Hyundai E&C (000720) 2Q12 review: OPM bottoms发布时间：2012-07-30 研究机构：韩国投资
What’s new: Sales growth driven by overseas orders
2Q12 earnings fell short of consensus. Domestic sales decreased 12% whileoverseas sales increased 13%, resulting in top-line growth of 11%. However, theCOGS ratio rose 2.0%p due to the recognition of costs on low-margin projectssince 1Q12. In particular, management booked costs for low-margin projects wonin 2010, including the KOC pipeline project in Kuwait, conservatively with theCOGS ratios for plants approaching 99.8% and overseas sales 94.3%.
Pros: Strong earnings growth at subsidiaries during tough season
Hyundai E&C’s margins deteriorated but earnings at subsidiaries, HyundaiEngineering and Midco, reached record highs. Hyundai Engineering sales and OPgrew 51% and 40%, respectively, on favorable new orders in 2011. Early costrecognition lowered OPM to 9.7% in 1Q12, but this rebounded to 11% in 2Q12.
Sales at Midco, an electronic power construction company, accounts for 4% of totalrevenue, but recorded a 15% OPM, accounting for 12% of OP. Electronic powerconstruction is a specialized high-margin market. We believe profits at overseassubsidiaries other than electronic power construction were also recognized. (Referto 7/13 report ‘Strategic tie-up paid off in the ME’ for more on Midco).
Cons: Housing COGS may increase in 2H12
In-cheon Youngjong in-house project (W450bn, 300 units unsold) is scheduled tobe completed soon. Housing COGS is unlikely to erode margins sharply ashousing accounts for only 8% of sales and as PF (W1.9trn) and housing supply(6,323 units in 2011) is relatively low. However, management has disclosed higherhousing COGS may be recognized in 2012. Margins are also unlikely to grow dueto conservative accounting. As such, we lowered our OPM forecast from 6.2% to5.7%, OP by 8% and NP by 9%.
Conclusion: Lower TP to W97,000, but maintain as top pick
We cut our TP 17% to W97,000 on the lower earnings outlook and excludinginvestment asset value from our valuation. As OPM changes 7% if overseasCOGS ratio moves 1%p, it is meaningful that recognition of overseas cost (a keyearnings variable) has been finished. Currently, 50% of the target orders havealready been booked. Additional orders are likely in 2H12 as tenders are focus onpower plants, a competitive strength for Hyundai E&C. Of note, oil and coal plants,which are protected by high entry barriers, are also scheduled to be tendered.