the ME
market and competition is easing as well. And, we believe fundamentals for orders
are improving in terms of project locations and methods of tenders. While Korean
builders have already filled their order books to some extent, key projects in the
ME are currently put up for open bidding, most of which will deliver results in 4Q13.
It is a significant improvement from a year ago when a company’s full-year order
results were hinged on the Jizan refinery and Jeddah power plant projects. We
forecast major builders’ overseas order achievement will reach 85.4% in 2013F, up
12.0%p YoY, and the overseas order value should grow 28.3% YoY. The biggest
contributor in 2H13 will be hydrocarbon plant projects in the ME, a home ground
for Korean builders.
Table 2. Major 2H13 project bids by builder (USD bn)
Samsung Engineering Amount Hyundai E&C Amount Daelim Industrial Amount
UAE Fujairah LNG tank 0.6 UAE Mirfa IWPP 0.5 Vietnam Long Phu no. 2 power plant 1.3
Iraq Zubair 1.0 Sri Lanka building complex 0.4 Ras Tanura clean fuel 1.0
Oman Sohar refinery 1.5 Venezuela Santa Ines refinery 2.0 Saudi Arabia Jizan IGCC 1.0
Gabon refinery 1.0 Thailand water management 1.0 Thailand water management 0.8
UAE Shaybah gas package 0.7 Türkmenistan gas 0.5
Ras Tanura clean fuel 1.0
Saudi Arabia Jizan IGCC 1.0
Myanmar Yangon power plant 0.4
Major bidding projects 5.5 6.8 4.1
YTD contracts 3.7 5.5 4.0
2H13 contracts expected 3.1 4.5 2.0
GS E&C Amount Daewoo E&C Amount Samsung C&T Amount
Kazakhstan LG Chem 1.5 Iraq Zubair 0.8 Saudi Rabigh 2 IPP 1.2
Ras Tanura clean fuel 1.0 Ras Tanura clean fuel 0.5 UK Mersey gateway bridge 0.3
Singapore civil engineering 0.2 Saudi Arabia Jizan IGCC 1.0 Turkey Kirikkale power plant 0.6
Nigeria gas 0.7 Iraq tank farm 1.2 Turkey 'Gaziantep' health care 0.2
Venezuela gas 1.0 Thailand water management 0.8
Indonesia LNG liquefaction 0.1 Algeria GOSP 0.6
Thailand water management 0.8 Iraq seawall 0.8
Major bidding projects 5.3 5.7 2.3
YTD contracts 2.3 2.2 11.4
2H13 contracts expected 3.7 3.8 2.6
Note: Bold indicates the lowest-price bidder or the pursuit of private contracts Source: Korea Investment & Securities
After harm from
cutthroat competition in
the ME, Korean EPC
players have changed
strategy: Non-ME entry
and selective order-
taking
Cutthroat competition
has eased; Major
builders likely to
achieve 85% of 2013
overseas order target
Construction
5
Korea’s major builders have not completely taken off the stocks from their troubled
sites. We forecast the bad backlog will take their final (but not least) toll on the
builders’ earnings from 4Q13 to 1Q14. The ME market is turning for the better but
a selective approach will be rewarding as the pace of economic recovery is too
slow to push a big upcycle. But at the same time, the construction industry has just
passed the phase of an unexpected, steep drop in earnings, and it is a positive
factor that must not be ignored. If the major builders’ market share recovery turns
out to be substantial in the ME where the results of project tenders will be
announced in 4Q13, we believe positive sentiment will spread across the
construction sector. And it would provide a reason for investors to aggressively reel
in shares of construction companies.
Pick Daelim Industrial and Hyundai E&C if reconsidering ME plays
If reconsidering ME plays, we recommend approaching companies that 1) are well
able to regain market share backed by proven EPC skills and 2) were less hurt
than those blind-sided during the past cycle. If companies are slow at straightening
out problem sites, they would not be able to focus on securing orders and it would
become difficult to regain market share due to poor confidence among clients.
Accordingly, we mark Daelim Industrial as our top pick given its outstanding in-
house developed design technology and Hyundai E&C as our second pick as the
company is internalizing its engineering capabilities via synergies with Hyundai
Engineering. From a long-term perspective that extends into 2014, Samsung
Engineering may be approachable after a crucial earnings test in 3Q14.
Investment points are as follows.
► Daelim Industrial: After entering Saudi Arabia via Daelim Engineering in 1973,
the company has the longest history among domestic players in the country’s
hydrocarbon plant market. Considering Daelim Industrial is the only firm with in-
house developed design technology for both hydrocarbon and power plants, it is
fundamentally different from others when it comes to project undertakings.
Accordingly, Daelim Industrial is one of only a handful of companies that can
currently meet project schedules in Saudi Arabia. From YTD figures, Daelim
Industrial has fulfilled 46% of its overseas orders target with mostly ASEAN power
plants such as Malaysia’s Manjung IPP project (W1.3tn) and it has achieved
diversification that can help expand its top line. We are looking forward to Daelim
Industrial securing volume from anticipated ME tenders. Moreover, the
multifaceted company should enjoy maximum leverage effect as earnings at
subsidiaries such as Daelim Motor, Daelim C&S and Yeocheon NCC (YNCC)
improve simultaneously. We estimate OP to grow 8.7% YoY in 2013F and 20.6%
YoY in 2014F. The stock trades at 8.2x 12MF PE and it is still the most
undervalued play in the peer group.
► Hyundai E&C: Despite not taking a perfectly selective approach to orders like
Daelim Industrial, Hyundai E&C has been the fastest to begin clearing efforts
(improving financials and winding down low-margin projects) since 2011 when it
was acquired by the Hyundai Motor Group. We believe 2014 will be the first year of
a full-fledged growth story. Backed by Hyundai Engineering’s in-house developed
design technology, Hyundai E&C is enjoying clear synergies at the USD1.7bn gas
plant project in Turkmenistan and the USD2bn refinery project in Venezuela.
Considering these works are all private contracts based on the complete
confidence of clients, there is a growing possibility of securing consecutive orders.
We estimate Hyundai E&C’s OP to jump 18.6% YoY in 2014F and its valuations
should level up as Hyundai Engineering’s capabilities enter the spotlight.
Economic recovery is
still slow and multiple
builders are still making
losses; While we are
more positive than
before, a selective
approach is needed
If reconsidering ME
plays, pick companies
well able to regain
market share backed by
proven EPC skills
Daelim Industrial is our
top pick as it is the only
firm with in-house
developed design
technology for both
hydrocarbon and power
plants
Hyundai E&C is our
second pick as it is now
time to reflect operating
synergies with Hyundai
Engineering
Construction
6
Meanwhile, the competitive level of European players who are the biggest rivals to
Korean firms should diminish slightly compared to 2012. 1) Problem backlogs for
some European companies including Saipem should wind down in 1H14 as for
some Korean firms. 2) Tecnicas Reunidas (TR) that had the most aggressive
order-taking strategy in 2012 saw its 1H13 OPM plunge 0.6%p YoY, heightening
the cause for concern. Moreover, backlogs are at record highs and there is no
urgent need to secure volume. 3) The EUR that is a key variable for European
firms competing for orders should gain strength compared to 2012. Meanwhile,
Japanese companies are focusing on establishing tie-ups with US-based EPC
players to enter North America’s LNG or ethylene markets. Thus, they are unlikely
to emerge as new rivals for Korean players.
Table 3. Daelim Industrial quarterly earnings estimates (W bn)
1Q12 2Q12 3Q12 4Q12 2012 1Q13 2Q13 3Q13F 4Q13F 2013F
Sales 2,051 2,469 2,727 3,007 10,253 2,516 2,474 2,836 3,227 11,053
YoY (%) 24.6 26.3 34.2 27.6 28.4 22.7 0.2 4.0 7.3 7.8
Daelim Industrial 1,807 2,150 2,427 2,658 9,042 2,144 2,027 2,399 2,777 9,348
DSA 113 166 165 208 652 231 277 250 248 1,005
COGS ratio 88.7 90.0 90.4 90.3 89.9 89.6 91.1 89.7 89.5 89.9
Daelim Industrial 88.5 90.2 89.9 89.6 89.6 89.6 90.5 89.2 89.6 89.7
DSA 96.9 97.9 106.1 102.5 101.3 99.9 103.0 102.0 98.8 101.0
OP 95 125 137 130 486 124 112 134 158 528
Daelim Industrial 89 108 137 136 466 104 102 123 147 476
DSA 3 3 2 (23) (15) 3 (15) (5) (2) (19)
OPM (%) 4.6 5.1 5.0 4.3 4.7 4.9 4.5 4.7 4.9 4.8
EBT 187 54 176 144 560 158 103 147 149 558
YoY (%) 28.4 (73.0) 2.6 4,249.2 7.8 (15.3) 91.3 (16.2) 4.1 (0.3)
NP 129 39 121 112 401 121 78 112 112 423
Source: Company data, Korea Investment & Securities
Table 4. Hyundai E&C quarterly earnings estimates (W bn)
1Q12 2Q12 3Q12 4Q12 2012 1Q13 2Q13 3Q13F 4Q13F 2013F 2014F
Sales 2,706 3,181 3,319 4,119 13,325 2,861 3,471 3,407 4,232 13,971 15,659
YoY (%) 18.4 10.8 12.1 8.3 11.8 5.8 9.1 2.6 2.8 4.8 12.1
Overseas 1,257 1,334 1,405 1,699 5,695 1,299 1,450 1,509 2,241 6,499 7,422
Domestic 958 1,134 1,124 1,523 4,739 933 1,158 1,146 1,228 4,465 4,439
Hyundai Engineering 370 524 626 752 2,271 535 638 614 670 2,457 3,238
COGS ratio 91.0 91.4 89.2 91.0 90.6 90.5 90.5 89.0 90.7 90.3 90.2
Overseas 89.3 94.3 87.3 96.1 92.0 91.2 92.5 91.5 91.9 91.8 91.5
Domestic 94.9 91.9 92.8 90.0 92.1 91.0 91.4 88.7 90.7 90.4 90.6
Hyundai Engineering 87.8 85.5 85.0 88.2 87.2 88.6 87.7 87.0 86.9 87.5 87.5
OP 147 158 220 237 760 179 201 222 236 839 994
(Hyundai Engineering) 28 54 66 85 234 49 68 58 71 246 303
YoY (%) (2.4) (17.0) (13.7) 69.7 3.4 21.5 27.2 1.1 (0.1) 10.3 18.6
OPM 5.4 5.0 6.6 5.7 5.7 6.2 5.8 6.5 5.6 6.0 6.4
(Hyundai Engineering) 7.7 10.3 10.6 11.3 10.3 9.1 10.6 9.5 10.6 10.0 9.4
EBT 162 164 219 244 788 190 179 224 242 836 989
YoY (%) 8.3 (33.9) (26.5) 56.5 (7.4) 17.9 9.1 2.3 (0.6) 6.1 18.7
EBT margin 6.0 5.1 6.6 5.9 5.9 6.7 5.1 6.6 5.7 6.0 6.3
NP 125 118 172 145 561 150 130 170 184 634 749
YoY (%) (2.2) (35.3) (27.7) 6.6 (18.1) 19.9 9.7 (1.3) 26.8 13.0 18.7
Source: Company data, Korea Investment & Securities
Europeans’ competitive
level to diminish slightly
compared to 2012
Construction
7
Table 5. Peer group valuation
Petrofac Tecnicas
Reunidas Chiyoda Saipem Technip Fluor JGC Daelim Ind. Hyundai
E&C Samsung
eng.
Country UK Spain Japan Italy France US Japan Korea Korea Korea
Currency GBP EUR JPY EUR EUR USD JPY KRW KRW KRW
Closing price (Sep 23)
19 35 1,156 17 90 71 3,650 101,500 64,400 90,000
Market cap. (USD mn) 7,794 2,633 3,044 9,877 13,657 11,562 9,565 3,287 6,673 3,350
Sales 2011 5,801 2,613 254,675 12,593 6,813 23,381 556,966 7,988 11,920 9,298
(mn) 2012 6,324 2,652 398,918 13,369 8,204 27,577 624,637 10,253 13,325 11,440
(W bn) 2013F 6,640 2,871 467,612 13,118 9,616 28,836 705,941 11,053 13,971 10,818
2014F 7,478 3,164 475,994 12,996 10,742 29,587 776,730 11,448 15,659 9,674
OP 2011 685 151 24,197 1,493 710 985 67,053 437 736 626
(mn) 2012 735 149 25,113 1,481 822 734 64,123 486 760 732
(W bn) 2013F 809 149 26,741 14 946 1,177 74,229 528 839 (214)
2014F 963 168 27,782 971 1,167 1,293 80,700 637 994 365
PE 2011 11.9 14.5 20.9 7.9 19.1 20.6 23.6 10.7 11.3 6.5
(x) 2012 10.2 14.1 18.6 8.1 18.2 26.0 20.0 10.0 14.1 0.2
2013F 10.0 13.9 16.9 (22.3) 16.7 17.4 18.3 9.5 12.6 (1.6)
2014F 8.6 12.6 16.2 13.7 13.5 15.4 17.1 7.8 10.7 1.6
PB 2011 5.8 5.5 1.8 1.6 2.7 3.5 3.2 0.9 1.7 2.2
(x) 2012 4.2 4.3 1.6 1.6 2.5 3.4 2.7 0.8 1.6 0.1
2013F 3.4 4.0 1.6 1.6 2.4 2.9 2.5 0.8 1.4 0.2
2014F 2.7 3.5 1.5 1.4 2.1 2.5 2.3 0.7 1.3 0.2
ROE 2011 57.2 38.4 8.9 21.0 14.9 17.2 14.1 8.5 15.8 43.7
(%) 2012 47.5 34.5 9.0 17.8 14.1 13.5 14.8 8.5 11.7 33.9
2013F 34.2 29.0 9.5 (5.1) 15.1 54.4 14.4 8.3 11.9 (12.9)
2014F 31.1 27.9 9.3 11.0 16.9 16.8 14.2 9.3 12.9 16.1
OPM 2011 11.8 5.8 9.5 11.9 10.4 4.2 12.0 5.5 6.2 6.7
(%) 2012 11.6 5.6 6.3 11.1 10.0 2.7 10.3 4.7 5.7 6.4
2013F 12.2 5.2 5.7 0.1 9.8 4.1 10.5 4.8 6.0 (2.0)
2014F 12.9 5.3 5.8 7.5 10.9 4.4 10.4 5.6 6.4 3.8
EPS chg. 2011 (3.4) 26.2 80.1 8.8 19.6 71.1 53.6 (2.8) 12.4 32.0
(%) 2012 16.7 2.9 11.9 (2.9) 4.7 (20.6) 18.1 7.0 (19.8) 2.0
2013F 1.7 1.2 10.4 NM 9.1 49.6 9.3 5.8 11.3 NM
2014F 16.6 10.6 4.5 NM 23.4 12.6 7.0 20.7 18.7 NM
Note: Overseas firms are based on Bloomberg consensus while domestic firms are based on KIS estimates Source: Bloomberg, Korea Investment & Securities
Construction
8
II. ME bottoms out
Key words are aged plants and unemployment
Bidding for the Ras Tanura clean fuel and aromatics plants has recently closed.
We focus on this project because it represents Saudi Arabia’s fuel strategy. The
country aims to modernize the Ras Tanura refinery via the clean fuel facility and
make downstream investment to diversify the petroleum business.
Many plants in the ME were built during the 1970s and 1980s. More than 30 years
after construction, it is increasingly necessary to modernize the facilities as 1)
environment regulations are tougher, 2) they need to prepare for the impact of
shale gas and newly built plants around the world and 3) feedstock materials are
changing. The region also faces a long-term challenge of the need to diversify the
industry to address youth unemployment.
Thus, the ME tender market will likely bottom out in 4Q13 although it may not be
followed by another major upcycle that came in the early and mid-2000s. For the
above reasons, there should be more brownfield investment (upgrading current
facilities) than greenfield (new plants) for a while. Moreover, infrastructure tenders
should precede downstream investment and be made as a part of industry
diversification. Below is a list of major ME projects (USD28.7bn) that will likely be
tendered through 1H14.
Table 6. Large ME projects to be announced in 4Q13-1H14
Country Project Bid result to be
announced Amount (USD bn)
Description Bidders
UAE Fujaira LNG terminal 4Q13 0.6 LNG terminal and regasification plant
Samsung Engineering waiting for bid result
Oman Sohar refinery upgrade 4Q13 2.0 Upgrade (see pg. 19) Samsung Engineering likely
Saudi Arabia Jizan IGCC 4Q13 5.0 Residual gas-fired IGCC Samsung Engineering, Daelim Industrial, GS E&C, Hyundai E&C
Saudi Arabia Ras Tanura clean fuel, aromatics 4Q13 2.0 Upgrade (see pg. 12) Samsung Engineering, SK, Hyundai E&C, Daelim Industrial
Iraq Zubair gas field 4Q13 2.7 Greenfield crude oil production facility
Samsung Engineering, Hyundai Heavy Industries and Daewoo E&C likely
Saudi Arabia Rabigh 2 IPP 4Q13 1.2 Private sector gas Samsung C&T likely
Saudi Arabia Yanbu polysilicon project 4Q13 1.0 Polysilicon and wafer plants Hanwha Engineering, Samsung Engineering
4Q13 sub-total 14.5
Kuwait Clean fuel project 1H14 10.5 Upgrade (see pg. 13) GS E&C, SK E&C, Hyundai E&C, Daelim Industrial, Samsung Engineering, Daewoo E&C
Kuwait North oil field water treatment 1H14 0.7 Pipeline Daelim Industrial, GS E&C, SK E&C, Hyundai E&C, Samsung Engineering
Kuwait Oil gathering center 1H14 3.0 (See pg. 18) Daelim Industrial, SK E&C, GS E&C, Hyundai E&C, Samsung Engineering
1H14 sub-total 14.2 4Q13-1H14 total USD28.7bn
Source: MEED Projects, company data, Korea Investment & Securities
As of end-July, this year’s ME tenders have grown 12.5% YoY by project amount.
In 4Q13, Korean EPC providers hope to win contracts worth W2bn-5bn from the
region. Based on projects that will likely go ahead, 2013F MENA tenders should
grow 8.2% YoY and escape from a downcycle that has lasted for three years.
Following railway and other infrastructure contracts in 1H13, chemical plants
should dominate the tender market in 2H13. Such a shift would be driven by a
gradual financial market recovery and steady oil prices.
Ras Tanura clean fuel
and aromatics plants
indicate ME’s future
strategy
30+ years after
construction, ME plants
urgently need to be
modernized
ME market to bottom
out in 4Q13; Bids worth
USD28.7bn to be
finalized through 1H14
Following
infrastructure deals in
1H13, chemical plants
(Korean players’
strength) should
dominate in 2H13
Construction
9
Table 7. Status of MENA tenders (USD mn, %)
Project amount Annual % Project amount Project amount (est.) Annual % YoY
1H12 2H12 2012 1H12 2H12 1H13 1H12 2H12 2012 1H12 2H12 1H13 1H12 2H12
Chemical 13,789 2,910 16,699 82.6% 17.4% 1,273 1,472 2,497 3,770 33.8% 66.2% -79.5% -81.7% -25.9%
Construction 35,218 26,650 61,868 56.9% 43.1% 33,269 12,933 33,733 67,002 49.7% 50.3% -2.9% 16.2% 0.6%
Gas 3,118 4,373 7,491 41.6% 58.4% 5,581 1,238 6,171 11,752 47.5% 52.5% 34.9% 49.8% 3.5%
Industrial 6,445 2,452 8,897 72.4% 27.6% 2,191 57 4,106 6,297 34.8% 65.2% -44.4% -67.7% 12.4%
Oil 10,828 11,425 22,253 48.7% 51.3% 11,938 1,720 14,015 25,953 46.0% 54.0% 16.6% 8.9% 22.7%
Power 11,566 16,804 28,370 40.8% 59.2% 8,993 1,098 22,449 31,442 28.6% 71.4% 10.8% -21.3% 33.6%
Transport 15,134 12,285 27,419 55.2% 44.8% 21,089 24,840 40,207 61,296 34.4% 65.6% 104.9% 147.7% 185.6%
Water 4,394 4,774 9,168 47.9% 52.1% 2,336 412 3,657 5,993 39.0% 61.0% -46.4% -51.9% -46.1%
Total 100,492 81,673 182,165 55.2% 44.8% 86,670 43,770 110,360 197,030 44.0% 56.0% 8.2% 12.5% 35.1%
Source: MEED Projects, Korea Investment & Securities
Key word 1. Need to modernize facilities
As Saudi Aramco shifted from being 100% overseas shareholder-owned to 100%
state-owned in the late 1970s, the company began to establish joint corporations
with international oil companies (IOC). Backed by their technology and capital
investment, full-bore spending was made for oil and gas-related infrastructure and
downstream markets. Thus, most current ME plants were built in the late 1970s or
early 1980s. As 13 of 16 refineries in operation in Saudi Arabia were built more
than 30 years ago, ~USD6.6bn brownfield tenders are being prepared. Modern
facilities are needed for the reasons described below.
1) Tighter environmental regulations, clean fuel strategy: Led by the US and
Europe, sulfur content and pollutant emissions standards for petroleum products
such as gasoline and diesel have been stepped up globally. Since 2008, the UN’s
International Maritime Organization (IMO) has strengthened its restriction on the
sulfur content1 of fuel for ships sailing in open waters. Since even tougher
standards are applied in emission control areas (ECA), aged ME plants need
upgrades such as desulfurization to continue exports.
As such, the ME plans to invest ~USD6.6bn in clean fuel projects in 2013-2016.
Saudi Arabia aims to meet the European sulfur standard of 10ppm for diesel and
gasoline, the toughest in the world. The US recently came up with new fuel
standards and plans to lower sulfur content to 10ppm for gasoline and 50ppm for
diesel by 2016. Since Saudi Arabia’s maximum sulfur content exceeds 500ppm,
modernization investment is urgently needed to continue its petroleum exports. To
meet global environmental regulations, upgrades would cost more for key ME
countries due to aged facilities (see Figure 4).
1 In 2012, the IMO lowered sulfur content for shipping fuels from 4.5%m/m (% by mass) to 3.5%m/m; For ECAs such as the Baltic
Sea, North Sea and North American ECA, a stricter standard has been applied (1.0%m/m since 2010) and should be stepped up to 0.1%m/m in 2015
Most current ME plants
were built in the 1970-
80s, modernization
badly needed
Due to tighter
environmental
regulations, upgrades
(e.g., desulfurization)
are imperative
Clean fuel projects
planned for coming
three years alone are
worth ~USD6.6bn
Construction
10
Figure 2. Sulfur content allowed in diesel fuel Figure 3. IMO’s sulfur content regulations
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
ECA seas General seas(% m/m)
Source: 10
th Biennial Sulfur Market Symposium, Beijing, China Source: BP
A good example is the Ras Tanura clean fuel and aromatics project whose bidding
results are to be announced in October or November. The project will expand the
capacity of the complex built in 1945 from 50,000b/d to 550,000b/d. Saudi Aramco
then plans to invest USD2bn for an upgrade of the Mobile refinery (400,000b/d).
The refinery was built in 1984 on a coastal region called Yanbu and mainly
produces fuels for export. At present, Australia’s Worley Parson is working on the
front-end engineering & design (FEED).
Table 8. Saudi Arabia’s upgrade projects planned in 2013-2016
Project Status Tender time
Ras Tanura refinery clean fuel & aromatics plants EPC bidding closed, awaiting result 4Q13
Riyadh refinery clean transportation fuel plant Awarded to Samsung Engineering (USD200mn of USD700mn)
April 2013
Saudi Aramco Mobil Refinery (SAMREF) clean fuel plant
Study in progress (greenfield investment planned)
2015
Petro Rabigh clean fuel plant Study in progress (greenfield investment planned)
3Q15
Source: MEED Projects
Following Ras Tanura
clean fuel project,
Mobile and Riyadh plan
to upgrade refineries
Figure 4. Costs to meet sulfur content standards for gasoline and diesel
Source: Wood Mackenzie
Construction
11
2) Competitiveness upgrade urgently needed for existing plants: Large-scale
refineries around the world for which investment began in the early 2000s have
begun operations and pose a threat to ME plant margins. As shown in Figure 5,
major refineries in Saudi Arabia, Kuwait and the UAE are as old as 40-60 years.
While China’s refineries are expected to meet domestic demand, India started
running the Jamnagar refinery (580mb/d) at the end of 2008. Vietnam fired up its
first refinery in 2009 and the second (Nghi Son) will begin to operate in 2015. The
Vietnamese refineries boast superb efficiency against which the ME plants cannot
compare. This explains why Kuwait’s clean fuel projects (CFP, brownfield) were
tendered before new refinery projects (NRP, greenfield) and the order outlook for
the latter became unclear.
Another threat to petrochemical plants is North America’s downstream capacity
additions, which taps shale gas’ formidable price advantage. Amid an opaque
ethylene price outlook, the most urgent task from a long-term perspective to fight
back against US petroleum products is to enhance the ME plants’ efficiency via
modernization
3) Changing feedstock: Another factor requiring plant upgrades is changing
feedstock. As oil and gas fields around the world including the ME enter a mature
phase, the weighting of heavy and sour crude oil that is high in viscosity and sulfur
content is rising unlike in the past. In particular, the ME has a greater heavy crude
weighting than North Africa and potential reserves are also larger. Thus, the
region’s plants need to be upgraded accordingly.
Figure 6. Global crude oil: More heavy & sour oil Figure 7. Extractable heavy oil and sour gas reserves
Middle eastAsia
Russia
Africa
Europe78
4451
71
1318
30
7
Recoverable heavy oil reserves (bn bbl)
Sour gas reserves (tn cubic meter)
Source: 10th Biennial Sulfur Market Symposium, Beijing, China Source: BP
Non-ME countries begin
to operate large
refineries and threaten
ME margins
Modern plants a must to
respond to North
American shale gas
Figure 5. Age of major ME plants
6864
55
46 4541
3731 30 29 27
18 16 15 149
5 4
Saudi R
as
Tanura
refinery
Kuw
ait M
ina
Al-
Ahm
adi
Kuw
ait M
ina
Abdulla
Saudi Jeddah
refinery
Kuw
ait
Shuaib
ah
UA
E L
ube O
il
Pla
nt
UA
E T
akre
er
Abu D
habi
UA
E
TA
KR
EE
R
Saudi Y
anbu
Refinery
Saudi S
am
ref -
Yanbu R
efinery
Saudi S
hell
Refinery
Saudi R
abig
h
Refinery
Saudi
LU
BE
RE
F
Qata
r G
ulf
Petr
ochem
-
Qata
r Jebel A
li
Condensate
Qata
r S
tar
Energ
y
Qata
r H
am
riya
Refinery
Unit 2
Qata
r
Lubri
cants
Oil
Age(y ear)
Source: MEED Projects
Feedstock with greater
heavy& sour crude
weighting
Construction
12
Despite heavy costs, clean fuel investment is essentially needed. A highly visible
project that indicates the ME’s future strategy is the Ras Tanura complex in Saudi
Arabia and the CFP refinery complex in Kuwait.
▶ Saudi Ras Tanura clean fuel and aromatics project (USD2bn): The project is to
ensure the Ras Tanura refinery produces diesel and gasoline that meet global
sulfur content standards. Most clean fuels produced there are planned for export.
With many oil production facilities nearby, such as offshore rigs, the Ras Tanura
complex has a well-established transport infrastructure that makes it easy to ship
its products overseas.
Table 9. Ras Tanura clean fuel and aromatics project
Work scope Bidders
Package 1 Naphtha and aromatics processing facility Samsung Engineering, Hyundai E&C, SK E&C, Daelim Industrial, etc. Package 2 Paraxylene production facility
Source: MEED Projects
▶ Kuwait National Petroleum Co. (KNPC) CFP at refineries (USD12bn): This
mega-project has been repeatedly canceled and delayed. Since groundwork such
as site cleaning and substation building is now ongoing at the site, KNPC will likely
tender related contracts in 1H14. Korean builders plan to form a strategic
consortium to win at least one package deal. This project is the most important
reason for us to forecast the ME tender market would improve through 1H14.
KNPC operates three refinery complexes: Mina Al Ahmadi, Mina Abdullah and
Shuaiba. The CFP is a brownfield work that will shut down the Shuaiba plant and
upgrade the two others which will then merge into a single large-scale refinery
complex. A main goal is to prepare for refining demand in 2020, especially greater
demand for transportation fuels.
Figure 8. ME crude with high sulfur content
0.0
0.5
1.0
1.5
2.0
30 32 34 36 38 40 42 44 46 48
(Sulfur content, %)
Saudi
(Arab Light)
Nigeria
(Qua Iboe)
Libya
(Es Sider)
UK
(Brent Blend)
Kazakhstan (CPC Blend)
Libya
(El Sharara)
Algeria
(SaharanBlend)
Low sulfur
High Sulfur
Heavy oil Light oil
(API Gravity)
Source: EIA, Korea Investment & Securities
Ras Tanura clean fuel
and aromatics project,
representative upgrades
Kuwait CFP too is a
mega-upgrade
Brownfield project that
closes one refinery and
merges two others
Construction
13
Figure 9. Kuwait CFP overview and bidders
Scheduled for shutdown
Integration and expansion
Source: MEED Projects
Key word 2. Industrial cluster building activity to peak in 2015, economy is the key
It is well-known that to lower youth unemployment, the ME is trying to change its
economic structure that relies on the oil industry. In addition, ME is beginning to
acknowledge that oil exports are no longer a regional competitiveness as oil supply
should grow significantly on unconventional resources from the US by 2020.
Accordingly, the ME has focused on capitalizing resources, rather than depleting
them via exports, since 2008. Such effort has led to a plan to develop a refinery-
linked petrochemicals complex.
Good examples are the Sadara complex jointly formed by Saudi Aramco and Dow
Chemical and the Petro Rabigh 2, another JV between Saudi Aramco and
Sumitomo Chemical. Contracts were tendered in 2012 for both complexes.
However, despite the dire need for investment, no other tenders followed for a long
time. Now, bidding has recently begun for an aromatics plant, the first package of
the Tacaamol project that will build a downstream complex in the UAE. And bids for
partial FEED have resumed. Thus, if everything goes as planned, tenders for this
mega-project should then be placed in full-swing from 2015.
However, we have already experienced delays at the Sadara and Petro Rabigh 2
projects while the recession raged in 2012 and according to the participating firms’
investment decision. As such, downstream investment is influenced by the global
chemicals firms’ participation, which is related to the pace of economic recovery.
Most downstream investment in Saudi Arabia is made through joint ventures
formed with global chemical makers. Since chemicals are cyclical products, the
ME cannot absorb the entire production. Thus, an off-taker’s joint investment is a
must. As shown in Figure 10, Saudi Arabia’s petrochemical plant tenders have
moved in a fashion similar to OPM at petrochemical firm Saudi Basic Industries
Corp. (SABIC). SABIC’s OPM was high when China fast absorbed the company’s
products.
When a slow economic recovery is projected, it should be noted that ME tenders
will not dry up in the long-term instead of expecting a big upcycle for refinery-linked
downstream investment. By country, downstream complex investment is ongoing
as described below.
ME needs to prepare for
increase in global oil
supply and
unemployment
FEED for a downstream
complex recently
resumed; Related
tenders to come forth in
full-swing from 2015
Downstream tenders
are sensitive to joint
investors’ spending
decision and PF market
Slow economic
recovery; Focus on
steady ME tenders, not
a big downstream cycle
Work scope Bidders
Package 1 Improve the Ahmadi refinery JGC (GS E&C, SK E&C) Petrofac (Samsung Engineering, CB&I) TR (Hanwha Engineering, Sinopec)
Package 2 Build a new process within the Abdullah refinery
JGC (GS E&C, SK E&C) Petrofac (Samsung Engineering, CB&I) TR (Hanwha Engineering, Sinopec) Saipem (Hyundai E&C + Hyundai Engineering, Daelim Industrial) Fluor (Daelim Industrial, Hyundai Heavy Industries)
Package 3 Improve some Abdullah refinery facilities and manage offsite and utility services
Petrofac (Samsung Engineering, CB&I) TR (Hanwha Engineering, Sinopec) Saipem (Hyundai E&C + Hyundai Engineering, Daelim Industrial) Fluor (Daelim Industrial, Hyundai Heavy Industries)
Each package is worth more than USD3bn-4bn; Bid deadline is December 24, 2013
Construction
14
2-1) Saudi Arabia: Infrastructure investment through 2014
Saudi Arabia has an ambition to build a motor complex some day. While it does not
seem very feasible at this moment, it is also a big way to address unemployment.
As part of this ambition, Saudi Arabia has announced a USD70bn plan to build
downstream complexes in Yanbu, Jizan and Ras Tanura to create jobs and
develop high value-added products to prepare for a surplus oil supply triggered by
unconventional resources development in 2020. Thus, while gas was the dominant
feedstock in the ME until the early and mid-2000s, oil-refined products are now the
feedstock for the region’s planned downstream investment.
Figure 10. Downstream upcycle requires confidence in economic recovery
0
5
10
15
20
25
30
35
40
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
2014
F
2015
F
5
10
15
20
25
30Petrochemical plant tenders (R) SABIC OPM (L)(%) (USD bn)
Source: SABIC, Aramco
Saudi Arabia recently
announced USD70bn
downstream complex
plan
Figure 11. Saudi Arabia’s refining petrochemicals integration initiative
Yanbu
Jizan
Ras Tanura
Source: MEED Projects, Korea Investment & Securities
Construction
15
What is required to realize a lofty dream of building separate industrial clusters
spread across a vast area are upstream facilities and infrastructure for power,
transportation, etc. Examples are projects that were tendered in 1H13, including
the Riyadh Metro, Maaden steel complex and Wasit and Shaybah gas fields for
sufficient feedstock supply (see Table 10). The Jizan IGCC project that will be
tendered in October and November too is indeed an infrastructure deal as it will
build a cluster-dedicated power plant as part of the initiative.
Table 10. Saudi Arabia’s industrialization plan – infrastructure tenders placed first
Project Tendered by Amount Year tendered
King Abdullah Economic City Emaar, The Economic City USD93bn 2009-2011
Saudi housing program Housing Ministry USD70bn 2010-2014
Sudair Industrial City Modon USD40bn 2011 (Phase 1), 2013 (Phase 2)
Jizan Economic City Sagia USD40bn 2013
Riyadh Metro Arriyadh Development Authority USD22bn 2013
Sadara chemical complex (Jubail) Sadara Chemical Co. USD20bn 2013
Kingdom City Kingdom Holding USD20bn 2011
Haramain high-speed rail network Saudi Railways Organisation USD14bn 2009 (Phase 1), 2013 (Phase 2)
Security compounds Interior Ministry USD13bn 2013
Yanbu Aramco Sinopec refinery Yanbu Aramco Sinopec Refining Co. USD10bn 2010
Maaden/Alcoa aluminum complex Saudi Arabian Mining Co. (Maaden) USD10bn 2011-2012
Manifa Arabian heavy crude program Saudi Aramco USD9bn 2007-2008
King Abdulaziz International Airport General Authority of Civil Aviation USD8bn 2013
Knowledge Economic City in Medina Knowledge Economic City Co. USD8bn 2011-2014
Sipchem complex phase 3, Jubail Sipchem USD8bn 2012
Waad al-Shamal Phosphate City Mosaic/Sabic USD7bn 2013-2014
King Abdullah Financial District Rayadah Investment Co. USD7bn 2013
Petro Rabigh phase 2 Petro Rabigh USD7bn 2012-2013
Wasit gas development Saudi Aramco USD5bn 2011
Jabal al-Kaaba Abdul Latif Jameel Real Estate Investment USD3bn 2007
Source: MEED Projects
The USD5bn Jizan IGCC project will build a large-scale power plant tendered by
Saudi Aramco. The IGCC will burn 90,000b/d of heavy residual oil (final residues
from crude refining) obtained from the Jizan refinery. The project also fits Saudi
Arabia’s master plan to export high value-added products from the coal-fired IGCC
in the long-term. The technology also offers a solution to address environmental
problems and sell surplus heavy oil. The project meets Saudi Arabia’s goal to
maximize domestic resources use and broaden the value chain of exports with a
bigger range of high value-added products from the petroleum industry.
From 4,000MW of electricity to be generated at the project, 500MW will be sold to
the refinery at Jizan (project tendered in 2012) and the rest to residents in the
nearby Jizan Economic City. Along with electricity, the project will produce
hydrogen and water. The IGCC technology for residues is typically more similar to
petrochemical processing than traditional IGCC. As such, for this project,
companies with experience in hydrocarbon plants will likely be more competitive
than those building power plant infrastructures.
For industrial clusters,
most tenders will be
upstream and
infrastructure (e.g.,
power) projects for a
while
Jizan IGCC, a major
power plant to be built
in the city of Jizan
Residue IGCC similar to
petrochemical
processing
Construction
16
Figure 12. Residue IGCC concept (similar to petrochemical processing) and bids for the Jizan IGCC
Source: MEED Projects, company data, Korea Investment & Securities
Below are three locations that will play a key role in Saudi Arabia’s USD70bn
downstream complex investment. All projects should gain pace from 2015 and
through 2014, investment will focus on building power generation or upstream
infrastructure.
1) Yanbu: Of the three, investment for this project will likely be the biggest
(possibly up to USD50bn, much bigger than Jubail’s USD20bn). The project, if
tendered, would be the largest among all ME orders in history. But it will likely
progress through several phases over the long haul, not in a single phase like the
Sadara complex. As such, the project’s impact on EPC firms in the short run would
be insignificant. Geographically, Yanbu is an ideal place to use oil and gas held in
the nearby Red Sea. The Yanbu project, being conceived by Saudi Aramco and
SABIC, will offer a more diverse product mix by using naphtha and natural gas
liquids (butane, propane) as feedstock (compared to using gas only) and help
widen the country’s industry portfolio.
2) Jizan Economic City: Aside from the Jizan refinery complex tendered in 2012,
the construction of two more refineries is being considered. Farabi, a private
petrochemical company, is leading the move and is already in talks with Saudi
Aramco to secure feedstock. To build infrastructure for Jizan Economic City, the
Jizan IGCC project is scheduled to be tendered in October 2013. We expect
aggressive support from the Saudi government to the region where there are loud
calls for jobs and development.
3) Ras Tanura: The region was supposed to house the Sadara complex tendered
in 2012. But due to shabby infrastructure in the region, the location for the complex
has changed to Jubail. At present, Saudi Aramco and SABIC plan to build a
petrochemicals complex at Ras Tanura.
2-2) UAE’s first downstream project tender
In 2010, the Abu Dhabi National Chemicals Co. (Chemaweyaat) announced the
Tacaamol investment plan to build the world’s biggest naphtha-based
petrochemicals complex in the UAE. But the project has been on hold for a long
time. Bids for EPC works at the first phase (aromatics) recently began and many
Korean EPC firms including Samsung Engineering are preparing to submit. If it
goes well, the deals would be awarded in 2014. Given the large scale, packages
are unlikely to be tendered in a lump sum but in a slow and gradual process.
Nevertheless, the start of EPC bidding is very meaningful.
Yanbu home to major
industry clusters
receiving maximum
investment of USD50bn
Jizan needs jobs and
development
Saudi Aramco and
SABIC plan a
petrochemicals
complex at Ras Tanura
After a long delay,
Chemaweyaat recently
opened first bidding for
the Tacaamol project
Package Work scope Bidders
1 Air separation and oxygen supply Daelim Industrial Samsung C&T Daewoo E&C Hyundai E&C
Samsung eng. GS E&C
2 Combined-cycle power generation
3 Utilities and off-sites
4 Facilities for sulfur recovery
USD1bn-1.5bn per package, bids due August 15
Construction
17
The Tacaamol project is a part of ‘Plan Abu Dhabi 2030’, the UAE’s USD20bn
investment scheme to build a downstream complex with 12 plants at New Mina
Khalifa. The project was supposed to be completed in 2014 but has suffered
frequent delays since 2009, the originally scheduled timeline for FEED. It resumed
in May 2012 with the selection of Foster Wheeler (US) as a new project
management contractor (PMC). By using 3mn tonnes of naphtha from the Luwais
Takreer refinery, the project has the goals of diversifying petroleum products and
creating jobs in the region.
Figure 14. Chemaweyaat’s project concept
나프타
프로판
나프타 크래커
Reformer70,000 b/d
PDH 1기650천 톤/년
PDH 2기650천 톤/년
방향족 콤플렉스
에틸렌1,450천 톤/년
프로필렌690천 톤/년
자일렌1,370천 톤/년
벤젠860천 톤/년
Cumene 400Phenol 110
Bisphenol A 160Polycarbonate 130
PP 420MEG 900DEG 46TEG 3
Ethanol Amine 100Butadiene 200
MTBE 140PE 950
Urea 1,000Melamine 80
(단위: 천 톤/년)
프로필렌 유도품
Naphtha
Propane
Naphtha cracker
Reformer
70,000 b/d
PDH No. 1
0.65mn tonnes/year
PDH No. 2
0.65mn tonnes/year
Aromatics
complex
Ethylene 1.45mn
tonnes/year
Propylene 0.69mn
tonnes/year
Xylene 1.37mn
tonnes/yaer
Benzene 0.86mn
tonnes/year
Propylene derivative
('000 tonnes/year)
Source: Chemaweyaat
2-3) Kuwait and Oman waking from slumber?
After a lengthy stagnant period, Kuwait will grab the spotlight in 1H14 with its
tenders for oil gathering centers #29-31, fifth gas train and clean fuel project.
Politically unstable Kuwait is less developed than Saudi Arabia and the UAE, and
its investment is still focused on energy supply (e.g., electricity, fuel or water to
meet the needs from growing population and transportation). Below are Kuwait’s
major projects in the bidding stage.
▶ Kuwait Oil Co. (KOC) oil gathering centers #29-31 (USD3bn): Currently, oil
fields in Kuwait are connected to 26 gathering centers. The project is aimed at
increasing oil and water output by building gathering centers in Kuwait’s northern
oil fields as a way to encourage balanced regional development. The design for
Building 12 plants by
investing USD20bn
Figure 13. UAE’s downstream complex plan
Ruwais Refinery
Capacity: 415,000 bpsd
Status: In operation (ADNOC)
Umm Al-Nar Refinery
Capacity: 85,000 bpsd
Status: In operation (ADNOC)
Fujairah Refinery
Capacity: 82,000 bpsd
Status: Shut down due to financial
difficulties (FRC)
Jebel Ali Refinery
Capacity: 120,000 bpsd
Status: In operation (ENOC)
Chemaweyaat
Complex
Ruwais
Complex
Source: MEED Projects, Korea Investment & Securities
Kuwait to stand out
among ME markets in
1H14 with investment
focus still on energy
supply
Oil gathering centers to
supply water and oil to
northern region
Construction
18
the project was completed at end-2011 but the Kuwait Petroleum Corp.’s (KPC)
approval delay put EPC tenders on hold. Given the planned capacity addition of
300,000b/d from the project, oil output in Kuwait’s northern region should grow to
700,000b/d. Water output should also grow by 240,000b/d.
▶ Fifth gas train (USD1bn): The project is to build Kuwait’s fifth gas train in the
vicinity of the Mina Al-Ahmadi refinery in response to greater upstream capacity in
the country following KOC and Kuwait Gulf Oil Co.’s (KGOC) investment. Most gas
to be supplied to the train would come from oil fields located in the southeast and
northern parts of the country. The bidding was expected to begin in August 2013 but
was delayed to end-2013 as the Kuwait National Petroleum Co. (KNPC)
concentrated on its large-scale CFP (USD12bn). The result is likely to come in 1H14.
Kuwait will likely tender projects worth more than USD21bn through 1H14 but we
believe the market is the least attractive in the ME. Its political instability is too risky
to endure. And the country’s large-scale projects for IWPP, metro or tourism
development have frequently been delayed or cancelled so far. Moreover, there
was an unprecedented replacement of all heads at the country’s national oil
companies in May 20132. KPC, the top authority of the nation’s oil business, saw
its CEO and two of six board members resign and all heads under the wing of KPC
were replaced at KOC, KNPC, Petrochemicals Industries Co. (PIC), Kuwait Oil
Taker Co. (KOTC), Kuwait Foreign Petroleum Exploration Co. (KUFPEC), Kuwait
Petroleum International (KPI) and KGOC.
But the mega-project CFP will likely be tendered in 1H14 after a long delay given
the inefficient and heavy ordinary costs to operate old facilities. Aside from this,
politically unstable Kuwait does not seem as predictable a market as Saudi Arabia
that offers a steady stream of tenders.
Table 11. KOC oil gathering centers #29~31
Package Bidders
#29 Daelim Industrial, GS E&C, SK E&C, Hyundai E&C, Samsung Engineering, Hyundai Heavy Industries, JGC, Chiyoda, Saipem, Technip, Tecnicas, Petrofac, Foster Wheeler,
Dodsal, Aker Kvaerner #30
#31
Bidding due November 10, USD1bn for each (USD3bn in total)
Source: MEED Projects, company data, Korea Investment & Securities
Figure 15. Kuwait oil fields and major project locations Figure 16. Kuwait mired in political strife
Clean Fuel Project
Oil gathering facilities
29, 30,31
(North Kuwait)
Source: Google Source: Google
2 Petrochemicals Industries Co. (PIC) scrapped a joint venture with Dow Chemical due to pressure from opposition MPs citing the
global financial crisis. Its payment of a USD2.2bn penalty to Dow Chemical (May 7, 2013) angered the country’s emir and triggered the replacement of all heads at the national oil companies.
Least attractive in ME
due to political jitters
and frequent delays
CFP tender likely in
2014 given costly and
inefficient operation of
old facilities
Construction
19
The state-owned Oman Oil Refineries & Petroleum Industries Co. (ORPIC), which
operates and manages the Sohar refinery, has recently finished taking bids for the
refinery’s upgrade. The project to expand capacity by 60% is a brownfield work
and Samsung Engineering is being mentioned as the lowest bidder. The
petrochemicals plant at Sohar runs at only 60% utilization due to a lack of
feedstock. As such, the capacity expansion at the refinery should supply more
feedstock to the petrochemicals plant (naphtha and propylene) and to the Sohar
complex (USD3.6bn investment expected with FEED bidding started this August),
expanding the country’s downstream value chain. As FEED bidding started only
recently, EPC tenders should come in full swing no earlier than 2015. But the move
suggests Oman has stepped up efforts to broaden its industrial landscape.
Takamul Investment Co., a subsidiary of the government-owned Oman Oil Co.,
plans to build a plant for purified isophthalic acid (PIA) in the northern part of Sohar.
The plant will have an annual capacity of 100,000 tonnes and the company will
invite EPC bidders in 2Q14. Mixed with purified terephthalic acid (PTA), PIA is
used to make polyethylene terephthalate (PET), a general-use chemical. Oman
hopes to achieve all value chains needed for PET production by 2018.
Oman’s recent
completion of bidding
for Sohar refinery
upgrade, a sign of
stepping up industry
diversification efforts
Downstream plant
bidding to start in 1H14
Figure 17. Oman’s refinery-related complex plan
Duqm ComplexRefinery: 300,000 bpd
Petrochemical:
- Mixed Cracker 2 mn t/y
- PP 1.2 mn t/y
- Aromatics 2.8 mn t/y
- Styrene 0.8 mn t/y
Sohar Complex
Refinery: 116,000 bpd
- Expansion 72,000 bpd
Petrochemical:
- PP 0.4 mn t/y
- Aromatics 1 mn t/y
Mina Al Fahal Refinery
Refinery: 106,000 bpd
Source: MEED Projects, Korea Investment & Securities
Construction
20
III. Changes in the market
Many of the ME investment plans we analyzed in the previous section have been
mentioned for a long time, as early as 2008. Then, what lies behind the recent
exuberance seen in Saudi Arabia’s USD70bn investment for a downstream
complex and the UAE’s first package tender for the Tacaamol project after a long
hiatus? Our answers are 1) stabilizing oil prices and 2) improving PF environment.
Project sponsors in the ME do not make large-scale investment decisions
depending on short-term economic conditions. Only the pace of project progress
will change according to financing conditions. Backed by robust oil prices of late,
the appeal in the region’s PF market is rising again. In a broad picture, the ME
tenders market is also under the influence of global economic conditions.
Change 1. Financial market turning for the better; PF market to regain the 2011 level
Saudi Arabia has a nearly USD700bn stockpile at its central bank, which equals
the nation’s budget for three years. But despite such deep state coffers, it is rare to
see tenders wholly financed by the Saudi government. It is because efficiency via
cost controls matters much in large-scale investments. ME tenders started
shrinking from 2H11 when the European crisis emerged, and the global PF market
slowdown deepened in 2012. With the withdrawal of European capital from the PF
market back then, large deals in the ME were mostly pushed back to 2013 as well.
The PF in the region amounted to USD23bn in 2011 but the figure plummeted to
USD8.5bn in 2012. With a draining PF pool, large deals experienced delays. For
example, the PF closing for the Sadara chemicals joint venture between Saudi
Aramco and Dow Chemical was completed in 2013, a year later than the originally
planned 2012.
Table 12. Massive PF deals postponed in 2012 (USD bn)
Company Country Project Amount Current status
SK E&C Colombia Barrancabermeja refinery 3.0 Bidding delayed three times
Samsung C&T Kazakhstan Balkhash coal-fired power plant 4.0 Financial contract unsigned
Samsung C&T Canada Ontario wind and solar power cluster 1.5 Financial contract unsigned
Honam Petrochemical
Uzbekistan Surgil gas field development 4.1 Financial contract delayed
Hyundai Heavy Industries
Qatar Barzan onshore gas plant 1.0 Financial contract delayed
Source: Infrastructure Journal, Korea Investment & Securities
ME market is regaining
vitality thanks to stable
oil prices and better PF
environment
ME tenders started
shrinking from 2H11
when the Europe’s
crisis flared
Figure 18. PF in the GCC
0
10
20
30
40
50
60
70
2005 2006 2007 2008 2009 2010 2011 2012 2013F
0
5
10
15
20
25
30
35
40
45
50PF v alue in GCC and Egy pt (L)
Number of PF (R)
(# of PF)(USD bn)
Note: GCC members are Saudi Arabia, UAE, Oman, Bahrain, Kuwait and Qatar Source: MEED Projects, MEED Insight, Infrastructure Journal
Construction
21
There are various reasons why the ME’s PF market contracted. 1) The sharp drop
and volatile oil prices in 2012 soured the investment appetite of the financial sector
that became very risk averse. 2) The adoption of Basel III standards that impose
stricter capital requirements via quantitative and qualitative approaches prompted
European banks to tone down their lending attitude. In particular, French banks
that had a major role in the PF market went missing in action. While banks had to
dump high-valued bonds to meet Basel III requirements, plant projects became
larger and more complex, and this further slowed the financial sector’s decision-
making process prior to the completion of final funding arrangements. Of note,
there have recently been some favorable changes compared to 2012, which are
shown below. We estimate the ME’s PF market to reach USD25bn-30bn in 2013,
on par with the 2011 level.
1) Oil price recovery: The rebound for oil prices helped improve financing
conditions. The ME countries have relatively small national debt for their GDP, and
such sound fundamentals allow them to more easily attract investment from
financial institutions. The loan-to-deposit ratio has steadily stabilized downward in
Saudi Arabia and the UAE.
Figure 19. Oil prices
Figure 20. Cross-currency basis swap between USD and
EUR (5yrs) narrowed to the 2011 level
0
20
40
60
80
100
120
140
160
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Crude Oil-WTI
Crude Oil Dubai
(USD/bbl)
-80
-70
-60
-50
-40
-30
-20
-10
0
10
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
(%p)
Source: Bloomberg Source: Bloomberg
Figure 21. Gross debt as % of GDP Figure 22. Saudi Arabia loan-to-deposit Figure 23. UAE loan-to-deposit
020406080
100
120140160180200
Qata
r
Saudi A
rabia
UA
E
Fra
nce
Germ
any
Gre
ece
UK
US
(%)
70
71
72
73
74
75
76
77
78
79
80
Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13
Loan to deposit(%)
84
86
88
90
92
94
96
98
100
102
104
Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13
Loan to deposit(%)
Source: IMF Source: SAMA Source: Central bank of UAE
Very volatile oil prices
and Basel III regulations
prompted European
banks to change their
lending attitude
Rebound for oil prices has
led to better PF market
conditions in the ME
where economic
fundamentals are healthier
than other regions
Construction
22
2) European banks’ recovery: HSBC and Société Générale (SocGen) were two
global banks that led the PF market. The banks recently moved to resume
participation in the global PF market after a hiatus in 2012. HSBC mentioned that it
would increase PF investment in the ME, citing increasing profit from the region.
SocGen reported an earnings surprise in 2Q13 that was mainly driven by the
investment banking business alongside the effects of cost cuts and restructuring.
As such, some European banks are able to resume PF investment in the ME.
Table 13. SocGen’s 2Q13 earnings were robust to beat the 2011 results (EUR mn)
Group-wide 2009 2010 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12 2012 1Q13 2Q13
Net banking income 21,730 26,418 6,619 6,503 6,504 6,010 25,636 6,311 6,272 5,397 5,130 23,110 5,088 6,233
Gross operating income 5,964 9,873 2,243 2,262 2,486 1,609 8,600 1,982 2,290 1,421 999 6,692 1,021 2,325
Operating income 116 5,713 1,365 1,077 1,294 534 4,270 1,080 1,468 524 -315 2,757 94 1,339
Net income 1,108 4,302 1,034 863 691 200 2,788 842 569 205 -392 1,224 462 1,070
Group net income 678 3,917 916 747 622 100 2,385 735 436 90 -471 790 364 955
Group ROE (after tax) 0.9% 9.8% 8.8% 6.9% 5.4% 3.1% 6.0% 6.4% 3.5% 0.2% n/s 0.0% 2.7% 8.4%
Source: Societe Generale
3) Wider range of capital sources: Money providers from the ME and the US and
export credit agencies (ECA) claim a bigger presence in the PF market. While
European financial institutions ebbed from the PF market, the ME’s capital and
ECAs from several countries started to fill the void. PF for the UAE’s Marafiq
independent water & power plant (IWPP) project was offered in 2007, a boom
period, and the loans were extended mostly in USD by commercial banks. For a
comparison, the Qurayyah independent power plant (IPP) project in Saudi Arabia
completed funding in 2011 after the debt crisis hit Europe. Of note, 51% of the
loans were denominated in Saudi Arabia’s riyal (SAR) and 38% of the lenders
were ECAs. Furthermore, US-based capital is again tapping opportunities in the
ME instead of North America with excess liquidity. European financial institutions
may not come back overnight but the PF market is fundamentally improving with a
wider range of capital sources.
Table 14. Diversification of capital sources 1:
ECAs and ME capital’s growing PF presence (USD mn)
Qurayyah IPP (December 2011) Marafiq IWPP (May 2007)
Amount Weighting Amount Weighting
Total debt 2,092 100.0% 3,300 100.0%
Commercial banks (in USD) 180 8.6% 3,270 99.1%
Commercial banks (in SAR) 1,067 51.0% - 0.0%
ECA capital 800 38.2% - 0.0%
Other financial institutions 10 0.5% 30 0.9%
Source: MEED Insight, Dealogic
Figure 24. Diversification of capital sources 2: HSBC regional head’s recent
comment implying more PF participation
HSBC also plans to boost the size of its project finance team, currently said to be one of the largest of any
bank in the region.
In 2011, we saw the big exits from the European banks," he said. "This year we've seen a comeback of
some American names due to the extra liquidity they have in their home markets- Georges Elhedery,
regional head of global markets at HSBC
Source: The National “HSBC to fund more big projects” (April 22)
HSBC and SocGen are
returning to the PF
market
Capital from the ME, US
and ECAs claim a
bigger presence in the
PF market
Construction
23
In the ME, most large-scale PF is centered on oil/gas projects. Accordingly,
tenders for hydrocarbon plants are closely correlated with financial market
conditions. Most PF has a maturity of five to 10 years. Given the ME’s tenders
started to swell in 2003 and a number of PF deals were inked from 2006 to 2010,
the PF maturity burden will be substantially reduced starting in 2014-2015. In
particular, the Gulf Cooperation Council (GCC) countries will see the biggest-ever
PF amount reach maturity in 2015, which means more room to participate in new
projects. In the ME, downstream investment will gather pace in 2015, suggesting a
meaningful recovery for the market.
Figure 25. Given PF reaching maturity in the ME, project tenders will likely be the
largest in 2015
0
1
2
3
4
5
6
7
8
3-YEAR 5-YEAR 7-YEAR 10-YEAR 14-YEAR 15-YEAR 20-YEAR
Maturity of major bonds issued in Saudi Arabia(SAR bn)
0
5
10
15
20
25
30
35
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Number of PF to expire in GCC region(# of PF)
PF should be repaid mostly in 2015, easing f inancial burden
Tender market should be most promising in 2015 on cyclical basis
Source: Bloomberg, MEED Projects
Change 2. Solid oil prices and controlled progress of unconventional resources development
The price of oil is a key variable in forecasting the ME’s PF market. Most financial
institutions cite the present solid oil price as their reason to return to the market.
While the global PF market remains in the doldrums, the ME is viewed as a
primary investment destination because when oil prices stay stable, its PF ensures
great stability on the back of ample resources and development capacity.
But shale gas in North America and tight oil will inevitably affect the oil/gas projects
in the ME. While the ME must develop high-cost non-associated gas fields,
production costs will fall further for shale gas in North America given the huge
deposits and continued development of technology for shale gas exploitation. Tight
oil production should also drive oil prices lower by creating oversupply.
Burden from PF
reaching maturity will
peak in 2015 and give
more room for new
project tenders
Oil price is a key factor
to forecast the ME’s PF
market
Unconventional
resources affect global
oil/gas investment plans
Construction
24
Meanwhile, the issue is the pace of development and supply of unconventional
resources. The profit for producers of unconventional resources is not as large as
thought. That is because of low prices and the low economic efficiency of tight oil
fields. As seen in Figure 26, each tight oil field has a small deposit and production
yield is unstable. And tight oil output falls at an accelerated pace as time passes.
As such, tight oil fields have poorer economic efficiency compared to conventional
fields where output is maintained in the second, third and following recovery
stages. Attracted by economic efficiency, IOCs have resumed exploration of
conventional fields in Iraq and Venezuela, where drilling costs are lower.
Figure 26. Drill decline for unconventional resources
Figure 27. Global production of unconventional vs.
conventional oil
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
90,000,000
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
Unconventional petroleum decline rate (40%)
Conventional petroleum decline rate (5%)
Glo
bal P
roduction(b
pd)
2013 Production
5-year conventional decline
petroleum gap ~ 18mn bpd
5-year unconventional decline petroleum
gap ~ 75mn bpd
Source: BP Source: BP
Therefore, we believe it is too simple to worry about a sharp decline in the oil/gas
market in the ME in the near term. The price outlook for natural gas and ethylene
may change over the long run. What is certain at this point is the ME countries
need to be prepared for the full-fledged development of shale gas, which will be
used as a feedstock mainly for general-purpose products such as high-density
polyethylene (HDPE) and polyvinyl chloride (PVC). It will eventually prompt ME
countries to focus their downstream investment on more diversified and high
value-added products. From a long-term perspective, Korean EPC players must
consider expanding into the North American EPC market.
Due to poorer economic
efficiency of
unconventional
resources, IOC
spending is still
centered on
conventional resources
Unconventional
resources will have
great significance over
the long run but will not
cause a rapid decline in
the ME projects
Figure 28. Technip’s oil demand and production forecast
Source: Technip
Construction
25
IV. Changes at companies
Back to basics: Engineering competitiveness
Despite the 1H13 earnings shock, the construction sector index outperformed the
market by 8.4%p for the past one month thanks to expectations for economic
recovery and a revised real estate policy. We believe a “technical gap filling” was in
play to drive the gains given favorable macroeconomic variables and the major
builders’ sound overseas order achievement. The ME’s project tenders market will
likely improve YoY at least through 1H14. Overseas project conditions will likely
improve YoY in 1H14. So here is the question: Will Korean builders re-enter a profit
upcycle? The outlook is not necessarily bright at this point. Most Korean builders
need time to clean up the mess of troubled sites and to restore stability. As such,
benefits from the approaching upcycle will be limited to a handful of companies
with the following competitive traits.
As projects become larger in scale and competition intensifies, quality growth is
getting more important than ever for EPC firms. If it is not accompanied by better
profitability, expanding the top line would only result in huge ill effects and negative
growth. We believe technological prowess, in particular in-house design ability, is
the most important prerequisite for successful projects and growth. Ultimately,
technological prowess will work to highlight differences in earnings and orders
between builders.
An overview of an EPC project’s structure is provided below (see Figure 29).The
proposer of a project selects contractors for front-end engineering design (FEED),
project management consultancy (PMC) and EPC. A key objective of FEED is to
optimize the entire project using its own license. PMC is to ensure a project
proceeds in a planned manner and to carry out construction supervision.
Figure 29. Plant project structure
Source: Korea Investment & Securities
In most cases, EPC success is determined at the engineering stage, where a mere
5% of total project costs are incurred, because solid foundation design is essential
to eliminate errors in the following stages. As such, in-house design ability
highlights differences in competitiveness among EPC firms. In the hydrocarbon
plant segment, most major builders including Daelim, Samsung Engineering, GS
E&C and SK E&C have in-house design ability. In contrast, KEPCO E&C, Daelim
and Hyundai Engineering are the only Korean companies that have in-house
design ability in the power plant segment. Other companies rely on external
sources for power plant design. For example, Daewoo E&C cooperates with
KEPCO E&C and Samsung C&T with the US’ S&L for the design process.
Some builders must
first clean up the mess
of troubled sites; Only
some competitive
builders will enjoy the
upcycle
Technological prowess
is the most important
virtue of an EPC player
Plant process
comprises FEED, PMC
and EPC
EPC success hinges on
engineering
Construction
26
In-house design ability gives builders the following advantages. 1) Risk of delay,
which arises when the design plan awaits the PMC’s approval, is lessened. 2) EPC
contractors’ in-house design will reduce contact points and thus quicken the
following stages, such as equipment procurement. 3) Contractors with in-house
design ability can fine-tune the design plan at the construction site, which is
effective to prevent construction delays. For example, Samsung Engineering’s cost
overruns at multiple power plant projects, such as Shaybah and Wasit in Saudi
Arabia, were partly due to lack of experience but essentially due to the absence of
in-house design ability and resulting construction delay.
Path that Korean EPC firms must tread
We believe Korean EPC firms must follow the footsteps of US top-tier counterparts
such as Fluor, Kellogg, Brown & Root (KBR) and Bechtel. Fluor has achieved
success with innovative EPC management skills though it has not owned any
licenses. With thorough risk management and cost controls, the company has
focused on improving profitability rather than increasing volume. It has reduced the
weighting of lump-sum turn-key contracts that easily support volume growth but
entail substantial risks. Instead, it increased the weighting of cost-plus-fee
agreements via non-competitive bids by participating more in the FEED and PMC
of large-scale projects. KBR and Bechtel are also working out a strategy of starting
with FEED and switching to EPC.
FEED providers often adopt designs that are advantageous to their own
construction methods. Thus, if EPC companies can provide both FEED and PMC
services, there would be more cases where companies win orders through private
contracts and bypass the competitive bidding process. Such examples include
Daelim Industrial’s Petron RPM-2 refinery project in the Philippines and Hyundai
E&C’s PLC refinery project in Venezuela secured in a consortium with Hyundai
Engineering. The two builders have much experience in winning orders through
exclusive bids or private contracts (see table below). The greater the portion of
projects secured through exclusive bids or private contracts, the more chance the
two builders would have in becoming a company comparable to the world’s top-tier
EPC firms.
Figure 30. Daelim Industrial’s Petron RMP-2 refinery project Figure 31. Hyundai E&C’s Venezuela PLC refinery project
Source: BP Source: BP
Daelim and Hyundai
Engineering have in-
house design ability
Korean companies must
reinforce software over
the long-term, the same
as Fluor and KBR did
Daelim Industrial and
Hyundai E&C have
much experience with
exclusive bids or
private contracts where
they started with FEED
Construction
27
Table 15. Projects secured by Daelim Industrial via private contracts or exclusive bids (USD bn)
Country Project Client Amount Awarded in
Saudi Arabia Kayan high-density polyethylene Kayan 0.6 2008
Saudi Arabia Kayan low-density polyethylene Kayan 0.4 2010
Philippines PetroFCC expansion Petron Corp. 0.2 2006
Philippines Petron BTX Petron Corp. 0.1 2007
Philippines JG Summit naphtha cracking JG Summit Petrochemical 0.5 2008
Philippines Petron RMP-2 refinery Petron Corp. 2.0 2011
Source: Company data, Korea Investment & Securities
Table 16. Projects secured by Hyundai E&C/Hyundai Engineering via private contracts or exclusive bids (USD bn)
Country Winner Project Client Amount Order date
Uzbekistan Hyundai E&C Uzbek power plant Uzbekenergo 1.0 2013
Venezuela Hyundai E&C + Hyundai Engineering PLC refinery PDVSA 2.0 2012
Bangladesh Hyundai E&C Power plant BTDB 0.3 2013
Turkmenistan Hyundai E&C + Hyundai Engineering Gas plant Turkmengaz 1.7 2013
Source: Company data, Korea Investment & Securities
Competitor analysis: European players in a similar plight, desperate to clear away bad orders
The poor order performance delivered by Korean builders in 2012 was attributed to
the slow market dampened by the soft global economy. But we also cannot ignore
their weakening ability to win orders while the smooth delivery of bad orders was
so desperate at the time. Troubled by slow growth, some European builders opted
for an aggressive order-taking strategy, and the weak EUR maximized the effect.
Looking back, the weak EUR negatively affected Korean builders, though the
effect did not last long. Two examples are Saipem’s (Italy) stellar orders won for
the Shah gas project in early 2010 and Spain’s Técnicas Reunidas’ (Técnicas)
strong presence in the Jizan, Sadara and Kemya projects. Our economy analysis
team expects a stronger EUR YoY for 2013 backed by the region’s economic
recovery. Such bodes well for Korean builders although it may not fully guarantee
their restoration of market share lost in the ME. Moreover, side effects from taking
thin-margin orders for the last two years left European builders little room to
continue the strategy, and even run the risk of being at a FX disadvantage. Below
is our analysis of Técnicas and Saipem’s current conditions.
In 2H12, Korean
builders lost some
orders to aggressive
European firms
Weak EUR harms
Korean builders; EUR to
gain strength down the
road
Construction
28
Figure 32. KRW/EUR and Korean builders’ overseas orders growth
-30%
-20%
-10%
0%
10%
20%
30%
40%
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
-100%
-50%
0%
50%
100%
150%
200%KRW/EUR (%YoY, L)
Korean builders' ov erseas orders (12M %YoY, R)
Source: ICAK, Bloomberg, Korea Investment & Securities
▶Técnicas: The most aggressive order taker in 2012 was Técnicas. The company
continues to pile up its record orders backlog by winning Turkey’s Star refinery
project in early 2013. Although the weighting of ME orders at Técnicas has grown
substantially, the company basically takes 40% of orders from the European
market and thus, its weighting of thin-margin orders does not exceed the Korean
builders. However, Técnicas’ 1H13 OPM dipped 0.6%p YoY as orders from Saudi
Arabia, taken excessively in 2012, have gradually turned into sales. Not only
doubts about the progress of Saudi projects but the possibility of additional delays
at Hungary’s Dufi/Duna power plant project (EUR450mn) and a likely penalty for
delays at the Galp Sines refinery are increasing risks for the company.
The push for Tecnicas’ aggressive order taking in 2012 was its aspiration to reduce
costs by carrying out five existing projects at the same time. But expected
synergies are unlikely as clients recently asked the builder to run the projects
separately. Given weaker-than-expected Saudi synergies and poor 2Q13
profitability, Técnicas is unlikely to continue the aggressive order taking in 2H13. In
fact, its orders backlog has already reached a new peak. For now, carrying out
existing projects is more important than expanding the top line.
Table 17. Técnicas financial summary (EUR mn)
1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12 2012 1Q13 2Q13
Sales 686 681 625 621 2,613 624 649 671 707 2,652 691 704
YoY (%) 2.1 (1.9) (10.3) (12.4) (5.7) (9.0) (4.6) 7.4 14.0 1.5 10.7 8.3
Oil and gas 606 610 531 540 2,285 525 557 593 623 2,298 622 654
Energy 51 46 50 56 203 41 39 30 21 132 24 16
Infrastructure - - 45 24 69 58 53 48 63 222 45 33
OP 39 40 37 36 151 37 37 38 37 149 40 33
YoY (%) 2.6 1.6 (5.2) (9.8) (2.7) (5.6) (7.6) 2.7 4.5 (1.7) 8.1 (9.6)
OPM (%) 5.7 5.8 5.9 5.7 5.8 5.9 5.6 5.6 5.3 5.6 5.8 4.7
EBT 36 40 41 39 155 35 39 41 43 158 38 40
YoY (%) (16.4) (6.3) 53.3 (19.0) (2.9) (2.2) (2.8) 0.5 11.2 1.7 8.6 2.1
EBT margin (%) 5.2 5.9 6.5 6.2 5.9 5.6 6.0 6.1 6.1 5.9 5.5 5.7
NP 31 35 34 30 135 32 31 38 35 136 35 32
YoY (%) (19.6) (16.4) 143.0 210.9 30.3 5.2 (12.5) 13.8 16.5 0.7 8.4 4.9
NPM (%) 4.5 5.2 5.4 4.8 5.2 5.2 4.8 5.7 4.9 5.1 5.1 4.6
New orders 355 176 609 857 1,997 77 1,762 691 757 3,287 1,250 1,164
YoY (%) (84.5) (62.6) (26.3) 2,097.4 (44.8) (78.3) 901.1 13.5 (11.7) 64.6 1,523.4 (33.9)
Backlog 5,379 4,491 4,636 5,387 5,387 4,889 6,218 6,182 6,205 6,205 6,616 7,005
Source: Company data, Korea Investment & Securities
Técnicas: OPM plunged
on thin-margin orders
from Saudi Arabia
Técnicas saddled with
record orders backlog
needs to focus on
project delivery
Construction
29
▶Saipem: Like GS E&C and Samsung Engineering, 2013 will be the year that
Saipem should endure the maximum bad orders backlog. The builder reported an
operating loss of EUR470mn in 1H13 that was in line with its guidance. As of now,
problem backlogs account for 24% of the total at EUR530mn and should turn into
sales for as much as 41% of the total in 2013. It also announced thin-margin
orders would make up more than half of its 2014F backlog. As such, Saipem plans
to shun cutthroat competition with Korean builders in the onshore market and
instead raise the weighting of offshore and drilling projects.
In 1H13, Saipem secured 16% of orders from its captive market ENI Group, which
seems similar to GS E&C bolstering sales with orders from affiliates. At Saipem,
the weighting of ME orders is shrinking while orders from Africa or Europe (e.g.,
Turkey) are brisk. As WTI sells for more than USD100/bbl, the IOCs’ offshore
development is still ongoing and a positive factor for Saipem.
Table 18. Saipem financial summary (EUR mn)
1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12 2012 1Q13 2Q13
Sales 2,954 3,067 3,160 3,412 12,593 3,132 3,265 3,549 3,423 13,369 3,089 2,097
YoY (%) 12.8 6.0 6.5 12.3 0.3 6.2 (1.4) (35.8)
Onshore 1,457 1,428 1,472 1,588 5,945 1,489 1,526 1,649 1,511 6,175 1,310 691
Offshore 1,115 1,259 1,304 1,397 5,075 1,223 1,295 1432 1406 5,356 1,288 922
Drilling (onshore/offshore) 382 380 384 427 1,573 420 444 468 506 1,838 491 484
OP 347 364 377 405 1,493 373 389 401 318 1,481 202 (670)
YoY (%) 13.2 7.5 6.9 6.4 (21.5) (0.8) (45.8) 적전
OPM (%) 11.7 11.9 11.9 11.9 11.9 11.9 11.9 11.3 9.3 11.1 6.5 (32.0)
Onshore 148 174 181 183 686 122 124 116 33 395 14 (609)
Offshore 115 116 121 131 483 159 169 185 177 690 66 (173)
Drilling (onshore/offshore) 84 74 75 91 324 92 96 100 108 396 122 112
NP 213 225 225 258 921 231 242 249 180 902 110 (685)
YoY (%) 9.1 8.5 7.6 10.7 (30.2) (2.1) (52.4) 적전
NPM (%) 7.2 7.3 7.1 7.6 7.3 7.4 7.4 7.0 5.3 6.7 3.6 (32.7)
New orders 2,908 3,098 2,771 3,728 12,505 3,116 3,187 2,837 4,251 13,391 2,883 4,268
YoY (3.3) 7.2 2.9 2.4 14.0 7.1 (7.5) 33.9
Onshore 933 1,289 1,401 1,649 5,272 275 1,175 1,040 1,482 3,972 913 1,043
Offshore 1,802 1,809 1,370 1,795 6,776 2,606 1,617 1,432 1,822 7,477 1,005 3,150
Drilling 248 270 457 235 395 365 947 1,942 965 75
Backlog 20,459 20,490 20,101 20,417 20,417 20,401 20,323 18,911 19,739 19,739 19,533 21,704
YoY (0.4) (0.3) (0.8) (5.9) (3.3) (3.3) (4.3) 6.8
Onshore 10,019 9,735 9,543 9,604 9,604 8,390 8,311 6,696 6,701 6,701 6,304 6,656
Offshore 6,156 6,432 6,202 6,600 6,600 7,983 8,005 8,311 8,721 8,721 8,438 10,666
Drilling 4,323 4,356 4,213 4,213 4,028 4,007 3,904 4,317 4,317 4,791 4,382
Source: Company data
Saipem facing
maximum bad orders
backlog needs to focus
on offshore rather than
onshore
Currently focusing on
affiliate orders
Figure 33. Change in Técnicas orders backlog Figure 34. Saipem 2014F sales breakdown
Europe, 42%
Latam, 34%
Others, 3%
Middle East,
21%
EUR5,387mn
2011
Europe, 38%
Latam, 24%
Middle East,
27%
Others, 11%
EUR7,005mn
1H13
2013 2014
20152016+
Drilling,
EUR120mn
New order,
USD170mn
Low margin
backlog,
EUR410mn
EUR700mn
E&C
Source: Company data Source: Company data
Construction
30
Competitor analysis: Japanese builders focused on US market
Among global EPC firms, Japanese players are maintaining the healthiest OPM.
When Korean and European builders concentrated on raising their ME market
shares in 2010-2011, Japanese firms selectively took orders from LNG liquefaction
projects where they have strength. The strategy worked and they could meet the
guidance even in 2012 when most builders suffered from the global economic
slowdown. And in 2013, they are unlikely to emerge as competitors in the ME
onshore market given their undivided attention to FEED and EPC bids for large
LNG projects in the US, Mozambique, etc.
▶JGC: The company is taking fewer orders from the ME market but more from
Asia. It plans to vigorously bid for LNG FEED and EPC projects in North America
and Southeast Asia. In particular, it views North America’s LNG and ethylene
markets as promising and is ardently teaming up with EPC firms in the region with
an eye on a bigger EPC presence there in 2014. As such, this year it plans to
recruit 300-500 new workers at its US subsidiary.
Table 19. JGC financial summary (JPY bn)
1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12 2012 1Q13
Sales 126 130 134 58 447 139 148 154 116 557 154
YoY (%) 8.0 10.1 14.6 15.4 99.5 24.5 11.2
Total engineering 111 117 125 48 401 126 138 144 97 506 143
Catalysts & fine products 13 11 8 5 36 11 8 9 14 42 8
OP 16 15 16 17 64 16 16 15 17 64 15
YoY (%) 51.6 1.9 8.0 (7.3) 0.1 0.5 (3.8)
OPM (%) 12.4 11.6 12.1 28.9 14.2 11.5 10.9 9.7 14.5 11.5 9.9
Total engineering 13 13 16 18 59 14 15 14 15 59 14
Catalysts & fine products 3 2 1 1 7 2 1 1 1 4 1
NP 10 9 12 (6) 25 11 12 13 10 46 14
YoY (%) (6.0) 12.4 30.1 10.4 NM 80.9 27.5
NPM (%) 7.7 7.2 9.0 (9.7) 5.7 7.9 8.2 8.6 8.4 8.3 9.0
New orders 41 87 89 400 618 52 82 141 518 793 69
YoY (%) (15.7) 25.6 (6.4) 57.8 29.6 28.3 32.9
Overseas 11 51 66 376 504 25 41 117 498 682 47
Domestic 30 36 23 24 114 27 41 24 20 112 23
Source: Company data
▶Chiyoda: Recently, the final investment decision (FID) for the US Freeport LNG
project which Chiyoda has been engaged to win was pushed back due to
environmental concerns. The project was supposed to reach the FID within 2013
and produce LNG from 2017 but it has now been put on hold for more than six
months. Chiyoda expects to win the project at end-2013. JGC and Chiyoda are
preparing bids for several LNG projects in the US, including Cameron LNG. The
US is the most important market for Chiyoda as the company hopes to achieve
about half its orders from the LNG business. For that reason, the builder is not
aggressive about ME projects and only participates in the form of JV with Korean
builders.
Japan boasts the most
robust profitability
JGC is reducing
presence in ME and
expanding in Asia with
special focus on North
American LNG and EPC
markets
Chiyoda focusing on
LNG and ethylene
projects in North
America does not seem
a rival to Korean firms
Construction
31
Table 20. Chiyoda financial summary (JPY bn)
1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12 2012 1Q13
Sales 55 54 63 82 255 74 87 110 128 399 97
YoY (%) 3.6 (7.3) (12.9) 30.8 3.1 32.7 61.0 74.1 56.5 56.6 32.2
Construction engineering 54 53 61 80 248 71 85 109 127 392 96
General chemicals 7 8 9 20 44 19 27 40 43 128 28
LNG plant 25 21 19 27 92 29 26 34 39 128 41
Gas & power 6 10 18 14 48 13 16 18 26 73 11
Petroleum & petrochemicals 8 9 11 13 41 8 12 12 12 43 12
Environment related/others 1 2 4 5 13 3 3 4 6 16 2
Industrial machinery 5 2 1 1 9 0 0 1 1 2 1
Gas chemicals 0 0 0 0 0 0 1 0 0 2 0
OP 4 2 9 8 24 5 5 9 6 25 5
YoY (%) 52.8 (17.2) 25.0 78.3 37.9 2.6 169.0 (6.5) (24.0) 3.7 3.1
OPM (%) 8.0 3.7 15.0 10.1 9.5 6.2 6.2 8.1 4.9 6.3 4.8
NP 2 2 5 6 14 3 3 6 4 16 3
YoY (%) 23.7 (2.2) 115.7 124.1 80.0 78.7 109.5 8.4 (29.5) 12.1 (10.1)
NPM (%) 2.9 2.9 8.7 7.0 5.6 3.9 3.7 5.4 3.1 4.0 2.7
New orders 26 62 64 461 613 107 31 39 226 403 65
Backlog 467 455 454 841 841 849 789 760 901 901 878
Note: FY ends March Source: Company data
Construction
32
� Glossary
� EPC: Engineering, procurement and construction
� Onshore: Coastal or inland plants for exploration, drilling, storage and
processing of resources such as oil/gas.
� Offshore: Seaborne plants for exploration, drilling, storage and processing of
resources such as oil/gas.
� Shale gas: Unconventional natural gas found trapped within shale formations, a
sedimentary rock formed by the deposition of successive layers of clay.
� Tight oil: Unconventional crude oil contained in shale or tight sandstone.
Extraction from tight oil formations requires a different technology from
conventional vertical well drilling.
� International oil company (IOC): IOCs integrate operations from global oil
production to distribution, refining and sale on the back of huge capital. IOCs
have played a major role in the global oil industry and now expand their reach
beyond the ME into the US, Latin America and Southeast Asia for oil exploration
and production. BP, ExxonMobil, Royal Dutch Shell, Chevron, Total and Eni are
IOCs.
Daelim Industrial (000210) .................................................................................................................................................. 34
Hyundai E&C (000720) ............................................................................................................................................................ 37
Company
Construction
34
Daelim Industrial (000210)
BUY (Maintain), TP: W133,000 (Up)
Proof that basics lead to innovation
Lift TP to W133,000, maintain as top pick: We lift our TP on Daelim Industrial by
10% to W133,000, and maintain the stock as our top pick. We revised our TP to
reflect a 12% increase in 12MF NOPLAT attributed to changes in the base period.
Daelim Industrial should emerge as the biggest beneficiary of the ongoing cycle in
the Middle East (ME), and 2014F OP should jump 20.6% YoY.
Table 21. TP calculation (W bn)
Value Remark
1) Operating value 4,390
Construction operating value 4,037
Construction NOPLAT 404 12MF
Construction target multiple (x) 10.0 Market PE
Petrochemical operating value 3,353
Petrochemical NOPLAT 59 12MF
Petrochemical target multiple (x) 6.0 Applied target multiple of 6x
2) Equity value 290
Construction subsidiaries (257) Samho International’s pre-construction PF balance, write off losses pro rata to % of ownership
YNCC 548 BV
3) Net debt 51 As of end-2013
Shareholders’ value (1 + 2 - 3) 4,629
Value per share (W) 133,000
Source: Company data, Korea Investment & Securities
1) Longest domestic player in Saudi Arabia: In 1973, Daelim Industrial became
the first domestic player to enter Saudi Arabia’s hydrocarbon plant market via
Daelim Engineering. After successfully completing multiple projects for major
clients, including Saudi Aramco, Daelim Industrial gained invitations for exclusive
bidding and emerged as a leading player in the ME market. Moreover, the
company has outstanding EPC skills backed by in-house developed design
technology for both hydrocarbon and power plants.
2) Ability to regain market share rapidly: During 2010-2011, Daelim Industrial
started seeking growth via diversification, including aggressive entry into the
ASEAN IPP market, rather than compete excessively in the ME. While most rivals,
such as Europe-based Saipem and Tecnicas Reunidas (TR) and domestic players,
are pressed to resolve pending issues rather than secure new orders, Daelim
Industrial has the ability to take advantage of the current situation to achieve the
fastest market share recovery.
3) Strengths as a multifaceted player, synergies among different types of
businesses and profit leverage effect: Daelim Industrial is a multifaceted
company that is engaged in manufacturing (auto parts and concrete piles) as well
as construction services. Given the intense restructuring of Daelim Motor and
Stock price (Sep 25, KRW) 101,500
Market cap (USD mn) 3,281
Shares outstanding (mn) 35
52W High/Low (KRW) 102,500/67,600
6M avg. daily turnover (USD mn) 22.5
Free float (%) 76.0
Foreign ownership (%) 40.1
Yr to Sales OP EBT NP EPS % chg EBITDA PE EV/EBITDA PB ROE
Dec (W bn) (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%)
2011A 7,988 437 519 366 9,469 9.6 492 9.5 7.6 0.8 8.5
2012A 10,253 486 560 391 10,128 7.0 548 8.6 5.2 0.7 8.5
2013F 11,053 528 558 413 10,717 5.8 589 9.5 6.5 0.8 8.3
2014F 11,448 637 674 498 12,934 20.7 696 7.8 5.4 0.7 9.3
2015F 12,435 740 849 628 16,305 26.1 796 6.2 4.6 0.6 10.6
Note: NP and EPS based on controlling stake
Performance
1M 6M 12M
Absolute (%) 21.7 11.5 4.2
Rel. to Kospi (%p) 14.9 10.5 3.9
12MF PE trend
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Oct-08 Oct-10 Oct-12
0
20
40
60
80
100
120
140
12MF PER (LHS)
price (RHS)
(X) (W' 000)
Kyungja Lee 82-2-3276-6155 [email protected]
Hyungjun Ahn 82-2-3276-4460 [email protected]
Construction
35
construction subsidiaries, Samho International and Korea Development, in 2011,
the combined NP of main consolidated and equity-method subsidiaries should
grow 5.4% YoY in 2013F despite the sluggish performance by Yeocheon NCC
(YNCC). Moreover, Daelim Industrial can secure full EPC orders accompanied by
operation & maintenance (O&M) for hydrocarbon plants by utilizing synergies with
the petrochemical division. Meanwhile, downside risk for YNCC’s bottom line
appears limited in 2H13. In addition, the government’s August 28 housing policy,
which focuses on addressing small and midsize unsold pre-sale homes in Seoul
and surrounding areas, such as Yongin and Gimpo, should ease risks related to
Korea Development, which has pre-construction PF worth W350bn in Seongbok-
dong, Yongin.
Table 22. Quarterly earnings estimates (W bn)
1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12 2012 1Q13 2Q13 3Q13F 4Q13F 2013F 2014F
Sales 1,646 1,954 2,031 2,357 7,988 2,051 2,469 2,727 3,007 10,253 2,516 2,474 2,836 3,227 11,053 11,448
YoY (%) 24.6 26.3 34.2 27.6 28.4 22.7 0.2 4.0 7.3 7.8 5.5
Daelim Industrial 1,435 1,763 1,830 2,160 7,187 1,807 2,150 2,427 2,658 9,042 2,144 2,027 2,399 2,777 9,348 9,861
(DSA) 111 121 107 119 459 113 166 165 208 652 231 277 250 248 1,005 852
COGS ratio 88.5 89.1 84.7 90.8 88.4 88.7 90.0 90.4 90.3 89.9 89.6 91.1 89.7 89.5 89.9 88.9
Daelim Industrial 88.6 90.7 84.5 89.8 88.4 88.5 90.2 89.9 89.6 89.6 89.6 90.5 89.2 89.6 89.7 88.9
(DSA) 90.0 76.9 92.4 105.7 91.2 96.9 97.9 106.1 102.5 101.3 99.9 103.0 102.0 98.8 101.0 97.0
OP 61 87 200 89 437 95 125 137 130 486 124 112 134 158 528 637
Daelim Industrial 235 164 137 43 407 89 108 137 136 466 104 102 123 147 476 555
(DSA) 11 27 7 (7) 38 3 3 2 (23) (15) 3 (15) (5) (2) (19) 18
OPM (%) 3.7 4.5 9.9 3.8 5.5 4.6 5.1 5.0 4.3 4.7 4.9 4.5 4.7 4.9 4.8 5.6
EBT 146 199 171 3 519 187 54 176 144 560 158 103 147 149 558 674
YoY (%) 28.4 (73.0) 2.6 4,249.2 7.8 (15.3) 91.3 (16.2) 4.1 (0.3) 20.7
NP 101 158 122 (1) 380 129 39 121 112 401 121 78 112 112 423 511
Source: Company data, Korea Investment & Securities
Table 23. Earnings at main and equity-method subsidiaries (W bn)
Stake Subsidiary 2009 2010 2011 1Q12 2Q12 2012 1Q13 2Q13 2013F YoY
59.02% Daelim Motor Sales 221 297 349 83 94 345 81 108 389 12.7%
NP (17) 2 3 1 5 11 4 11 16 43.1%
100.00% Ora Resort Sales 42 46 46 11 14 54 12 16 59 9.8%
NP 3 5 3 1 4 9 3 4 12 37.9%
69.77% Daelim C&S Sales 94 181 206 56 64 244 67 58 261 6.9%
NP (1) 0 6 3 6 15 9 7 23 56.1%
Consolidated subsidiaries
NP sub-total 1) (7) 7 9 4 11 26 11 16 37 46.6%
50.00% YNCC Sales 4,832 6,317 7,521 2,043 1,986 7,843 2,017 1,792 7,500 -4.4%
NP 233 379 250 97 (28) 152 29 (16) 50 -67.1%
50.00% Poly Mirae Sales 845 1,100 1,117 229 233 909 227 454 1,000 10.0%
NP 40 29 14 (1) (6) (19) 7 13 40 NM
29.75% Korea Development Sales 609 622 612 135 189 694 123 220 700 0.8%
NP 3 6 (235) 0 0 (3) (17) 6 0 NM
40.00% KR Copolymer Sales 104 126 90 28 25 95 28 63 100 5.2%
NP 17 22 19 1 1 3 0 4 6 75.4%
46.76% Samho International Sales 490 450 516 77 121 506 106 140 520 2.7%
NP 3 (49) 5 (9) (0) (35) 1 1 (10) NM
Equity-method subsidiaries
NP sub-total 2) 146 192 72 44 (17) 51 14 2 43 -15.5%
Total 138 198 81 48 (6) 76 25 18 80 5.4%
Note: NP pro rata to Daelim Industrial’s equity interest in each company Source: Company data, Korea Investment & Securities
Construction
36
Key financial data
FY-ending Dec. 2011A 2012A 2013F 2014F 2015F
per share data (KRW)
EPS 9,469 10,128 10,717 12,934 16,305
BPS 114,427 123,800 133,495 145,401 160,669
DPS 100 500 500 500 500
Growth (%)
Sales growth 7.4 28.4 7.8 3.6 8.6
OP growth 12.9 11.1 8.7 20.6 16.1
NP growth 9.6 7.0 5.6 20.7 26.1
EPS growth 9.6 7.0 5.8 20.7 26.1
EBITDA growth 12.9 11.4 7.4 18.2 14.5
Profitability (%)
OP margin 5.5 4.7 4.8 5.6 6.0
NP margin 4.6 3.8 3.7 4.4 5.1
EBITDA margin 6.2 5.3 5.3 6.1 6.4
ROA 3.7 3.7 3.8 4.5 5.4
ROE 8.5 8.5 8.3 9.3 10.6
Dividend yield 0.1 0.6 0.5 0.5 0.5
Stability
Net debt (W bn) 285 (418) 51 (17) (133)
Debt/equity ratio (%) 45.9 31.8 36.4 33.4 31.1
Valuation (X)
PER 9.5 8.6 9.5 7.8 6.2
PBR 0.8 0.7 0.8 0.7 0.6
PSR 0.4 0.3 0.4 0.3 0.3
EV/EBITDA 7.6 5.2 6.5 5.4 4.6
Cash flow
FY-ending Dec. (W bn) 2011A 2012A 2013F 2014F 2015F
C/F from operating 501 780 (283) 147 271
Net profit 380 401 423 511 644
Depreciation 50 57 55 52 50
Amortization 5 5 6 6 6
Net incr. in W/C (128) 99 (754) (376) (359)
Others 194 218 (13) (46) (70)
C/F from investing (647) (296) (323) (83) (194)
CAPEX (302) (156) (16) (13) (9)
Decr. in fixed assets 3 2 2 2 2
Incr. in investment (411) (172) (131) (34) (102)
Net incr. in intangible assets (3) (9) (12) (9) (14)
Others 66 39 (166) (29) (71)
C/F from financing 190 (331) 345 (20) 32
Incr. in equity 132 0 0 0 0
Incr. in debts 78 (290) 364 (1) 51
Dividends (20) (19) (19) (19) (19)
Others 0 (22) 0 0 0
C/F from others 0 (1) 0 0 0
Increase in cash 44 152 (261) 44 109
Note: Based on K-IFRS (consolidated)
Income statement
FY-ending Dec. (W bn) 2011A 2012A 2013F 2014F 2015F
Sales 7,988 10,253 11,053 11,448 12,435
COGS 7,058 9,219 9,940 10,178 10,982
Gross profit 930 1,034 1,112 1,270 1,453
SG&A expense 492 548 584 633 713
Operating profit 437 486 528 637 740
Financial income 95 96 65 69 73
Interest income 72 64 65 64 68
Financial expense 129 102 75 83 84
Interest expense 105 79 75 83 84
Other non-operating profit 78 36 20 0 40
Gains (Losses) in associates, subsidiaries and JV
38 45 20 50 80
Earnings before tax 519 560 558 674 849
Income taxes 140 159 135 163 205
Net profit 380 401 423 511 644
Net profit of controlling interest 366 391 413 498 628
Other comprehensive profit (95) (20) (20) (20) (20)
Total comprehensive profit 285 381 403 491 624
Total comprehensive profit of controlling interest
268 372 394 479 609
EBITDA 492 548 589 696 796
Balance sheet
FY-ending Dec. (W bn) 2011A 2012A 2013F 2014F 2015F
Current assets 7,159 7,292 7,429 7,695 8,358
Cash & cash equivalent 1,325 1,477 1,216 1,259 1,368
Accounts & other receivables 3,313 3,481 3,753 3,887 4,222
Inventory 1,378 1,155 1,245 1,289 1,400
Non-current assets 3,606 3,714 3,845 3,889 4,057
Investment assets 1,600 1,693 1,824 1,890 2,053
Tangible assets 1,635 1,517 1,477 1,435 1,393
Intangible assets 77 79 85 88 96
Total assets 10,765 11,006 11,274 11,584 12,416
Current liabilities 4,650 4,779 4,349 4,245 4,452
Accounts & other payables 2,572 2,961 3,095 3,205 3,109
ST debt & bond 473 336 356 353 352
Current portion of LT debt 468 341 414 492 564
Non-current liabilities 1,478 1,309 1,623 1,564 1,586
Debentures 468 448 698 648 638
LT debt & financial liabilities 685 432 462 437 427
Total liabilities 6,127 6,088 5,972 5,810 6,037
Controlling interest 4,417 4,779 5,153 5,612 6,202
Capital stock 219 219 219 219 219
Capital surplus 513 507 507 507 507
Capital adjustments 0 0 0 0 0
Retained earnings 3,623 4,005 4,398 4,877 5,485
Minority interest 221 140 150 161 176
Shareholders' equity 4,637 4,919 5,302 5,774 6,378
Construction
37
Hyundai E&C (000720)
BUY (Maintain), TP: W75,000 (Maintain)
Time to reflect Hyundai Engineering synergies
Maintain TP of W75,000 and as second pick: Given the substantial top line,
Hyundai E&C’s clearing efforts (improving financials and winding down low-margin
projects) has been slow, but we believe most of these risks should be faded from
the bottom line by 1Q14. Investment points include: 1) better fundamentals for
orders, backed by optimal synergies with Hyundai Engineering, which boasts
proven technological capabilities, and 2) the clearest earnings transparency in the
industry. Considering the Venezuela Santa Ines refinery plant deal should
materialize in 4Q13, overseas orders for 2013 may exceed USD10bn. We estimate
OP to rise 10.3% YoY to W839bn in 2013F and 18.6% YoY to W994bn in 2014F.
Growing orders via consortium with Hyundai Engineering: After being
acquired by the Hyundai Motor Group, Hyundai E&C underwent organizational
restructuring, and the most noticeable operating change was the increased
synergies with Hyundai Engineering. By becoming more than just a high-valued
subsidiary, Hyundai Engineering began having a direct effect on Hyundai E&C’s
operations. Some examples include the Puerto La Cruz (PLC) refinery project in
Venezuela (secured in 2012) followed by the Santa Ines refinery project (USD2bn,
Hyundai E&C and Hyundai Engineering combined) and the recently won gas plant
deal in Turkmenistan (USD1.7bn) and the Mirfa power plant deal in the UAE
(USD700mn).
Of note, the Turkmenistan gas plant was the fourth successful project secured after
Hyundai Engineering worked with LG International to win a massive USD1.48bn deal
in 2009. As such, we believe it is time to fully price in Hyundai Engineering’s impact
on Hyundai E&C (parent) and view it as more than just a simple subsidiary. Of note,
Hyundai Engineering’s OPM is in the 10% level (highest in the industry) backed by
orders mostly for engineering and private contracts.
Table 24. TP calculation (W bn)
Value Remark
1) Operating value 7,677
Hyundai E&C based NOPLAT 507 12MF
Target multiple (x) 10.0 Kospi PE
Hyundai Engineering based NOPLAT 217 12MF
Target multiple (x) 12.0 20% premium to Kospi PE
2) Seosan land value 400 BV
3) Net debt -328 As of end-2013
Shareholders’ value (1 + 2 - 3) 8,405
Number of shares (common shares, ‘000) 111,356
Value per share (W) 75,000
Source: Company data, Korea Investment & Securities
Stock price (Sep 25, KRW) 63,600
Market cap (USD mn) 6,578
Shares outstanding (mn) 111
52W High/Low (KRW) 73,800/54,100
6M avg. daily turnover (USD mn) 24.0
Free float (%) 65.0
Foreign ownership (%) 26.4
Yr to Sales OP EBT NP EPS % chg EBITDA PE EV/EBITDA PB ROE
Dec (W bn) (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%)
2011A 11,920 736 851 635 5,705 23.8 812 12.3 9.2 1.9 15.8
2012A 13,325 760 737 510 4,578 (19.8) 846 15.3 8.9 1.7 11.7
2013F 13,971 839 836 568 5,095 11.3 912 12.6 7.8 1.4 11.9
2014F 15,659 994 989 674 6,047 18.7 1,065 10.6 6.6 1.3 12.9
2015F 16,295 1,123 1,119 763 6,847 13.2 1,192 9.4 5.9 1.2 13.2
Note: NP and EPS based on controlling stake
Performance
1M 6M 12M
Absolute (%) 16.7 (3.3) (6.9)
Rel. to Kospi (%p) 9.9 (4.4) (7.2)
12MF PE trend
0.0
5.0
10.0
15.0
Oct-08 Oct-10 Oct-12
0
20,000
40,000
60,000
80,000
100,000
12MF PER (LHS)
price (RHS)
(X) (KRW)
Kyungja Lee 82-2-3276-6155 [email protected]
Hyungjun Ahn 82-2-3276-4460 [email protected]
Construction
38
Table 25. Hyundai Engineering’s orders from Turkmenistan (USD bn)
Project Order period Client EPC amount
Yoloten gas plant 2009 Turkmengaz (state-owned gas company) 1.5
Turkmenistan refinery 2012 Turkmenbashi Refinery (state-owned refinery) 0.5
Kiyanly crude oil treatment 2013 Petronas Carigali Turkmenistan 0.2
Turkmenistan gas 2013 Turkmengaz 1.7
Source: Hyundai Engineering
Table 26. Quarterly earnings estimates (W bn)
1Q12 2Q12 3Q12 4Q12 2012 1Q13 2Q13 3Q13F 4Q13F 2013F 2014F
Sales 2,706 3,181 3,319 4,119 13,325 2,861 3,471 3,407 4,232 13,971 15,659
YoY (%) 18.4 10.8 12.1 8.3 11.8 5.8 9.1 2.6 2.8 4.8 12.1
Overseas 1,257 1,334 1,405 1,699 5,695 1,299 1,450 1,509 2,241 6,499 7,422
Domestic 958 1,134 1,124 1,523 4,739 933 1,158 1,146 1,228 4,465 4,439
Hyundai Engineering 370 524 626 752 2,271 535 638 614 670 2,457 3,238
COGS ratio 91.0 91.4 89.2 91.0 90.6 90.5 90.5 89.0 90.7 90.3 90.2
Overseas 89.3 94.3 87.3 96.1 92.0 91.2 92.5 91.5 91.9 91.8 91.5
Domestic 94.9 91.9 92.8 90.0 92.1 91.0 91.4 88.7 90.7 90.4 90.6
Hyundai Engineering 87.8 85.5 85.0 88.2 87.2 88.6 87.7 87.0 86.9 87.5 87.5
OP 147 158 220 237 760 179 201 222 236 839 994
(Hyundai Engineering) 28 54 66 85 234 49 68 58 71 246 303
YoY (%) (2.4) (17.0) (13.7) 69.7 3.4 21.5 27.2 1.1 (0.1) 10.3 18.6
OPM 5.4 5.0 6.6 5.7 5.7 6.2 5.8 6.5 5.6 6.0 6.4
(Hyundai Engineering) 7.7 10.3 10.6 11.3 10.3 9.1 10.6 9.5 10.6 10.0 9.4
EBT 162 164 219 244 788 190 179 224 242 836 989
YoY (%) 8.3 (33.9) (26.5) 56.5 (7.4) 17.9 9.1 2.3 (0.6) 6.1 18.7
EBT margin 6.0 5.1 6.6 5.9 5.9 6.7 5.1 6.6 5.7 6.0 6.3
NP 125 118 172 145 561 150 130 170 184 634 749
YoY (%) (2.2) (35.3) (27.7) 6.6 (18.1) 19.9 9.7 (1.3) 26.8 13.0 18.7
Source: Company data, Korea Investment & Securities
Construction
39
Key financial data
FY-ending Dec. 2011A 2012A 2013F 2014F 2015F
per share data (KRW)
EPS 5,705 4,578 5,095 6,047 6,847
BPS 37,711 40,811 44,483 49,106 54,529
DPS 500 500 500 500 500
Growth (%)
Sales growth 4.8 11.8 4.8 12.1 4.1
OP growth (6.7) 3.4 10.3 18.6 12.9
NP growth 23.8 (19.8) 11.4 18.7 13.2
EPS growth 23.8 (19.8) 11.3 18.7 13.2
EBITDA growth (5.8) 4.2 7.7 16.9 11.8
Profitability (%)
OP margin 6.2 5.7 6.0 6.4 6.9
NP margin 5.3 3.8 4.1 4.3 4.7
EBITDA margin 6.8 6.4 6.5 6.8 7.3
ROA 6.0 4.6 5.0 5.7 6.0
ROE 15.8 11.7 11.9 12.9 13.2
Dividend yield 0.7 0.7 0.9 0.9 0.9
Stability
Net debt (W bn) (539) (500) (328) (492) (499)
Debt/equity ratio (%) 34.1 36.4 32.2 29.0 25.9
Valuation (X)
PER 12.3 15.3 12.6 10.6 9.4
PBR 1.9 1.7 1.4 1.3 1.2
PSR 0.7 0.6 0.5 0.5 0.4
EV/EBITDA 9.2 8.9 7.8 6.6 5.9
Cash flow
FY-ending Dec. (W bn) 2011A 2012A 2013F 2014F 2015F
C/F from operating (156) 28 534 705 432
Net profit 685 567 631 749 849
Depreciation 75 83 71 69 66
Amortization 2 3 2 2 3
Net incr. in W/C (1,110) (813) (76) (165) (503)
Others 192 188 (94) 50 17
C/F from investing (69) (208) (466) (508) (378)
CAPEX (68) (97) (91) (91) (90)
Decr. in fixed assets 3 8 3 3 3
Incr. in investment (40) (46) (572) (380) (274)
Net incr. in intangible assets (1) (3) 23 (9) (5)
Others 37 (70) 171 (31) (12)
C/F from financing 345 186 (107) (56) (56)
Incr. in equity 0 0 0 0 0
Incr. in debts 425 245 (51) 0 0
Dividends (80) (60) (56) (56) (56)
Others 0 1 0 0 0
C/F from others 1 (13) 0 0 0
Increase in cash 121 (7) (39) 141 (2)
Note: Based on K-IFRS (consolidated)
Income statement
FY-ending Dec. (W bn) 2011A 2012A 2013F 2014F 2015F
Sales 11,920 13,325 13,971 15,659 16,295
COGS 10,752 12,076 12,622 14,125 14,583
Gross profit 1,168 1,249 1,349 1,534 1,713
SG&A expense 433 488 510 540 590
Operating profit 736 760 839 994 1,123
Financial income 250 172 137 136 138
Interest income 63 76 67 66 68
Financial expense 137 141 117 116 116
Interest expense 43 61 56 55 55
Other non-operating profit 18 (43) (15) (15) (15)
Gains (Losses) in associates, subsidiaries and JV
(17) (11) (10) (10) (10)
Earnings before tax 851 737 836 989 1,119
Income taxes 166 170 202 239 271
Net profit 685 567 634 749 849
Net profit of controlling interest 635 510 568 674 763
Other comprehensive profit (183) (114) (114) (114) (114)
Total comprehensive profit 502 453 517 635 734
Total comprehensive profit of controlling interest
453 399 465 571 660
EBITDA 812 846 912 1,065 1,192
Balance sheet
FY-ending Dec. (W bn) 2011A 2012A 2013F 2014F 2015F
Current assets 8,711 9,611 8,917 9,916 10,237
Cash & cash equivalent 1,862 1,855 1,816 1,957 1,955
Accounts & other receivables 4,423 5,128 4,657 5,220 5,432
Inventory 1,283 1,128 1,075 1,205 1,253
Non-current assets 3,161 3,136 3,632 4,012 4,230
Investment assets 1,375 1,232 1,690 1,957 2,118
Tangible assets 1,120 1,144 1,162 1,182 1,203
Intangible assets 44 77 52 58 61
Total assets 11,872 12,747 12,549 13,928 14,467
Current liabilities 5,773 6,150 5,577 6,312 6,160
Accounts & other payables 3,588 3,774 3,420 3,921 4,054
ST debt & bond 170 186 136 106 76
Current portion of LT debt 177 439 489 539 589
Non-current liabilities 1,736 1,841 1,754 1,820 1,833
Debentures 897 848 948 898 848
LT debt & financial liabilities 212 241 91 121 151
Total liabilities 7,508 7,991 7,331 8,132 7,993
Controlling interest 4,203 4,549 4,958 5,473 6,078
Capital stock 557 557 557 557 557
Capital surplus 828 830 830 830 830
Capital adjustments (5) (4) (4) (4) (4)
Retained earnings 2,675 3,079 3,591 4,210 4,917
Minority interest 160 207 259 323 397
Shareholders' equity 4,363 4,756 5,217 5,797 6,475
Construction
40
Changes to recommendation and price target
Company (Code) Date Recommendation Price target Company (Code) Date Recommendation Price target
Daelim Industrial 02-16-12 BUY W168,000 Hyundai E&C 10-10-11 BUY W91,000
(000210) 08-06-12 BUY W128,000 (000720) 03-05-12 BUY W118,000
09-28-12 Hold - 07-30-12 BUY W97,000
01-16-13 BUY W121,000 10-28-12 BUY W90,000
09-25-13 BUY W133,000 07-28-13 BUY W75,000
Daelim Industrial(000210) Hyundai E&C(000720)
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13
■ 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 the companies mentioned in this report.
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 the companies mentioned in this report
in the past 12 months;
Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from the companies mentioned in this
report 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 the companies mentioned in this report in the next 3 months.
Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in securities of the companies mentioned in this report at the time that the research
report was published.
Korea Investment & Securities Co., Ltd. does not own over 1% of Daelim Industrial,Hyundai E&C shares as of September 26, 2013.
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 September 26, 2013.
Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of Daelim Industrial,Hyundai 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,
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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.
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