Only the Strong Survive

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January 17, 2013 Industry Report

Shipbuilding (Neutral)
Only the strong survive
Offshore orders to drive growth
The shipbuilding industry is in a situation similar to that of 2002. In 2013, plunging order volume and weak new building prices are fueling intensifying competition. In 2002, shipbuilding shares rose because of an increase in orders, but then quickly fell on concerns over weak new building prices, which caused earnings to stagnate. For a period in 2002, shipbuilders went into red. There is a big difference between the shipbuilding market of 2002 and 2013, however. In 2013, a few, major shipbuilders with an edge in the construction of offshore plants are expanding order backlogs due to growing demand for offshore plants. We anticipate investments in offshore E&P projects will continue to rise, as we expect oil prices will remain high. We anticipate major shipbuilders will offset sluggishness in the commercial vessels market with their offshore-plant businesses. Daewoo Securities Co., Ltd.

Ki-jong Sung +822-768-3263 kijong.sung@dwsec.com Ryan Kang +822-768-3065 ryan.kang@dwsec.com

Three major catalysts in 2013
1) Increase in new orders despite depressed market conditions. 2) Improved cash flow and balance sheets. 3) Growing competitive gap between shipbuilders due to accelerated restructuring.

Historic low P/B presents attractive valuations
We expect Korean shipbuilders will be able to maintain their competitive edge regardless of the depressed shipbuilding market. Although shipbuilding shares currently trade at a P/B of 1.0x, we believe they have the potential trade at a P/B of 1.2x. We recommend Hyundai Heavy Industries (009540 KS/Buy/TP: W280,000), and Samsung Heavy Industries (010140 KS/Buy/TP: W46,200) out of the large shipbuilders. We find Hyundai Mipo Dockyard (010620 KS/Buy/TP: W148,000) to be the best among shipbuilders that focus on mid-to-small vessels. We raise our target price on Samsung Heavy Industries by 5% to W46,200 to reflect its stable earnings and solid order flow; however, we downgrade our rating of Hanjin Heavy I&C (097230 KS/Hold) from Trading Buy to Hold. Three major domestic shipbuildersÊ cash flow and share performance (Wbn) 10,000 Avg. cash flow of major shipbuilders (L) Avg. share price of major shipbuilders (R) (1/31/2005=100) 1,000

6,000

800

600 2,000 400 -2,000

200

-6,000 05 06 07 08 09 10 11 12 13F 13 14 14F

0

Source: KDB Daewoo Securities Research

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.

January 17, 2013

Shipbuilding

Figure 1. New orders and newbuilding price for commercial vessels (mnCGT) 100 New orders (L) Newbuilding price (R) 80 180 160 60 140 40 120 20 100 80 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F (1988=100) 200

0

Source: Clarkson, KDB Daewoo Securities Research

Figure 2. Three major domestic shipbuildersÊ order trend and forecast (Wbn) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 01 02 03 04 05 06 07 08 09 10 11 12 13F Shipbuilding Non-shipbuilding

Source: Company data, KDB Daewoo Securities Research

Figure 3. KOSPI and shipbuilding stock index trend
(1/1999=100) 1,000 KOSPI Shipbuilding stock index

800

600

400

200

0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 13 14F 14

Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research

2

January 17, 2013

Shipbuilding

Three major catalysts in 2013
1. New orders for major Korean shipbuilders to increase sharply In 2013, we expect major Korean shipbuilders will see sharp increases in new orders. Despite intensifying competition, these companies have demonstrated competitive advantages in the construction of large commercial vessels and offshore plants. We expect demand for LNG carriers will remain sound, and anticipate orders for mega-containerships will also increase. We expect the latter to be driven by small- and...
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