Hyundai Heavy Valuation

8/7/2019 Hyundai Heavy Valuation

1/20

HYUNDAI HEAVY

INDUSTRIES VALUATION

009540 KS

SELL HOLD BUY

Target Price : 499.163,61 KRWExpected Period: 1st Quarter of 2011

31 DECEMBER 2010


2/20

Hyundai Heavy

Industries Co (fromnow on: the Compa-

ny) is a major indus-

trial entity situated in

the peninsula of

South Korea. Its main

and historical source

of production has for

long been shipbuild-

ing. However theCompany for the last

decade has expand-

ed its portfolio and

now is active also in

the sectors of Off-

shore Construction,

Industrial Plant, Elec-

trical, Machinery and

Construction and

through the recent

past it is expanding in

the renewable energy

sources.

Moreover the

Company networks

with a wide array of

joint ventures and af-

filiated companiesthat cover various as-

pects of business

(finance, leisure,

shipping etc). The

main production facili-

ties are located in the

town of Ulsan. Re-

cently the Company

expanded further, its

shipbuilding mostlycapacity, by estab-

lishing a second ship-

yard in Gunsan. Re-garding shipbuilding

capacity still, the

Company is almost

the complete owner

of Hyundai Samho

(94,92%) and through

it has a share of

Hyundai Mipo, two

other large Koreanshipyards. Finally it

relates with Hyundai

Vinashin (10% ) a

shipyard situated in

Vietnam. As a result

the capacity that it

controls, directly or

indirectly, gives it the

capability to act as a

major player in the

global shipbuilding

industry.

As said earlier,

the Company em-

ployees itself with a

wide range of activi-

ties that cover variousand unrelated sectors

of business. This

sounds dysfunctional

as it expands the fo-

cus of the administra-

tion in quite different

issues, demands

many and very effec-

tive teams of busi-ness sector analysis

to keep the manage-

ment well informed

and supposes a lot of

expertise workers

(blue or white collars)

to complete compli-

cated projects in any

sector. The last can

sometimes prove

time and effort con-

suming as issues like

training or transfer-

ring of personnel be-

tween sectors can be

Chapter 1

General Information

the capacity

that it controls,

directly or

indirectly, givesit the capability

to act as a

major player in

the global

shipbuilding

industry

Page 2 Hyundai Heavy Valuation

$0

$5.000

$10.000

$15.000

$20.000

$25.000

Sales Analysis

Shipbuilding Offshore Industrial

Engine & Machinery Electric Construction

Diagram 1: Overall and per sector annual


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needed at any time,

like it did at recent

past. On the otherhand diversification

has for long been the

key to reduce market

risks, to expand

sales, to increase

growth rates and so

on. For the Company,

diversification could

be the winning atti-

tude for the future if

used carefully and

correctly. Till now the

selected strategy of

diversification can

prove a long tradition

of increasing sales as

we can see in Dia-

gram 1 and 2, where

we can examine eachsectors contribution

Another im-

portant in our opinion

reason for the so far

performance appears

to be the constant

spending of the Com-

pany in CAPEX and

especially in R&D. InDiagram 3 we can

see how these two

aspects of invest de-

velop.

of discoveries that either speed up produc-

tion, or build ships more effectively, or makes

the ships better operated, faster, stronger

etc. It was important that the Company main-

tained this strategy during the financial crisis

By that way

the Company has

managed to develop

a respectable intan-

gible asset in know-

how, a long record

and even tries to get in-

volved with renewable

energy and the current

trend of energy efficient

ships in a tighter way. In

the long term R&D ex-

penditure can contribute

in the increase of sales

and this is a fact that we

Diagram 2 Sector contributions as percent ofsales

In the long term

R&Dexpenditure can

contribute in the

increase of

sales

Page 3Hyundai Heavy Valuation

46,10%46,60%51,40%51,00%48,70%45,50%42,60%

15,20%16,60%14,30%15,00%

14,30%15,50%

16,20%

8,03% 6,80%6,00% 5,00%

6,50% 6,90% 9,00%

8,81% 8,30%9,20% 10,00%10,60%12,60%13,10%

10,12% 9,10%7,80% 8,00% 9,40% 9,60%

12,80%

10,37%11,40%10,20%10,00% 9,70% 8,90%5,60%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008 2009

Division Share

Electric

Engine & Machinery

Industrial

Offshore

Shipbuilding

% of Sales

0,00%

1,00%

2,00%

3,00%

4,00%

5,00%

6,00%

7,00%

8,00%

9,00%

10,00%

2004 2005 2006 2007 2008 2009

R&DexpenditureCAPEX

Diagram 3: R&D and Capital Expendi-tures as % of sales

will keep in mind inchapter 3 and theevaluation.


4/20

remain close to peak

figures from the good

times.

3. Working Capital:As we can see from

the diagram below

the Company found

itself in a rather favor-

able situation which

gave it the opportuni-

ty to run the business

without actually re-

quiring any workingcapital expenditures.

Indeed during 2003

true for shipbuilding in-

dustry where the con-

tractual product ship-

arrives some time laterof the initial and in-

between installments.

Especially for the Com-

pany we see from 2002

and on a significant in-

crease both in orders

and the backlog. That

situation helped it to in-

crease sales with work-

ing capital coming fromoperating activities and

not from investing.

Considering the

current climate, the

Company had to dealwith an uneven in-

crease or decrease of

sales per sector and a

hard situation for new

orders. These issues

are analyzed in detail

in the per sector anal-

ysis in chapter 2 and

shown in relevant dia-

grams. A critical situa-

tion appeared be-

cause of the serious

drop in cash and cash

equivalents, especially

because of the short-

age of new orders

from shipbuilding. The

outcome of this was

the increase of debt ofthe Company either by

issuing corporate

bonds or by increasing

borrowing from finan-

cial institutions.

Regarding fi-

nancial ratios we can

say the following:

1. ROE: The ratio alt-

hough declining for

the previous year is

still in a high level.

Moreover if we track

past results of the

Company we see that

the ratio moves along

an upwards trend. In

Diagram 4 we can seethe development of

the ratio for the past

years.

2. Operating Profit

Margin: Another im-

portant ratio is tellingus despite ups and

downs in terms of

sales and the gen-

eral economic cli-

mate, the Company

generates more net

income for a given

level of sales. Dia-

gram 4 says exactly

that and even in

2009 it managed to

b. Financial Data

even in 2009

Operating ProfitMargin

managed to

remain close to

peak figures


Diagram 4: Key financial ratios

Financial Ratios

-10,00%

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

ROE ROIC Operating Profit Margin

operating activities of theCompany became nega-tive. That in reality meantthat the Company dealtwith accounts payablelarger than inventoriesand receivables. Whilethis might seem thatgives short term liquiditytrouble, in reality meantthat the Company wasreceiving money for pro-jects that hadnt yet start-

ed. And this is quite


5/20

However the

significant decrease

in orders from 2008led to a sharp de-

crease of accounts

payables as the Com-

pany didnt order

much from its suppli-

ers. Last year operat-

ing activities pro-

duced even less

money but still invest-

ing is not yet re-

quired. In order for

the Company to keep

that trend, it must in-

crease orders, and

therefore backlog,

especially in ship-

building and offshore

sector as these sec-

tors assemble longlines of future produc-

tion that decrease

WCR.

4. Costs

Regarding

costs, as we can see

from the following di-

agrams, cost of salesmoves in an area of

78-90 %. This fluctua-

tion has to do with

changes mainly in the

cost of raw material

procurements, alt-

hough the Company

takes certain

measures to hedge

this kind of exposure

and in labor cost for

which it agreed cer-

tain agreements with

unions for stabiliza-tion of wages during

the crisis. There is

another useful indica-

tion that derives from

sales and improved

profitability.

Selling General and

Administrative costs on

the other hand are kept

in low levels, while theCompany tries even

further to reduce them

Diagram 5: Comparison of Working Capital

Requirements

the strategic

choice of

preference of

high valueadded

shipbuilding , a

choice that

lowered the %

of cost in sales

and improved

profitability.


Diagram 6: Developing of certain opera-

tional costs

more. As long assales keep increas-ing lowering thepercentage is aneasy task forSG&A.

the following diagram

and highlights the stra-

tegic choice of prefer-ence of high value add-

ed ships from the Com-

pany, a choice that low-

ered the % of cost in

-$10.000,00

$0,00

$10.000,00

$20.000,00

$30.000,00

$40.000,00

$50.000,00

$60.000,00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Working Capital Requirements Sales

Orders overall Backlog overall

81,2%80,7%83,6%86,8%88,3%

94,0%93,1%87,4%

83,5%84,2%85,1%

8,3% 7,9% 9,2% 7,6% 8,3% 7,1% 6,0% 5,6% 5,2% 4,7% 4,4%

-5,00%

10,00%

25,00%

40,00%

55,00%

70,00%

85,00%

100,00%% of Sales

Cost of sales SG&A Operating income


6/20

In this chapter

we shall proceed with

an in depth analysisfor each sector of the

Company in order to

develop a clear view

of them, the pro-

spects, the threats

and how they are be-

ing affected from cur-

rent economic climate.

a. Shipbuilding Divi-sion

The Company

is practically the larg-

est shipbuilder in the

world by many as-

pects (orderbook, no

of ships being

launched until now,

sales, etc). It has the

capabilities and mostly

the know how to con-

struct practically any

kind of ship whether it

relates with merchant

shipping or with war-

ships. As a result of it

and because of the

increasing pressure ofChina, the shipyard in

the past, turned most-

ly in building high add-

ed value ships like

containerships, LPGs,

LNGs while gave up

space in building non

complex ships like

bulkers. Regardingwarships, recently it

accomplished the con-

struction of the new

highly modern sub-

marines of class 214

with AIP propulsionin conjunction with

HDW, Germany,

adding further in the

critical intangible as-

set of shipbuilding

knowledge. Regard-

ing sector output we

must state that it is in

a steady decline,

speaking of sales, for

some years now.

This is considered in

some extent as rea-

sonable mainly for

two reasons. First

because of the in-

credible lag that ap-

pears in case of

shipbuilding con-tracts, meaning the

difference in time

from ordering a ship

and actually getting

the ship, (during

2007-8 orders, the

delivery date had

reached 2012), it

made little sense forship-owners to pro-

ceed with further

new orders which

impacted in reduc-

tion of new orders.

Second, fundamental

reasons as well as

speculation, had

driven newbuilding

prices in extreme

heights which in con-

junction with the

growing competition

of China, a country

that injected enor-mous amount of ship-

building capacity,

made it hard to find

new clients. Moreover

increasing steel

plates prices and the

appreciation of Kore-

an Won (KRW) are

two more factors that

had negative effect in

sales. Last but not

least the financial

crunch, which began

during 2007, led to a

critical halt of the sea

commerce that even-

tually led to a zero

order attitude from

the shipping industry.

The above sit-

uation was largely

changed throughout

2010 which showed a

significant increase in

orders of newbuild-

ings for the Company

and which creates the

belief that the targetof 4 billion US$ in or-

ders will be sur-

passed reaching, in

our estimates, 4431

bil US$. On the other

hand sales, which

carry the bad perfor-

mance of past orders,

are expected to reach7721 billion KRW for

the year. Considering

the future we have to

The Company

is practically thelargest

shipbuilder in

the world by

many aspects


Chapter 2


7/20

keep in mind regard-

ing shipbuilding in-

dustry, in a globalpoint of view, that

though the macros

seem relatively posi-

tive, it is still rather

hasty to declare a

certain and holistic

growth. Instead the

differentiation in

growth/contractionthat was observed

between countries,

or regions, or conti-

nents is going to

strengthen.

Considering

the fact that ship-

building like shipping

are industries that de-pend on the above

mentioned factors,

we should not be very

optimistic for an easy

increase in the global

orderbook, though

the sights during

2010 add positive

momentum. Besides,

in spite of efforts from

both sides of the

shipbuilding contract

(buyers-sellers) to

delay deliveries, or to

alter the contract by

size (number of

ships) or by kind

(type of ships) and

other measures, newtonnage ordered dur-

ing the good years

is going to keep en-

tering the market for

the next couple of

years. Markets like

containerships, a type

of ship that the Com-pany has great expe-

rience, were hit hard

and it seems that will

need more time to

recover in sustainable

levels, despite the

surge in orders at the

second half of 2010.

Additionally the mac-

roeconomic condition

that prevails, with

money leaving the

developed, western

countries for new

markets, doesnt

seem that will change

soon. This eventually

will lead to a further

decrease in profitmargin because of a

further appreciated

Diagram 8: World growth GDP, selected coun-

tries, Source UNCTAD 2010 Review of Mari-

time Transport, page 3

new tonnage

ordered during

the goodyears is going

to keep entering

the market for

the next couple

of years.


Korean Won that will

add pressure in the

profitability of the

shipbuilding sector,

through increased

competition mainlyfrom China.

Facts like the

state aided Chinese

shipyards that didnt

decrease their capac-

ity, during 2008-09

using easy state fi-

nancing and the con-

stantly developingChinese know how in

building more and

more sophisticated

ships will eventually

subtract another lu-

crative portion of the

Korean market share

in high added value

ships. Strong support

in this argument is

the fact that during

2009 China became


8/20

the leader considering

global orderbook. Fi-

nally it makes usskeptical the fact that

the Company lost No

1 position globally in

annual orders to a ri-

val from the same

country for 2010.

Still there are

some positive spots

that we must pay at-

tention that affect the

shipbuilding sector of

the Company. There

is a rising of new trade

routes between cer-

tain regions that

seems to have great

potentials. Routes de-

veloping in the south-

ern hemisphere,across countries or

regions, kept picking

up power even during

the recent crisis. The

much discussed South

-South routes could in

the long run doubt tra-

ditional trade routes

like east-west or tradi-tional partners like Eu-

rope, US etc. Although

this aspect doesnt

necessarily mean

more ships, it actual

means more constant

world growth with

more players react-

ing among each other

and replace each oth-

er in terms of growth/

contraction, import/

export, and produc-

tion/consumption.

That situation couldeventually stabilize

sea trade and with

that the sustainability

of shipbuilding indus-

try.

Specific as-

pects of trade dont

seem to have taken

a hard hit during the

crisis 08-09. Specifi-

cally LNG segment,

although suffered the

same problems like

any other ship-

segment, could have

the fastest rebound.

Several reasons con-

tribute to this but

they will be analyzedin the Offshore sec-

tor. The useful clue

here is that the Com-

pany could harvest

serious profit from

this type of ships.

Summing up

we believe that the

shipbuilding sectorhas entered a long

period of doubts, in-

creasing competition

and uncertainty andalthough we assume

a five year period of

one way or another

increase in sales, in

the long run we

should remain skepti-

cal. After all, past re-

sults of the share of

shipbuilding sales for

the Company point to

a diminishing figure.

This could just be an

occasional phenome-

non, but could also

mean a turn in the

focus of Company to

other industries, a fa-

vorable-to-other-

segments mind ofthinking, or use of ca-

pacity, or distribution

of sources (human or

not) from the admin-

istration. We interpret

the above theoretical

analysis in figures in

Chapter 3. Regarding

financial performancewe can state the fol-

lowing

The much

discussed

South-South

routes could in

the long run

doubt traditional

trade routes


Shipbuilding Division

$0

$2.000

$4.000

$6.000

$8.000

$10.000

$12.000

$14.000

$16.000

$18.000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

milUS$

Sales Shipbuilding

Cost of sales

Operating Income

Orders

Diagram 9: Main financial data for division


9/20


10/20

Looking at the

quarter results of 2010

we see that the Com-pany made a huge

step during the 1st Q.

but remained disap-

pointingly flat through

the others. We can

justify this by the on-

going climate and de-

bate whether the crisis

is over, or if the

growth will be solid or

steep for this year and

for future, matters that

affect CAPEX deci-

sions and by that the

performance of the

sector. Considering

the above we expect

the Company to hit

3315 million US$ inorders, far away from

its annual target. From

the sales side results

the Company per-

formed quite well and

for 2010 it seems that

it could reach annual

sales of 3324 bil KRW

roughly the levels ofthe previous year.

Looking at the future

we should keep in

mind the following ar-

guments.

Even though the de-

bate about the quality

and quantity of the re-

covery goes on, the

undeniable fact is the

steady increase of oil

prices. Although this

increase could face

variations as OPEC

increase productivity,or as storage used

VLCCs deliver their

cargo, the fact is that

world remembers its

old appetite of ener-

gy. This time though

we could witness

changes in the desti-

nation of oil (and en-

ergy in general) as

except from the un-

questionable China

factor, other develop-

ing countries, such

as southern America

or Africa or India

could surpass tradi-

tional great consum-

ers as EU in terms of

% changes of im-

ports. All these are

expected to affect

positively the relevant

sector of the Compa-ny (including LNG

newbuildings as men-

other

developing

countries, such

as southern

America orAfrica or India

could surpass

traditional great

consumers as

EU in terms of

% changes of

imports



Offshore Division

$0,00

$500,00

$1.000,00

$1.500,00

$2.000,00

$2.500,00

$3.000,00

$3.500,00

2000

200120

0220

0320

0420

0520

0620

0720

0820

09

milUS$

Sales Offshore

Cost of sales

Operating Income

Orders

of the two data until

2003 and then the

rest. Another im-

portant information is

that offshore has be-

come a high valueadded sector as it is

clear through the

gap that develops

tioned in shipbuilding).

Major and unfulfilled, be-

cause of world financialcrisis, plans of offshore

platforms, FPSOs and

energy production facili-

ties are expected to reac-

tivated and if the Compa-

ny manages, it could har-

vest great profits.

In diagram 11 the

upward trend that is de-

veloping both in orders

and sales, is clear. This in

time has developed accu-

mulation of work (the so

called backlog) that has

uncorrelated orders and

sales, an alteration easily

seen if we examine the

movement


11/20

between sales and

cost of sale.

The share ofthe division has been

steady for the past

decade at about 15 %

and that will be the

case for 2010 too

(diagram 12). As

mentioned above op-

erating margin is con-

stantly improving andwe believe it is going

to do so for some

time in the future.

Summing up and in a

5 to 10 year horizon

we think that offshore

could be the second

leading actor of the

non-shipbuilding divi-sions (Offshore ves-

sels included here).

Diagram 12: Qualitative view of division For the past

years the sector

performed quite

well either interms of sales

or terms of new

orders which

kept rising in

steady and

sharp figures


The Compa-

ny is considered a

respectable manu-

facturer of industrial

products whether

we are talking about

parts and equip-

ments or holistic

projects of majorindustrial sites and

complexes. It has a

large track of devel-

oped projects that

justify its reputation

and gives significant

advantage regard-

ing competition. For

the past years the

sector performed

quite well either in

c. Industrial Plant and Engineering Division

terms of sales or terms

of new orders which

kept rising in steady and

sharp figures. What is

most significant is that

the Company has accu-

mulated a large amount

of work that is yet to be

done, which kept it verybusy through the whole

period of crisis (namely

2007-10).

Regarding the present

year and by examining

the quarter reports we

can see that the Com-

pany can surpass its

target of 2 billion US$ in

new orders and could

reach well 2,2 billion

In chapter 3 we shall

provide figures con-

sidering the aboveissues and future

sales.

Offshore Division

-5,00%

15,00%

35,00%

55,00%

75,00%

95,00%

115,00%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

DivisionShareCost as %of salesOperatingMargin

US $ a significant

achievement. In

terms of sales the

Company can in the

same way surpass its

annual target of 2,4

trillion KRW and

reach figures of 2,6

tril KRW.Considering future

performance the sec-

tor could accept posi-

tive influence from

issues mentioned in

the previous sector

analysis regarding

energy industrial sites

and components of

them and could boost

sales significantly.


12/20

Other factors

that we should keep in

mind are the following.The Company has

shown a resilient rela-

tionship with the US

and countries of Mid-

dle East through the

good and through the

bad times and has

been awarded with a

great number of pro-

jects. These two re-

gions seem to get out

of the crisis in a faster

pace. US shows signs

of steady recovery but

in a slower rate be-

cause of the FED

measures (stimulation

packages, liquidity,

aggressive attitude)that strengthens the

opinion that US will be

back on track in the

near future (anyway

faster that competitive

markets like the EU,

Japan). The middle-

eastern countries

though hit hard fromthe crisis (Dubai ex-

ample) in general

have major stockpiles

of cash that will keep

rising as oil prices re-

turn to pre crisis lev-

els. Eventually these

countries will have to

deal with their self-

reliance regarding en-

ergy production, water

purification, oil refining

etc, demands that

ultimately will evolve

in huge projects.On the other hand a

major drawback that

the sector could face

in the near future is

the developing debt

crisis that right now

affects Europe in an

unprecedented size.

And though Europe

has all eyes on it ei-

ther from the specu-

lative side (banks,

speculators, mar-

kets) or from the vic-

tim side (Greece, Ire-

land for now) there

are candidate coun-

tries that could spark

global trouble. US isa country that stock-

piles huge amounts

of debt and the cur-

rent monetary policy

then China could find

itself in a difficult po-

sition as it is the big-gest US debt collec-

tor. While the above

scenario has limited

possibilities to hap-

pen in full, a partial

development could

affect country spend-

ing in terms of Ex-

penditure. Consider-

ing the fact that the

sector deals mainly

with country wide pro-

jects the above sce-

nario could reduce

sales by far.The Company

has shown a

resilient

relationship with

the US and

countries of

Middle East

through the

good and

through the bad

times



In diagram 13

we observe a con-

stant rise in sales for

the division. This

trend is going to be

even more intense

according to our

sales forecasts. Unfor-

tunately only recentlythe Company

Industrial Plant Division

-$500,00

$0,00

$500,00

$1.000,00

$1.500,00

$2.000,00

$2.500,00

$3.000,00

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

milUS$

SalesIndustrialPlantCost ofsales

Operating

Income

Orders

If US financial situation

considering debt worsensin the future to unsustain-

able levels,


13/20

managed to develop

profitability so we

must be careful aboutthe future perfor-

mance of the division.

Positive sign is un-

doubtedly the sky-

rocketing of orders for

the past 5 years

The significant

problem of high cost

of sales for the divi-sion is even clearer

here in diagram 14

according to the pur-

ple line. Regarding

share of sales the di-

vision was sailing

somewhere between5-10% for the past

decade. According to

Diagram 12: Qualitative view of division Considering

future

performance we

believe that the

sector will be

affected by the

performance of

the shipbuilding

industry


The Compa-

ny is a major con-

structor of diesel

engines, mainly two

strokes, although

this is changing as

has developed very

effective four

strokes ones too.

Besides that it man-ufactures certain

industrial equipment

like pumps, or ro-

bots that contribute

too in the division

performance. Re-

garding sales we

expect that Compa-

ny will reach 2703bil KRW far below

the target of 3,1 tril

d. Engine and Machinery Division

KRW. The main reason

of this is the underper-

formance of the marine

engines sub-division

which generates most

of the sales. Orders

seem to do better as

they are expected to

reach 2345 mil US$,

slightly above the targetof 2,3 bil US$. The in-

crease of orders is an-

other effect of the global

resent increase in ship

orders that was ana-

lyzed in the shipbuilding

division, contrary to

sales which, because of

a smaller backlog, fol-low the reduction of

past years orders.

our estimates during

2010 is going to climb

to 12%. We shall con-sider the above say-

ings in the next chap-

ter.

Offshore Division

-5,00%

15,00%

35,00%

55,00%

75,00%

95,00%

115,00%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009


Considering

future performance

we believe that the

sector will be affected

by the performance of

the shipbuilding in-

dustry in a global

point of view and the

doubts it faces. On

the other hand thediversification that the

division has devel-

oped could add or-

ders from various

sources such as the

industrial pumps and

machinery, products

that their performance

is attracted more bythe performance of

the industrial sector


14/20

and the argu-

ments that were ad-

dressed there. In short

sectors performance

is expected as a mix

of the above men-

tioned divisions and

we shall proceed in

this way in chapter 3.

The halt of ship

ordering impacted in

this division too

whereas diagram 15

shows there was sig-nificant reduction. We

believe that the divi-

sion will face almost

the same problems as

shipbuilding one.

Finally not much to

say in diagram 16 ex-

cept from the increas-

ing sales share. Dur-ing 2010 we estimate

it will stay unchanged.

Looking at the

future we arestrongly

optimistic for

the electro

electric division


Diagram 16: Qualitative view of division

Engine-Machinery Division

$0,00

$500,00$1.000,00

$1.500,00

$2.000,00$2.500,00$3.000,00

$3.500,00

$4.000,00$4.500,00

$5.000,00

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

milUS$

Sales Engine-Machinery

Cost of sales

OperatingIncome

Orders


Engine-Machinery Division

0,00%10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

80,00%

90,00%

100,00%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

DivisionShare

Cost as %of sales

OperatingMargin

e. Electro- Electric Systems Division

The division

could develop as the

leading sector of the

Company in the long

term. The turning torenewable energy

sources is a strategy

that while not providing

much at the moment,

can be a significant

decision that will affect

the long term profitabil-

ity of it. The company

for now is occupied in

solar and wind energy

and is taking serious

steps to increase its know

-how and develop its ca-

pabilities through its own

capacity or through coop-

eration with third parties.Regarding conventional

products the Company

manufactures various

electrical components as

well as the infrastructure

for power distribution and

generation (grids, trans-

formers etc). Looking at

2010 results the Compa-

ny is expected to reach

sales of 3108 billion

KRW, away of its tar-

get of 3311 bil KRW

while orders could

reach 3838 mil US$,

above the annual tar-get of 3636.

As explained in the

previous parts of the

analysis, the above

results show the effect

of financial crisis and

the imminent, yet slow

recovery that spurs

around the world.

Looking at the future

we are strongly opti-


15/20

for the division and its

performance. The

Company has the po-tential to ride the

wave of renewable

energy as this will de-

velop from alternative

to mainstream source

of energy. The transi-

tion is not without un-

certainties consider-

ing the way it is goingto develop, or if we

think in terms of com-

petition especially

from Germany and

the US. However the

establishment of the

Company as a re-

newable energy com-

ponents manufacturer

in the eastern world

could give competi-

tive advantages, a

dominant space of

development and

plenty of potential

customers whose

economies are in the

developing side with

great potentials.We should

state here that it is

very possible the

Company in the fu-

ture will separate the

two activities by cre-

ating a separate divi-

sion of renewable en-

ergy. Since that fornow is estimation we

shall proceed with the

existing set up taking

in account the appro-

priate information foreach category

(electric, renewa-

bles).

As we can see

from diagram 17 for

some time now the

division is quite bull-

ish and will stay like

this through 2010.We believe that if the

Company expands

consistently the re-

newable energy plan

we may look at the

first leading actor of

future performance


it is very

possible the

Company in the

future will

separate the

two activities by

creating a

separate

division of

renewable

energy


from the middle of the

current decade

(remember offshorecomment)

It is also im-

portant that the Com-

pany has been reduc-

ing its costs for the

past decade and this

improved profit mar-

gin. As renewables

are getting cheaperto produce, while re-

tail is still somewhat

expensive, this will

improve margins

even further. We esti-

mate that 2010 share

of sales will be at

Offshore Division

-5,00%

15,00%

35,00%

55,00%

75,00%

95,00%

115,00%

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9


Electric Division

-$100,00

$400,00

$900,00

$1.400,00

$1.900,00

$2.400,00

$2.900,00

$3.400,00

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

milUS$

Sales ElectricSys Division

Cost of sales

OperatingIncome

Orders



16/20

The division

appears to give mixed

signals regarding its

effectiveness and per-

formance in general.

During last year

(2009) it generated

losses. Furthermore

we can see a con-

stantly reducing share

in the overall sales.On the other side the

sector, excluding the

previous two years,

can demonstrate a

constant increase in

sales every year, as

well in 2010, where it

managed to cover the

lost ground We ex-pect that the division

could reach sales of

2332 bil KRW, above

target of 2138 bil KRW

and far beyond the pro

-losses year of 2009

covering the lost

ground in only a year.

The same goes with

orders which are ex-

pected to hit 2 billion

US$ above target of

1872 million US$.

The future per-

formance of the divi-

sion is a mixed result

of commodities prices

which drive need for

excavating equipmentand construction (eg

real estate) that de-

mand construction

equipment. And alt-

hough the first one

seems to recover,

the second ones fac-

es a lot of trouble

that undermine its

We expect that

the division

could reach

sales of 2332 bil

KRW, above

target of 2138

bil KRW


future performance

(housing foreclosures in

US, monetary pressure in

EU, a hot housing sector

in China that could easily

develop to a housing bub-

ble if not properly han-

dled).


It is alarming that the division wrote with red ink its

2009 results although we expect a far better perfor-

mance in 2010.

Construction Division

-$100,00

$400,00

$900,00

$1.400,00

$1.900,00

$2.400,00

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

milUS$

Sales ConstructionEquipment

Cost of sales

Operating Income

Orders


Construction Equipment

-5,00%

5,00%

15,00%

25,00%

35,00%

45,00%

55,00%

65,00%

75,00%

85,00%

95,00%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

DivisionShare

Cost as %of sales

OperatingMargin

The Company should also pay attention at the

increasing cost of sales for the division as it is inalarming figures (diagram 20)

f. Construction Equipment


17/20

Chapter 3

In this chapter weshall expand our val-

uation model. Before

we proceed we shall

make some key as-

sumptions as these

will differentiate our

scenarios.

a. The valuationmethod will be the

Discounted Cash

Flow model. We shall

examine in detail a 5

year period time and

then we shall esti-

mate the Terminal

Value.

b. Base year will be

2010 and the estima-

tions of results for

each sector during

the year. The estima-

tions are based in

quarter and monthly

results that the Com-

pany publishes. Con-

sidering that, the

price target has a life-time until the publica-

tion of the final results

for 2010. At that time

we shall revise our

target price for the

next 3 months.

c. We avoided the

Comparable Firms

Valuation Model asthe Company is quite

different in structure

and number of divi-

sions that it operates

than any other insideKorea. So it would be

misleading to com-

pare it with other

shipyards.

d. In order to esti-

mate sales and costs

we shall proceed with

a per sector approach

regarding, growthrates, % of cost and

so on. In order to esti-

mate other financial

data Working Capital

Requirements,

CAPEX, R&D, etc we

shall examine the

Company overall.

e. Regarding Oil-

bank acquisition that

finally came to an end

after years of court

arbitration against

IPIC, the Company

paid 2573 billion

KRW and gained total

control of South Ko-

rea's fourth-largest

refiner by output in 12of August 2010. The

financing came from

short term borrowing

as from 291,7 billion

KRW at 2Q 2010 it

reached 2865,6 bil-

lion KRW at 3Q 2010.

There are two points

of view concerningthe strategy that

Company is going to

The valuation

method will be

the Discounted

Cash Flow

model


deploy for Oilbank.

The simple believes

that Oilbank is goingto be sold, or a more

experienced strategic

investor is going to

be sought. The com-

plicated one says that

the Company is going

to diversify further its

business portfolio by

investing heavily andmanaging aggres-

sively the newly ac-

quired entity. Alt-

hough recent activity

strengthens the se-

cond scenario we

cant completely ig-

nore the first one in a

3-5 year period. To

sum up, the valuation

will take in mind the

short term borrowing

liability that was cre-

ated but will not try

any forecasts con-

cerning future plans

for Oilbank.

All valuation boards

and calculations aregoing to be ex-pressed in US$ usingthe exchange rate of31-12-2010 (the dateof the finalization ofthe analysis). We pre-fer the US$ ap-proach, as this is theglobal currency forthe shipbuilding in-

dustry so the num-bers can be more ex-planatory for the


18/20

Second and most im-portant, as the Com-pany expands its busi-

ness portfolio and be-comes even more in-ternational, suddenand severe fluctuationof exchange rates, alt-hough could affect fi-nancial performancein the short term,

could easily distortthe actual and longterm picture concern-

ing the viability of theCompany. After allthe Company hedg-es high percentageof its foreign ex-change liabilities inorder to reduce theabove risk.


Taking the above as-

sumptions under consid-

erations we provide the

following table regarding

DFCF of company for the

next five years and after-

wards we compute Ter-

minal Value. Amounts in

million US$

Sales 2010

Base

2011e 2012e 2013e 2014e 2015e

Shipbuilding $7.721,00 $7.334,95 $6.968,20 $7.665,02 $8.431,53 $9.274,68

Offshore $3.315,00 $3.646,50 $4.193,48 $5.032,17 $5.535,39 $6.088,93

Industrial $2.600,00 $2.860,00 $3.432,00 $4.118,40 $4.530,24 $4.983,26

Machinery $2.703,00 $2.567,85 $2.696,24 $3.235,49 $3.882,59 $4.659,11

Electric $3.108,00 $3.729,60 $4.848,48 $6.303,02 $7.563,63 $9.076,35

Construction $2.332,00 $2.425,28 $2.522,29 $2.623,18 $2.728,11 $2.837,23

Total $21.996,8 $22.789,8 $24.907,3 $29.267,1 $32.998,2 $37.288,76

Costs 2010

Base

2011e 2012e 2013e 2014e 2015e

Shipbuilding $6.948,90 $6.601,46 $6.271,38 $6.898,52 $7.588,37 $8.347,21

Offshore $2.884,05 $3.172,46 $3.648,32 $4.377,99 $4.815,79 $5.297,37

Industrial $2.210,00 $2.574,00 $3.088,80 $3.500,64 $3.941,31 $4.335,44

Machinery $2.027,25 $1.925,89 $1.887,37 $2.264,84 $2.717,81 $3.261,37

Electric $2.486,40 $2.983,68 $3.781,81 $4.727,27 $5.672,72 $6.807,27

Construction $1.982,20 $1.818,96 $1.891,72 $2.229,71 $2.318,89 $2.411,65

Total $18.724,2 $19.267,2 $20.775,1 $24.239 $27.325,4 $30.764,91

Estimating some critical

values we arrive at the

following figures for our

calculations:

WACC=9,75% , gTV=5%


19/20


2010 Base 2011e 2012e 2013e 2014e 2015e

Sales $21.996,8 $22.789,8 $24.907,3 $29.267,1 $32.998,2 $37.288,8

COGS $18.724,2 $19.267,2 $20.775,1 $24.238,9 $27.325,4 $30.764,9

SG&A $1.033,9 $1.139,5 $1.170,6 $1.317,0 $1.484,9 $1.678

Op Income $2.238,8 $2.383,1 $2.961,6 $3.711,1 $4.187,8 $4.845,9

Op Income

(1-t)

$1.813,4 $1.930,3 $2.398,9 $3.006 $3.392,1 $3.925,1

WCR -$96,7 -$1.218,8 -$1.563 $591,4 $1.090,2 $1.435,4

CAPEX $1.319,8 $1.367,4 $1.494,4 $1.756,0 $1.979,9 $2.237,3

Deprecia-

tion

$338,4 $607,6 $682,9 $832,6 $1.016,1 $1.093,4

FCF $928,7 $2.389,3 $3.150,3 $1.491,1 $1.338,1 $1.345,9

TV= $29.727,7DFCF $928,7 $2.177 $2.615,2 $1.127,9 $922,2 $19.511,8

PV DFCF $27.300,61

Debt $2.635,65

Marketa-bles

$8.883,35

Firm Value $33.548,31

Value pershare 499.163,61 KRW

Sensitivity analysis for different values of WACC and g (after the 5-year

period) .

WACC \ g 3% 4% 5% 6%

8% 506.502,96 580.097,10 702.753,98 948.067,75

9% 446.515,04 493.801,95 564.732,32 682.949,60

9,75% 413.067,66 448.629,03 499.163,61 576.649,9610% 403.489,68 436.054,46 481.645,15 550.031,20

11% 371.072,03 394.627,31 426.034,35 470.004,20


20/20

Anakous St 129

Phone: 0030 6973981444

E-mail: [email protected]

Shipyards Evaluators

Analyst:

Moutoupas Vasilis

MBA

Documents

Hyundai Heavy Valuation