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HYUNDAI HEAVY
INDUSTRIES VALUATION
009540 KS
SELL HOLD BUY
Target Price : 499.163,61 KRWExpected Period: 1st Quarter of 2011
31 DECEMBER 2010
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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.
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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
Page 4 Hyundai Heavy Valuation
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
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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.
Page 5Hyundai Heavy Valuation
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
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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
Page 6 Hyundai Heavy Valuation
Chapter 2
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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.
Page 7Hyundai Heavy Valuation
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
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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
Page 8 Hyundai Heavy Valuation
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
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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
Page 10 Hyundai Heavy Valuation
Diagram 11: Main financial data for division
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
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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
Page 11Hyundai Heavy Valuation
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.
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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
Page 12 Hyundai Heavy Valuation
Diagram 13: Main financial data for division
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,
8/7/2019 Hyundai Heavy Valuation
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
Page 13Hyundai Heavy Valuation
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
DivisionShareCost as %of salesOperatingMargin
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
8/7/2019 Hyundai Heavy Valuation
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
Page 14 Hyundai Heavy Valuation
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
Diagram 15: Main financial data for division
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-
8/7/2019 Hyundai Heavy Valuation
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
Diagram 18: Qualitative view of division
it is very
possible the
Company in the
future will
separate the
two activities by
creating a
separate
division of
renewable
energy
Page 15Hyundai Heavy Valuation
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
DivisionShareCost as %of salesOperatingMargin
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
Diagram 17: Main financial data for division
8/7/2019 Hyundai Heavy Valuation
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
Page 16 Hyundai Heavy Valuation
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).
Diagram 19: Main financial data for division
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
Diagram 20: Qualitative view of division
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
8/7/2019 Hyundai Heavy Valuation
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
Page 17Hyundai Heavy Valuation
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
8/7/2019 Hyundai Heavy Valuation
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.
Page 18 Hyundai Heavy Valuation
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%
8/7/2019 Hyundai Heavy Valuation
19/20
Page 19Hyundai Heavy Valuation
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
8/7/2019 Hyundai Heavy Valuation
20/20
Anakous St 129
Phone: 0030 6973981444
E-mail: [email protected]
Shipyards Evaluators
Analyst:
Moutoupas Vasilis
MBA
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