20160719-三星证券-Machinery_DBI_IPO_price_to_determine_Doosan_stocks__upside_13页_436kb

Sector Update Summary: Doosan Group Affiliates

Core Content

This document provides an analysis of the financial performance and investment outlook for Doosan Group affiliates, including Doosan Heavy Industries & Construction (DHIC), Doosan Infracore, and Doosan Engine, for the second quarter of 2016. The key focus is on the impact of the upcoming IPO of Doosan Bobcat (DBI) on the valuations and performance of these companies, as well as the revised financial forecasts and target prices.

Main Points

1. Doosan Infracore (042670, HOLD, TP: KRW7,500)

• 2Q16 Performance:

  • Operating profit surged 56% q-q, beating the consensus due to strong performances from DBI and its engine unit.
  • Pre-tax profit fell 11.3% q-q due to forex-related losses.
  • Net profit quadrupled q-q, driven by gains from the sale of its machine tool unit.
  • The firm increased its stake in DBI from 67% to 70% by repurchasing shares previously sold in a pre-IPO placement.

• Investment Recommendation:

  • Despite strong 2Q results, the firm is recommended to HOLD due to unattractive valuation (0.7x P/B, excluding hybrid bonds).
  • The IPO pricing of DBI is the most significant factor affecting the company's valuation and investment sentiment.
  • A disappointing IPO price could have a severe negative impact on the stock.

• Forecast Revisions:

  • Raised 2016 net profit forecast due to gains from the machine tool unit.
  • Raised 2017 net profit forecast by 8%, reflecting solid 2Q results.
  • Target price increased from KRW7,000 to KRW7,500.

2. Doosan Heavy Industries & Construction (034020, HOLD, TP: KRW24,000)

• 2Q16 Performance:

  • Consolidated operating profit met expectations, but the core heavy industries unit performed disappointingly.
  • DHIC turned to a net loss due to one-off costs and the exclusion of gains from its subsidiaries.
  • DHIC secured KRW2.3t in orders in 1H, achieving only 20% of its full-year target.

• Investment Recommendation:

  • HOLD recommendation is reiterated due to uncertainty around DBI's IPO price and sluggish 1H sales.
  • The stock is trading significantly higher than domestic construction peers (7.5x EV/EBITDA vs 5.3x).

• Forecast Revisions:

  • Revised 2016 net profit estimate downward due to the net loss.
  • Target price remains unchanged at KRW24,000, as sum-of-the-parts valuation remains intact.
  • Expected improvement in 2H due to domestic nuclear power plant orders.

3. Doosan Engine (082740, HOLD, TP: KRW4,900)

• 2Q16 Performance:

  • Posted a second consecutive quarterly operating profit, albeit a small one.
  • Pre-tax profit was influenced by one-off gains from an equity swap with DBI.

• Investment Recommendation:

  • HOLD due to uncertain DBI IPO pricing and the lack of momentum in its core business.
  • The firm is trading at 0.4x P/B, the lowest among Doosan affiliates.
  • Overhang concerns from SHI's divestiture may affect Doosan Engine's performance in the future.

• Forecast Revisions:

  • Raised 2016 net profit forecast due to one-off gains.
  • Lowered 2017-2018 forecasts as DBI's equity is now classified as available-for-sale securities.
  • Target price increased by 14% to KRW4,900, reflecting half of the increase in BVPS from one-off gains.

Key Information

• DBI's IPO Impact: The IPO price of DBI is expected to be a key determinant of the fair value of Doosan Group affiliates. Previous pre-IPO placements and equity swaps have influenced the valuations, with estimates ranging from KRW3.3t to KRW5.2t.

• Valuation Summary:

  • DHIC: P/B ratio of 0.8x (2016E), P/E ratio of 64.9x (2016E).
  • Doosan Infracore: P/B ratio of 0.7x (2016E), P/E ratio of 5.4x (2016E).
  • Doosan Engine: P/B ratio of 0.4x (2016E), P/E ratio of 2.1x (2016E).

• Financial Metrics:

  • DHIC: Sales dropped 3.7% q-q to KRW3,598b, but operating profit increased 19.0% q-q to KRW262b.
  • Doosan Infracore: Sales increased 12.9% q-q to KRW1,618b, with operating profit up 56.0% q-q to KRW173b.
  • Doosan Engine: Sales increased 26.7% q-q to KRW210b, with operating profit rising 3.2% q-q to KRW2b.

Conclusion

The analysis highlights the importance of DBI's IPO pricing on the overall valuation of Doosan Group affiliates. While Doosan Infracore and DHIC have shown some positive results in 2Q16, the uncertainty surrounding DBI's IPO price and the firm's current valuations lead to HOLD recommendations for all three affiliates. The financial performance and forecasts are influenced by one-off gains and the restructuring efforts of the group.