Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Issuer of report: The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch View HSBC Global Research at:
https://research.hsbc MiFIDII–Research Isyouraccessagreed CONTACT us today over the past three months The construction sector has underperformed KOSPI by 14.7% over the past three months: This was due to:1) slowing overseas new orders in 1H due to a weak oil price,2) disappointing 1H earnings because of margin deterioration and additional loss from overseas by cost overrun, and 3) growing concern about a slowing housing market after the government’s property measures, announced on 2 August. Korea E&C’s new orders in 1H17 fell 7.5% y-o-y. Despite relatively strong domestic new orders, overseas new orders were weak. There was growing optimism that delayed overseas new orders from UAE POC (USD2.5bn), Bahrain BAPCO (USD5bn) and Oman Duqm projects would resume in 1H 2017. However, only the Oman Duqm project materialised. We think projects have been delayed further as oil prices have stayed below USD50 per barrel, compelling oil producing countries to delay placing orders because they are worried about deteriorated project profitability, as well as lacking the resources for construction cost. Government announced severe property measures on 2 August, targeting property market speculation. Multiple home owners (three or more) will have to pay higher taxes on capital gains and face restrictions on getting mortgages. Maximum LTV (loan to value) has been cut from 60% to 40% in speculative areas, and to 30% for multiple home owners. Surging property price seem to be stabilising, especially in reconstruction and redevelopment apartments. However, transaction volume cliff is inevitable, in our view, and lack of housing supply may cause a further surge in property prices. What worries us is that domestic construction companies are aggressively bidding for reconstruction projects by significantly lowering prices. This may mean they win projects but margins will deteriorate, leading to projects being loss making, as we have seen in overseas projects. According to local press reports (Yonhap News,14 September), Hyundai E&C and GS E&C are competing to win Banpo 1 phase projects. Hyundai E&C even offered a special package (KRW70m per house) to Banpo 1 phase of home owner association to cover moving expenses. Our view on the Korea E&C sector is conservative. We have Buy ratings on Hyundai Development (012630 KS, KRW35,450) and Daelim Industrial (000210 KS, KRW81,200): they have well diversified business portfolios and, while Hyundai Dev is dedicated to housing construction, it has diversified into other businesses such as duty free stores, the building maintenance business and the chemical industry. Our least preferred stock in the sector is Samsung Engineering (028050 KS, KRW10,200) and we rate it Reduce. 14 September 2017 Brian Cho* Head of Research, Korea The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch briancho@kr.hsbc +82237068750 * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Korea E&C EQUITIES CONSTRUCTION & ENGINEERING Korea A bumpy road ahead EQUITIES ● CONSTRUCTION & ENGINEERING 14 September 2017Key stocks Company Ticker Currency Current price TP Rating Up/downside Market Cap (USDm)3mADTV (USDm) Daelim Industrial Co.000210 KS KRW 81,200116,000 Buy 42.9%2,6139 Hyundai Development Co.012630 KS KRW 35,45067,000 Buy 89.0%2,36611 Samsung Engineering 028050 KS KRW 10,2009,000 Reduce -11.8%1,77017 Source: HSBC estimates.Priced as of close at 13 September 2017 KOSPI vs. Construction index price performance for the past 3 months Source: Quantiwise, HSBC Oil Price vs Korea E&C’s overseas new orders (monthly) Source: Quantiwise, HSBC Korea E&C 1H17 new orders (KRW bn) _______________2016_________________________________2017_________________ 2016 Guidance % Achieved 1H17 Guidance % Achieved Hyundai Development Co.3,9514,65085.0%1,1265,00022.5% Daelim Industrial Co.10,43813,00080.3%2,3079,95023.2% Hyundai E&C21,23027,33077.7%9,34124,30038.4% GS E&C11,53012,30093.7%5,57910,90051.2% Samsung Engineering4,9956,00083.3%2,117 N/A N/A Daewoo E&C9,79712,20080.3%4,8419,00053.8% Source: Company data, HSBC 80 85 90 95 100 105 110 2017-06-132017-06-282017-07-132017-07-282017-08-122017-08-272017-09-11 2017.06.13=100 KOSPIConstruction KOSPIConstruction index started falling since the government&39;s 8.2 property measures.40 60 80 100 120 1405,000 10,000 15,000 20,000 Apr-07Apr-09Apr-11Apr-13Apr-15Apr-17 Overseas new orderWTI (RHS) ($/Barrel)(USDm)EQUITIES ● CONSTRUCTION & ENGINEERING 14 September 2017 Sector PB, PE and ROE Company HSBC TP Rating 2017e PB 2017e PE 2017e ROE Daelim Industrials KRW116,000 Buy 0.62x 6.49x 9.84% Hyundai Development KRW67,000 Buy 0.90x 6.63x 14.47% Hyundai E&C KRW46,000 Hold 0.65x 8.24x 8.50% GS E&C KRW31,000 Hold 0.57x 14.60x 4.09% Daewoo E&C KRW6,500 Hold 1.14x 4.99x 24.90% Samsung Engineering KRW9,000 Reduce 1.86x 32.94x 6.44% Average 0.96x 12.31x 11.37% Source: Bloomberg. HSBC estimates Hyundai E&C (000720 KS, KRW38,700, Hold), Daelim Industrial Co.(000210 KS, KRW80,100, Buy), Hyundai Development (012630 KS, KRW35,450, Buy),Daewoo E&C (047040 KS, KRW 6,920, Hold), GS E&C (006360 KS, KRW27,800, Hold) Nationwide apartment prices (incl. re-construction) Seoul apartment prices (incl. re-construction) Source: Real Estate 114Source: Real Estate 114 Nationwide apartment transaction volumeSeoul apartment transaction volume Source: Onnara, Real Estate 114Source: Onnara, Real Estate 114 -4% 0% 4% 8% 8.6 9.1 9.6 10.1 10.6 11.1 Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17 Growth (RHS)Nationwide apartment price (LHS) (KRWmn/pyong)(y-o-y) -8% -3% 2% 7% 12% 16.0 17.0 18.0 19.0 20.0 21.0 Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17 Growth (RHS)Seoul apartment price (LHS) (KRWmn/pyong)(y-o-y) -50% -25% 0% 25% 50% 75% 100% 125%20,000 40,000 60,000 80,000 100,000 120,000 140,000 &39;12&39;13&39;14&39;15&39;16&39;17 (y-o-y)(Unit) SMA (LHS)Province (LHS)Growth (RHS)2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 Jan11Jan12Jan13Jan14Jan15Jan16Jan17 (Units) Seoul 淘宝店铺 “Vivian研报” 收集整理 获取最新报告及后续更新服务请淘宝搜索“Vivian研报” EQUITIES ● CONSTRUCTION & ENGINEERING 14 September 2017Nationwide unsold apartmentSeoul unsold apartment Source: Real Estate 114Source: Real Estate 114 Valuation and risks Daelim Industrial Co.(000210KS, KRW81,200, TP KRW116,000, Buy) We derive our target price using PB-ROE based valuation methodology. We apply a target multiple of 0.82x 2017e PB to our 2017e BPS estimate of KRW142,359. We arrive at our target multiple using the Gordon growth model based on 2017e ROE of 8.5% and COE of 10.4% and Beta of 1.4. With our unchanged target price implying 42.9% upside, we maintain our Buy rating on the stock. Table 1: PB-ROE based valuation PB-ROE valuation 2017e COE (%)10.4 Risk free rate (%)2.5 Equity Risk Premium (%)5.5 ROE (%)8.5 Long term growth rate (%)0.0 Implied PB 0.82x 2017e BPS (KRW)142,359 Fair Value per share (KRW)116,466 Target price (KRW)116,000 Source: Company data, HSBC estimates Downside risks to our rating:(1) Weaker oil prices further delaying orders from the Middle East; and (2) a plunge in housing price due to a dramatic drop in transaction volume. Hyundai Development Co.(012630 KS, KRW 35,450, TP KRW67,000, Buy) We derive our target price using an SOTP approach, valuing the construction and duty-free shop businesses separately. For the construction business, we apply our unchanged target multiple of 13.0x PE, equivalent to the company’s one-year average PE multiple in 2009 when the property price moved sideways after rising for the past few years, to 2017e construction- related net profit of