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All rights reserved. Standard Chartered Bank 2013 http://research.standardchartered.com



l Equity Research l South Korea l General Industrials l 10 October 2013
Korea shipbuilding
Oligopoly


The Korean big three oligopoly: With their competitive advantages infrastructure, track record and technological
leadership Koreas big three shipbuilders effectively have an oligopoly in the offshore platform segment. Given the robust
demand for deepwater drilling since 2011, we now expect strong demand for offshore production platforms to continue for the
rest of this decade. The big-three shipbuilders are also introducing a large-scale structure, the Floating-LNG platform
(F-LNG), which integrates a gas production facility and liquefaction plant. Our cost analysis shows that F-LNG could be 25%
more cost competitive than on-shore LNG and cost competitive with US shale gas in Northeast Asia.
Differentiated supply and demand analysis: Our in-depth supply and demand analysis on each vessel class includes
expected returns at current charter rates, new-build prices and interest rates. The outlook is positive for deepwater drilling rigs
and LNG carriers and we expect resilient demand through 2015 on the renewal and upgrade cycle. Our project-by-project
analysis of LNG projects indicates strong LNG carrier demand, with a number of carrier orders likely to be placed by 2016.
Positive on offshore and F-LNG: We initiate coverage of Daewoo Shipbuilding & Marine Engineering (DSME) and Samsung
Heavy Industries (SHI) with Outperform ratings. Both companies are well positioned to capture offshore market opportunities
and the growing potential from F-LNG platforms. We believe they have pricing power in these segments given their strong
track record and technological advantages. We initiate coverage of Hyundai Heavy Industries (HHI) with an In-Line rating.

James KP Hong
James.KP.Hong@sc.com
+82 2 3703 5164










Equity Research l Korea shipbuilding

10 October 2013 2
Contents
Executive summary 3
Valuation 6
Valuation backtesting 7
Offshore and marine
Offshore and marine: Oligopoly 10
Offshore rigs in a multi-year up-cycle 12
Offshore platforms, market for Korean big three 16
Offshore rigs: Supply and demand 21
Commercial vessels
Commercial vessels: Back to normal 23
Defining the commercial vessel cycle 25
Supply and demand of commercial vessels 30
Competition in commercial vessels 36
Appendix
Appendix I: Shipbuilders dockyards 38
Appendix II: Rig economics 39
Appendix III: Drillship charter status 41
Appendix IV: How the shipbuilding cycle works 43
Appendix V: Supply-demand model 44
Appendix VI: Price trends of commercial vessels 48
Companies
Daewoo Shipbuilding & Marine Engineering 50
Samsung Heavy Industries 56
Hyundai Heavy Industries 62

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Equity Research l Korea shipbuilding

10 October 2013 3
Executive summary
In this report, we explore Koreas shipbuilding sector from two angles:
offshore and marine and commercial vessel shipbuilding. We analyse supply
and demand, market potential and the competitive dynamics. We are bullish on
the offshore and marine sector, especially on production platforms and F-LNG,
also known as LNG-FPSO (floating production storage and offloading). Our top
picks are Daewoo Shipbuilding & Marine Engineering (DSME, OP) and
Samsung Heavy Industries (SHI, OP) which are more leveraged to this theme,
while we view Hyundai Heavy Industries (HHI, IL) as a late-cycle play on
commercial vessels.
Offshore and marine, from drilling to production
Deepwater (DW) drilling demand has been strong since 2011, with drilling rig
utilisation bottoming out. We expect DW drilling demand to remain resilient for the
next two to three years given strong day rates, high utilisation and offshore drillers
positive outlook. We believe exploration success or new discoveries are good early
indicators of offshore production platform demand and we see this strength
continuing into the rest of the decade.
F-LNGs are a game changer
We identify a USD 50bn p.a. addressable market for the Korean shipbuilders, of
which F-LNG vessels represent USD 5-6bn. Our cost analysis indicates that F-LNG
have a 25% cost advantage over the on-shore LNG model. Moreover, F-LNGs
enable operators to monetise stranded gas fields, which are equivalent to c.50% of
proven gas reserves, according to the US Geological Survey. Our cost analysis
indicates F-LNG could supply LNG to the Northeast Asia market at USD 11.6 per
mmbtu compared to the current price of USD 15 per mmbtu and the US shale gas
price of USD 10.2 per mmbtu.
Koreas big-three shipbuilders have a first mover advantage
We have studied the competitive advantages of Koreas big-three shipbuilders, and
see a two-year lead time versus their competitors, as: (1) only the big-three
shipbuilders have dockyards capable of building structures the size of F-LNG, (2)
they have an existing track record with international oil companies (IOCs), who are
leading offshore investments; and (3) they have a technological edge, as all 13 new-
build F-LNG projects in the pipeline are involved with Korean shipbuilders from the
development stage (there are no other bidders for these projects).
Positive outlook for DW drilling rigs and LNG carriers
Our detailed supply and demand model maps the outlook for each vessel class and
the expected returns at current charter rates, new-build prices and interest rates. The
supply and demand situation for LNG carriers and container ships remains healthy,
with oversupply below a year, while tankers have 1.1 years of oversupply and bulkers
2.7 years of oversupply. Our analysis of expected returns indicates attractive returns
for LNG carriers and container ships, we estimate IRRs of 6-9% during an assumed
operational period of 25 years. We expect a renewal and upgrade cycle for DW
drilling to drive demand for rigs. Our project-by-project analysis of LNG projects
indicates strong LNG carrier demand, with 25 LNG projects globally needing to fill
LNG carrier orders by 2016.
Strong demand for offshore
production platforms over the rest
of the decade, following strong
drilling demand
F-LNG offers a cost effective
alternative to the on-shore LNG
model and cost competitive to US
shale gas
Koreas big-three shipbuilders have
at least a two year lead on
competitors
Equity Research l Korea shipbuilding

10 October 2013 4
Introducing backlog-based valuation
We introduce a backlog-based valuation, EV/backlog, as a core valuation
methodology for shipbuilding companies. Our back-testing shows that a backlog-
based valuation works better in valuing shipbuilding companies as it is an early
indicator of earnings and book value.
Leaders in technology
Koreas big-three shipbuilders have continuously climbed the technology curve and
now dominate the market for the most advanced structures. The shipbuilders are
building the first F-LNG units, the largest and most advanced platforms in the world.
We believe the shipbuilders oligopolistic market position positions them well for USD
50bn p.a. of opportunities in offshore and commercial vessels in 2013-16.
Figure 1: Market opportunity for Koreas big-three shipbuilders
We expect a USD 50bn p.a. opportunity



Source: Standard Chartered Research estimates

DSME and SHI are our preferred plays
We prefer DSME and SHI among Koreas big-three shipbuilders on their leadership
in offshore production platforms. Both companies have successfully climbed the
technology curve and have more pricing power than the competition.
Daewoo Shipbuilding & Marine Engineering (Outperform, PT: KRW 45,000)
Strong market leadership in offshore production platforms and builder of Petronas
F-LNG.
Strong market leadership in very large post-Panamax (VLPP, 18,000 TEU or
larger) container ships, and cost cutting should kick in from late 2013E.
Expect strong earnings turnaround from 2014.
Trading at 1.4x 2014E PBR versus 2014E ROE of 10.4%.
Offshore production
platform
F-LNG
Deepwater drilling rig
Container ship
and tanker
LNG carrier
Average 28 units p.a.
assuming 50% is new-build
ASP c.USD 1bn
13 new-builds in
pipeline in 2014-15
ASP c.USD 1.5bn
Rig renewal/upgrade
shortage continues
ASP c.USD 500mn (drillships & high-spec jack-ups)
Global LNG boom
strong order flow c.30 units p.a.
ASP c.USD 200mn
Offshore &
Marine vessels
Commercial
vessels
Equity Research l Korea shipbuilding

10 October 2013 5
Samsung Heavy Industries (Outperform, PT: KRW 55,000)
An industry leader in F-LNG (Shells Prelude FLNG) and Oil-FPSO (Totals Egina
project).
Solid drillship and LNG carrier orders are cash cows, and the company is adding
high-spec jack-ups; expect order wins of c.USD 16bn p.a. in 2014-16.
Valuation re-rating on solid earnings, market leadership and sound order wins.
Trading at 1.4x 2014E PBR vs. 2014E ROE of 14.9%.
Hyundai Heavy Industries (In-Line, PT: KRW 280,000)
Remains the most cost competitive of the big three due to economies of scale and
vertical integration, but has a large exposure to the commercial vessel market and
is facing fierce competition from Chinese shipyards.
Slower-than-expected ROE accretion without a correction in heavy plate prices (a
major component of costs); lower plate prices help current profitability but
inevitably drag down new-build prices (and future profitability).
Possible ROE accretion fully priced in, thus reflecting its fundamentals.
Trading at 1.0x 2014E PBR vs. 2014E ROE of 4.2%.
Figure 2: Initiating coverage of Koreas big three shipbuilders
Prefer DSME and HHI


Above data as of 9 October 2013.
Source: Companies, FactSet, Standard Chartered Research estimates

Mkt cap Price hide column-old rating PT Up/(Dn)
Ticker (USD mn) (lc) Rec (lc) side (%) FY1E FY2E FY1E FY2E FY1E FY2E
DSME 042660 KS 6,301.1 35,350 OP 45,000 27.3 43.4 13.2 18.7 11.1 1.5 1.4
Hyundai Heavy Industries 009540 KS 18,897.8 267,000 IL 280,000 4.9 26.1 23.4 19.7 18.2 1.0 1.0
Samsung Heavy Industries 010140 KS 9,573.2 44,500 OP 55,000 23.6 9.9 10.2 6.5 5.7 1.6 1.4
PER (x) EV/EBITDA (x) PBR (x)
Equity Research l Korea shipbuilding

10 October 2013 6
Valuation
Valuation methodology
Earnings-based valuation
Due to the time lag between backlogs, new-build prices and earnings, we believe
conventional earnings-based valuation methodologies lag changes in the intrinsic
value of order-driven companies in sectors such as shipbuilding and construction.
Furthermore, this lag should lengthen once companies receive more orders for
projects with longer build times, such as offshore production facilities. This makes
earnings-based valuation approaches even less appropriate for Korean shipbuilders,
in our view, as the shipbuilders are becoming more focused on offshore platforms
rather than commercial vessels.
Figure 3: Life cycles of different products
Longer time from backlog to sales



Source: Standard Chartered Research

Backlog-based valuation
While most of our peers are still using PER or PBR as a core valuation methodology,
we believe backlog-based valuation methodologies, such as EV/backlog, best reflect
the underlying value of these order-driven companies. However, we continue to use
other valution methodologies to supplement the shortcomings of the backlog-based
valuation approach (such as the lack of information on peer comparison and dramatic
changes in project profitability).
Figure 4: Aggregate operating profit of big three versus
aggregate market cap
Figure 5: Aggregate backlog of big three versus aggregate
market cap





Source: Bloomberg, Standard Chartered Research

Source: Bloomberg, Clarksons, Standard Chartered Research estimates
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Earnings are a lagging indicator in
order-driven industries
Backlog-based valuation is more
appropriate
Equity Research l Korea shipbuilding

10 October 2013 7
Valuation backtesting
Backlog works best
We have conducted valuation backtesting using backlog, EBITDA, EPS and BVPS
valuation approaches. Backlog works best in our backtesting with each of the
shipbuilders (correlation during the past decade). The charts below show the
historical trends of share prices, backlog, EBITDA, EPS and BVPS for all three
companies. While share prices move along with backlog, other financial metrics lag
the share price.
Figure 6: Daewoo Shipbuilding & Marine Engineering
Share price moves with backlog, EBITDA lags
Figure 7: Daewoo Shipbuilding & Marine Engineering
Both BVPS and EPS have no correlation





Source: Company, Bloomberg, Standard Chartered Research estimates

Source: Company, Bloomberg, Standard Chartered Research estimates

Figure 8: Samsung Heavy Industries
Share price moves with backlog, EBITDA lags
Figure 9: Samsung Heavy Industries
EPS has high correlation, but lags share price





Source: Company, Bloomberg, Standard Chartered Research estimates

Source: Company, Bloomberg, Standard Chartered Research estimates

Figure 10: Hyundai Heavy Industries
Share price moves with backlog, EBITDA lags
Figure 11: Hyundai Heavy Industries
Both BVPS and EPS have weak correlation





Source: Company, Bloomberg, Standard Chartered Research estimates

Source: Company, Bloomberg, Standard Chartered Research estimates

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DSME stock price (LHS, KRW) Backlog (LHS, KRW bn)
EBITDA (RHS, KRW bn)
R
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to backlog ~ 62%
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to EBITDA ~ 19%
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to EPS ~ -2%
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SHI stock price (LHS, KRW) Backlog (LHS, KRW bn)
EBITDA (KRW bn)
R
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to backlog ~ 80%
R
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to EBITDA ~ 71%
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SHI stock price BVPS EPS (RHS)
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to BVPS ~ 43%
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to EPS ~ 72%
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to backlog ~ 67%
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to EBITDA ~ 55%
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HHI stock price BVPS (RHS) EPS (RHS)
R
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to BVPS ~ 47%
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to EPS ~ 29%
Backlog > EBITDA > ROE
Equity Research l Korea shipbuilding

10 October 2013 8
Valuation comparison

Figure 12: Valuation comparables Global shipbuilders
(USD mn)

DSME SHI HHI KAWASAKI MITSUI KEP SMM YANGZIJANG RONGSHENG GUANGZHOU
Ticker

042660 KS 010140 KS 009540 KS 7012 JP 7003 JP KEP SP SMM SP YZJ SP 1101 HK 317 HK
Market cap (USD mn) 6,288 9,549 18,861 6,921 1,750 15,512 7,548 3,521 840 1,097
Price target (LC) 45,000 55,000 280,000 NA NA 10.91 4.60 NA NA NA
Rating OP OP IL NR NR IL IL NR NR NR
Sales 2013E 13,437 13,780 50,050 13,076 5,829 12,890 4,581 2,348 842 1,183

2014E 14,037 14,584 52,714 14,314 6,716 15,084 5,822 2,354 1,378 1,556
2015E 14,194 15,046 53,140 15,104 7,357 NA 5,969 2,529 1,760 1,694
OP 2013E 364 1,159 1,125 420 242 1,808 495 553 -218 -15

2014E 761 1,216 1,338 695 188 2,096 643 433 -95 -11

2015E 883 1,393 1,631 799 216 NA 656 449 -12 -4
NP 2013E 141 938 703 313 -84 1,508 443 453 -275 37

2014E 478 935 809 397 89 1,689 560 348 -160 38
2015E 572 1,072 978 494 90 NA 569 353 -94 42
OP margin 2013E 2.7 8.4 2.2 3.2 4.2 14.0 10.8 23.5 -25.9 -1.3
(%) 2014E 5.4 8.3 2.5 4.9 2.8 13.8 11.0 18.4 -6.9 -0.7
2015E 6.2 9.3 3.1 5.3 2.9 NA 11.0 17.7 -0.7 -0.3
PER 2013E 43.4 9.9 26.9 22.0 -20.4 13.2 17.1 1.6 -4.0 46.6
(x) 2014E 13.2 10.2 23.4 17.7 19.2 11.7 13.6 2.0 -6.0 44.5
2015E 11.0 8.9 19.3 14.2 19.1 NA 13.4 1.9 -10.1 40.8
PBR 2013E 1.4 1.6 1.0 2.1 0.9 2.0 3.2 0.3 0.5 NA
(x) 2014E 1.4 1.4 1.0 1.8 0.9 1.9 2.8 0.2 0.6 NA

2015E 1.2 1.4 0.9 1.7 0.9 NA 2.5 0.2 0.6 NA
ROE 2013E 3.1 18.9 3.7 9.5 -4.8 15.6 20.9 17.1 -9.7 4.2
(%) 2014E 10.4 14.9 4.2 10.9 4.9 16.3 23.2 12.3 -8.3 4.2
2015E 11.5 15.9 4.9 12.6 5.1 NA 20.8 10.8 -7.5 4.5
EV/EBITDA 2013E 18.7 6.9 19.7 11.2 6.5 14.0 11.2 5.9 -45.2 NA
(x) 2014E 11.1 5.6 18.2 11.9 6.1 12.1 8.6 5.8 -48.0 NA
2015E 9.5 4.5 16.0 11.9 5.8 NA 8.2 5.1 -51.7 NA
Above data as of 9 October 2013.
Source: Bloomberg, Standard Chartered Research estimates

Figure 13: Forward PBR trend Figure 14: EV/modified backlog trend


Source: Bloomberg, Standard Chartered Research estimates

Source: Company, Bloomberg, Standard Chartered Research estimates

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Equity Research l Korea shipbuilding

10 October 2013 9
Figure 15: Valuation comparables Korea industrials
(USD mn)

DSME SHI HHI HMD SECL Daelim HE&C GSE&C SK Bend
Doosan
Engine
Ticker 042660 KS 042660 KS 042660 KS 010620 KS 028050 KS 000210 KS 000720 KS 006360 KS 014620 KS 082740 KS
Market cap (USD mn) 6,288 9,549 18,861 2,918 3,030 3,218 6,521 1,766 795 642
Price target (LCY) 45,000 55,000 280,000 NA 105,000 120,000 60,000 30,000 NA NA
Rating OP OP IL NR OP OP IL IL NR NR
Sales 2013E 13,437 13,780 50,050 3,702 10,017 9,774 12,735 8,758 399 792

2014E 14,037 14,584 52,714 3,936 9,296 11,217 14,979 9,475 435 763
2015E 14,194 15,046 53,140 4,015 9,490 12,884 17,124 10,008 465 1,104
OP 2013E 364 1,159 1,125 -55 -72 497 632 -754 94 2

2014E 761 1,216 1,338 41 362 666 856 137 102 -1

2015E 883 1,393 1,631 127 480 806 985 298 112 22
NP 2013E 141 938 703 -51 -98 386 462 -696 70 -5

2014E 478 935 809 66 294 523 672 63 76 2
2015E 572 1,072 978 118 384 633 776 181 84 17
OP margin 2013E 2.7 8.4 2.2 -1.5 -0.7 5.1 5.0 -8.6 23.5 0.3
(%) 2014E 5.4 8.3 2.5 1.0 3.9 5.9 5.7 1.4 23.6 -0.1
2015E 6.2 9.3 3.1 3.2 5.1 6.3 5.7 3.0 24.0 2.0
PER 2013E 43.4 9.9 26.9 -72.3 nm 8.1 13.7 nm 11.3 -125.9
(x) 2014E 13.2 10.2 23.4 44.1 10.3 6.2 9.7 28.0 10.5 266.9
2015E 11.0 8.9 19.3 24.6 7.9 5.1 8.4 19.6 9.5 38.4
PBR 2013E 1.4 1.6 1.0 1.1 2.1 0.6 1.4 0.5 2.0 0.9
(x) 2014E 1.4 1.4 1.0 1.0 1.8 0.6 1.2 0.6 1.7 0.9

2015E 1.2 1.4 0.9 1.0 1.6 0.5 1.1 1.0 1.4 0.9
ROE 2013E 3.1 18.9 3.7 -1.5 -6.4 8.2 10.4 -20.6 19.1 -0.7
(%) 2014E 10.4 14.9 4.2 2.1 19.0 9.8 13.5 2.0 17.4 0.3
2015E 11.5 15.9 4.9 4.2 21.4 10.3 13.6 5.4 16.2 2.3
EV/EBITDA 2013E 18.7 6.9 19.7 6324.9 nm 5.9 9.1 nm 7.8 25.2
(x) 2014E 11.1 5.6 18.2 23.7 7.8 4.1 6.8 15.3 7.4 25.4
2015E 9.5 4.5 16.0 12.3 5.7 3.0 5.9 12.7 7.0 24.5
Above data as of 9 October 2013.
Source: Bloomberg, Standard Chartered Research estimates

Equity Research l Korea shipbuilding

10 October 2013 10
Offshore and marine: Oligopoly
Koreas big-three shipbuilders dominate the global offshore deepwater rig
and offshore platform markets, especially drillships.
We believe their infrastructure, track record and technological leadership
provide sustainable competitive advantages.
We estimate stable offshore production platform order flow of c.USD 15bn
p.a. in 2013-19.
The new F-LNG market, a separate market potentially worth c.USD 20bn (we
estimate USD 5-6bn p.a. in the next three to four years) provides additional
growth potential for the shipbuilders, in our view.
Expect resilient demand for offshore deepwater drilling rigs of c.USD 10bn
p.a. in 2011-15 on the renewal/upgrade cycle.
Offshore platforms > USD 15bn p.a. in 2013-19E
Following the rigs
We believe exploration success and discoveries are good early indicators of demand
for offshore production facilities. Strong rig demand since 2011 should therefore
translate to offshore platform demand in 2013-19.
Competitiveness of Koreas big three
The big three Korean shipbuilders effectively constitute an oligopoly in the offshore
platform business. Their competitiveness is secured by their infrastructure, strong
track records and technological leadership.
The size of offshore platforms has grown enormously as functionality has expanded.
In the case of F-LNG (LNG-FPSO) platforms, length can reach 488 meters, and only
the Korean big three have the large-scale docks to build such platforms (see
Appendix I). Moreover, the big-three shipbuilders have built a strong relationship with
the IOCs that are leading offshore oil and gas investment.
We believe the high entry barriers will enable the Korean big three to dominate the
c.USD 15bn p.a. offshore platform market over the next six years.
Figure 16: Order forecasts for offshore production platforms
2013E 2014E 2015E 2016E 2017E 2018E 2019E
Demand (units)* 28 28 27 25 23 30 32
Orders (units) 14 14 14 13 12 15 16
Amount (USD bn) 15 15 15 14 13 16 17

* New-build 50%, conversion 50%.
Source: Clarksons, companies, Standard Chartered Research estimates

F-LNG platforms are a game changer
F-LNG platforms seem to be emerging as an alternative to the onshore LNG terminal
model given their potentially better economics than onshore models (c.30% lower
capex and a shorter construction period of three to four years).
Equity Research l Korea shipbuilding

10 October 2013 11
F-LNG enable IOCs to monetise stranded gas reserves, which are equivalent to 48%
of proven gas reserves. We expect F-LNG gas to be cost competitive with US shale
gas. Our cost analysis shows that Australian F-LNG could be delivered to Japan at
USD 11.6 per mmbtu versus US shale gas of USD 10.2 per mmbtu.
SHI and DSME are each already building an F-LNG unit, and our checks indicate
there are 13 more projects to be awarded. The Korean big three are the only bidders
for these projects, and we believe they are in a strong position to win as they are
already involved in the early design stage. We estimate this is a c.USD 20bn
opportunity over the next three to four years, providing a USD 5-6bn p.a. opportunity
for the big three Korean shipbuilders.
Figure 17: F-LNG new-build awards in the pipeline
USD 5-6bn p.a. opportunity for big three Korean shipbuilders
Project/Field
Developer/
Operator Region
Value
(USD bn)
Award
schedule Bidders
Prelude FLNG Shell Australia 3 2Q11 SHI (winner)
Kanowit LNG FPSO Petronas Malaysia 1 2Q12 DSME (winner)
Rotan LNG FPSO Petronas Malaysia 0.8 2H13-2014 SHI
GDF Bonaparte Development GDF Suez Australia 1.8 2H13-2014 HHI, DSME
N/A Petrobras Brazil 1.8 2014 SHI, DSME
Tamar gas filed Noble Energy, Delek Group, Ratio Oil Israel 5 2014 DSME
Cash-Maple LNG FPSO PTTEP Australia 2 2014 HHI, SHI, DSME
Browse Great Poseidon ConocoPhillips Australia 3.3 2014 SHI, DSME
PNG LNG FPSO Petromin PNG Holdings Papua New Guinea 1.3 2014 DSME
Abadi LNG INPEX Masela, Shell, ENRG Indonesia 2.3 2014-15 SHI
Sunrise Woodside Petroleum Australia 1.8 2014-15 SHI, DSME
Crux Shell Australia 1.8 2014-15 SHI
Scarborough gas field ExxonMobil Australia 2 2014-15 HHI, SHI, DSME
NA ConocoPhillips NA TBD 2014-15 SHI, DSME
Browse LNG Browse JV Australia TBD TBD SHI, DSME

Source: Companies, Upstream, Asiasis, Standard Chartered Research estimates

Offshore rigs: c.USD 10bn p.a. till 2015E
Strong deepwater drilling rig demand over the next two to three years
We believe the rigs new-build cycle will remain resilient over the next two to three
years as underlying fundamentals in the deepwater drilling rig market remain solid:
(1) the day-rate for deepwater rigs remains as high as c.USD 600k per day, making
rigs an attractive investment vehicle; (2) offshore drillers remain supportive, with
tender and inquiry activity remaining strong; and (3) the supply-demand dynamics are
underscored by the increasing rig utilisation rate (especially for deepwater rigs).
We expect the big three Korean shipbuilders to win a total of c.USD 10bn of
deepwater rig orders p.a. through 2015. However, with SHI and DSMEs recent
penetration into the high-spec jack-up sector, we see upside risk to our order
forecasts.
Both SHI and DSME have recently won high-spec jack-up orders with ASPs of USD
500-650mn, 2-3x more than Singaporean-built jack-ups. We see a USD 2bn, or four
units p.a., opportunity in the high-spec jack-up market in 2013-14.


Equity Research l Korea shipbuilding

10 October 2013 12
Offshore rigs in a multi-year up-cycle
Positive on offshore sector
Growth from deepwater
Statistics from Quest Offshore (Quest) show healthy spending trends for the global
offshore sector, with Quest forecasting capex to rise 15% p.a. through 2015. Quest
believes deepwater will attract twice the investment dollars as shallow water in 2010-
15. The drilling and subsea segments are good ways to play rising deepwater capex
as they will account for c.60% and c.20% of total offshore capex, respectively.
Healthy upstream expenditure
Solid growth opportunities
We expect global upstream expenditure to exceed USD 660bn in 2013. The
combination of a healthy commodity price and exploration success worldwide should
provide support for the upstream sector over the next three to five years. We believe
exploration success or discoveries are good leading indicators of future activity.
Standard Chartereds 2013-15 crude oil forecast is USD 113-116/bbl for Brent and
USD 99-111/bbl for WTI.
Figure 18: Upstream expenditure
Oil price is a leading indicator
Figure 19: Exploration success, newly developed capacity
On a positive trend





Source: Wood Mackenzie, Standard Chartered Research estimates

Source: Wood Mackenzie, Standard Chartered Research

Figure 20: Top 10 basins in 2011 (by total discovered reserves)

Source: Wood Mackenzie
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Constructive view on oil price = solid
upstream spending
Equity Research l Korea shipbuilding

10 October 2013 13
Figure 21: Many deepwater opportunities emerging outside the Golden Triangle

Source: Ensco

Figure 22: New field resources discovered in 2012
Majority of discoveries are deepwater gas fields
Figure 23: Deepwater drilling contract status and demand
Healthy supply and demand in 2005-15E





Source: Wood Mackenzie

Source: Fearnley Offshore

Strong new-build of deepwater rigs
Expect rig new-build cycle to remain resilient through 2015
We believe the rig new-build cycle will remain resilient over the next two to three
years as underlying fundamentals in the deepwater drilling rig market remain solid:
(1) the day-rate for deepwater rigs remains as high as c.USD 600k per day, making
rigs an attractive investment vehicle; (2) offshore drillers remain supportive, with
tender and inquiry activity remaining strong; and (3) the supply-demand dynamics are
underscored by the increasing rig utilisation rate (especially for deepwater rigs).
Day-rate for deepwater rigs and investment return: The recent announcement
of rig-contracts with day rates close to USD 600k is strong evidence that the
supply and demand situation remains supportive. At the current day-rate level of
USD 500-600k, rig investment payback has shortened to around four years (based
on EBITDA) from seven to nine years at the 2008 day rate of USD 400k. We
estimate the IRR for drillship rig investment is c.17%, an attractive yield, in our
view (details in Appendix II: Rig economics).
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2015E
Equity Research l Korea shipbuilding

10 October 2013 14
Figure 24: Drillship rig day rate
Recent announcement of rig contracts at USD 600k
Figure 25: Drillship rig utilisation
Strong demand for DW drilling





Source: Rig-zone, Standard Chartered Research

Source: Rig-zone, Standard Chartered Research

Supportive offshore drillers stance: Major offshore drillers have commented
positively on market demand, and drillers continue to see strong tender and inquiry
activity. Drillers seem upbeat on the segment across the board, as they believe
recent significant discoveries will require appraisal and development drilling in
2014 and beyond. Based on Wood Mackenzies estimate, deepwater wells of
1,300ft and beyond comprised 77% of total wells discovered in 2012.
Supply-demand dynamics: Concern about rig oversupply is perennial, but we
believe they are overblown, as key supply-demand indicators such as day rates
have remained resilient and new-build activity also continues. We believe the
market remains healthy, with the near-100% utilisation and day rates of c.USD
600k reflecting strong supply-demand dynamics, in our view.
Figure 26: Offshore drilling rig delivery schedule
Majority of future deliveries have already been chartered
2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
New-build (units)
Drillships 11 22 16 9 5 5 3 1
Semi-submersibles 1 6 8 5 1 2 1 0
Jack-ups 25 32 39 6 0 0 0 0
Contracted new build (units)
Drillships 11 9 5 8 5 5 3 1
Semi-submersibles 1 4 5 1 1 2 1 0
Jack-ups 9 7 6 2 0 0 0 0
Charter ratio (%)
Drillships 100% 41% 31% 89% 100% 100% 100% 100%
Semi-submersibles 100% 67% 63% 20% 100% 100% 100%
Jack-ups 36% 22% 15% 33%

Source: Riglogix, Bloomberg, Standard Chartered Research estimates


0
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2007 2008 2009 2010 2011 2012 2013
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%

Drillship < 5000' WD Drillship 5000'-8000' WD
Drillship > 8000' WD
Equity Research l Korea shipbuilding

10 October 2013 15
2013-15E: USD 10bn of orders p.a. for Korean big three
Shortage of 85 floaters (semi-submersibles and drillships) by 2015E
The big three Korean shipbuilders command a global market share of virtually 100%
in deepwater drilling, except in Brazil, where Singaporean shipbuilders have strong
networks. We believe resilient deepwater drilling demand, supported by new field
discoveries, should enable the Korean big three to win a total of USD 10bn of orders
p.a. through 2015.
Moreover, SHI and DSME have successfully penetrated the high-spec jack-up
market, winning orders for high-spec jack-ups with ASPs of USD 500-650mn, 2-3x
more than ASPs for Singaporean-built jack-ups. We see a USD 2bn, or four units
p.a., opportunity for the Korean shipbuilders in the high-spec jack-up market.
Figure 27: 2013E, another year of > USD 10bn deepwater rig orders

Year Shipbuilder Rig type Value (USD bn) Units
2011 Hyundai Heavy Drillship 6 11

Samsung Heavy Drillship 5.7 10

DSME Drillship 2.7 5
Semi-sub 1.8 3
2011 subtotal 16.2 29
2012 Hyundai Heavy Drillship 1.1 2

Semi-sub 0.6 1

Samsung Heavy Drillship 5 9

DSME Drillship 2.8 5

Semi-sub 1.1 2

Hyundai Samho Semi-sub 0.6 1
STX Drillship 0.6 1
2012 subtotal 11.8 21
2013 Hyundai Heavy Semi-sub 0.8 1

Samsung Heavy Drillship 2.1 4

Semi-sub 0.7 1

High-spec Jack-up 1.3 2

DSME Drillship 2.3 4
High-spec Jack-up 0.5 1
2013 YTD subtotal 7.7 13
Remaining options Hyundai Heavy Drillship 0.6 1

Samsung Heavy Drillship 2.9 5
DSME Drillship 2 4
2013 remaining options 5.5 10


Source: Companies, Asiasis, Clarksons, Standard Chartered Research


Equity Research l Korea shipbuilding

10 October 2013 16
Offshore platforms, market for Korean big
three
Resilient FPSO market
Positive stance on offshore oil and gas production
Between 2013 and 2017, Douglas-Westwood estimates up to USD 91bn will be spent
on 121 floating production storage and offloading (FPSO) units. The underlying driver
is growth in offshore oil and gas production, which Douglas-Westwood expects to
increase over 20% over the next five years to 30 mbpd.
Figure 28: Top 15 companies by upstream capital expenditure, 2013-14E



Future development capital expenditure in 2012 real terms, E&A spending not included.
Source: Wood Mackenzie, Standard Chartered Research

141 FPSOs in the planning stage
Research by International Maritime Associates (IMA) points to 141 FPSOs in the
planning stage worldwide, compared to 96 at the end of 2008. IMA forecasts 20-28
FPSO orders per year over the next five years, up from the average of 15 a year over
the preceding five years.
FPSO units are the biggest segment of offshore production platforms, accounting for
58% of the existing fleet. We forecast orders for c.28 offshore production platforms a
year in 2013-19.
Figure 29: Order forecasts for offshore production platforms
2013E 2014E 2015E 2016E 2017E 2018E 2019E
Demand (units)* 28 28 27 25 23 30 32
Order forecast (units) 14 14 14 13 12 15 16
Amount (USD bn) 15 15 15 14 13 16 17

*New-build 50%, conversion 50%.
Source: Clarksons, companies, Standard Chartered Research estimates

Following the rigs
We believe exploration success or discoveries are good early indicators of demand
for offshore production facilities. Strong rig demand since 2011should enhance order
visibility for offshore production platforms.

0
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Strong rig demand enhances order
visibility
Another growth driver for big three
Korean shipbuilders
Equity Research l Korea shipbuilding

10 October 2013 17
F-LNG Monetising stranded gas reserves
85 tcf opportunity
A stranded gas reserve is a natural gas field that has been discovered but remains
undeveloped for either physical or economical reasons. Such fields can be: (1) too
deep to drill; (2) too small to justify the investment; (3) too expensive to build a
pipeline to reach; (4) too far away from markets to make exploitation economically
feasible; or (5) have a high carbon oxide content, resulting in excessive maintenance
costs in a pipeline due to corrosion.
The US Geological Survey (USGS) estimates there are 85tn cubic feet (tcf) of
stranded gas, or around 50% of proven reserves. Since natural gas is a cleaner and
safer source of power generation, we see enormous potential for the natural gas
market and remain positive on its long-term growth and sustainability.
Figure 30: Gas reserves
Stranded gas makes up c.50% of proven reserves
Figure 31: Size distribution of gas fields
On-shore LNG ineffective for small- to mid-size LNG fields



Source: US Geological Survey, Standard Chartered Research

Source: IHS Energy, Standard Chartered Research

F-LNG platforms are a game changer
Many players appear to consider F-LNG (also known as LNG-FPSO) a potential
alternative to the existing on-shore LNG terminal-based model, as they could provide
better accessibility to small- and mid-sized and remote gas fields, cost less to
develop than the on-shore model (c.25% lower costs) and take three to four years to
construct compared to six to seven years for on-shore facilities.
However, F-LNG are still an unknown quantity, as Samsung Heavy Industries is
scheduled to deliver the worlds first F-LNG platform in February 2016. There are
therefore risks until F-LNG facilities prove their economics and safety. Nonetheless,
we see a growing interest in the F-LNG model as a substitute for the on-shore LNG
model, due to rising fears of cost overruns and national oil companies (NOC)
increasing involvement in gas field development.
F-LNG, a cost-effective solution?
Comparison with on-shore LNG model
We examine the historical capital costs of on-shore LNG models. We assume a new
plant complex with a single train having a capacity of 6mn metric tonnes per year
(MMtpa) constructed in Australia has a capital cost of USD 1,025 per MMtpa of
output. However, recent greenfield gas field development costs have reached USD
1,300-1,500 per MMtpa, mainly due to project cost overruns.
0
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natural gas
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reserves
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t
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Small-to-mid scale
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F-LNG could have a competitive edge
over the on-shore terminal model
F-LNG enables the development of
stranded gas reserves, which make up
c.50% of proven reserves
Capex of the on-shore LNG model has
risen from USD 1,025 per MMtpa to USD
1,300-1,500
Equity Research l Korea shipbuilding

10 October 2013 18
Cost overruns at major LNG projects have been a major issue recently, with Gorgon
LNGs cost overrun reaching 41%. It is clear that cost overruns hurt a projects long-
term profitability, forcing LNG developers to find a cost-effective solution.
Figure 32: On-shore LNG versus F-LNG
F-LNG does not need on-shore processing and has easier access to gas fields using a vessel-type platform


Source: Standard Chartered Research

On-shore LNG model: As highlighted in the above figure, the on-shore LNG
model requires a central processing facility (CPF), a pipeline and an on-shore LNG
terminal. The CPF processes gas from gas fields, then transmits it through a
pipeline to an on-shore LNG plant. The on-shore LNG terminal liquefies and stores
natural gas in liquid form. The on-shore terminal has historically been the main
source of cost overruns, due to strict safety and environmental regulations.
F-LNG model: In the F-LNG model, gas processing, liquefaction and storage are
all done on the LNG-FPSO, so there is no need for a pipeline and on-shore plant.
LNG is offloaded to LNG carriers directly from the LNG-FPSO.
Figure 33: On-shore model costs
Pluto LNG (Woodside, 2011) reached c.USD 1,300/MMtpa
Figure 34: F-LNG model costs
Development costs 25% lower


Source: Douglas-Westwood, Flex LNG, Standard Chartered Research estimates

Source: Douglas-Westwood, Standard Chartered Research estimates

Gas field
LNGC
LNGC
Gas field
Land
Land
2) Pipeline to
on-shore plant
1) Offshore production
for gas processing
3) On-shore processing -
liquefaction and storage
4) Transmission
1) F-LNG processing -
production, liquefaction and storage
2) Offloaded/transmission
F-LNG model
On-shore model
3) On-shore processing -
liquefaction and storage
On-shore plant
Pipeline
Gas compression
Platform
Well installation
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Equity Research l Korea shipbuilding

10 October 2013 19
Competition with US shale
Given most F-LNG projects will be based in Oceania (Australia and Papua New
Guinea) and Southeast Asia (Malaysia and Indonesia), we believe the biggest market
for the gas produced will be Asia, especially Japan and Korea. This puts them in
direct competition with US shale gas exports. Our cost analysis of F-LNG gas and US
shale exports, shows that F-LNG gas could provide an attractive cost structure for
Asian end users.
Asia continues to pay between USD 12-18 per mmbtu of LNG, while natural gas
costs around USD 3-5 per mmbtu in North America (Henry Hub basis).
Figure 35: Historical gas price trend
Asian countries pay USD 12-18/mmbtu of LNG vs. USD 3-5 per mmbtu in US (Henry Hub)



Source: Bloomberg, Standard Chartered Research

US shale exports (from US Gulf coast to Japan): We use the development cost
from the on-shore LNG model described above, which implies capex of USD
1.8/mmbtu of LNG. According to Cheniere Energy (which operates Sabine Pass),
the reservation fee and operational expenditure cost USD 0.32/mmbtu. Assuming
overhead costs at 5% of capex and opex, we estimate the current margin of
exporting US shale gas to Japan to be around USD 4.8/mmbtu of LNG.
F-LNG (from Australia to Japan): Due to the strong cost competitiveness of US
shale exports, LNG developers in Oceania and Asia are considering F-LNG
facilities as a way to cut costs. The International Energy Agency (IEA) expects
deepwater gas production to cost USD 5-10/mmbtu, with overhead/shipping costs
USD 2.3/USD 1.3 per mmbtu. We estimate the margin left to producers is USD
3.4/mmbtu versus USD 4.8 for US shale.
Figure 36: Estimated costs, US shale exports
Liquefaction and shipping costs > USD 6/mmbtu
Figure 37: Estimated costs, F-LNG (Australia)
Cheaper shipping costs make F-LNG competitive





Source: Cheniere Energy, Bloomberg, Standard Chartered Research estimates

Source: Cheniere Energy, Bloomberg, Standard Chartered Research estimates
0
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compete against US shale exports
Equity Research l Korea shipbuilding

10 October 2013 20
Growth opportunity for Koreas big three
Monetising USD 5-6bn p.a. opportunity
We believe only Koreas big-three shipbuilders are capable of building F-LNG
platforms given the structures massive size and technological challenges. Korean
shipbuilders have cooperated with global oil companies, mainly IOCs, in developing
F-LNG.
Shell, developer of the Prelude F-LNG, has an exclusive commitment with SHI on F-
LNG. According to the companies, there has been a verbal agreement between Shell
and SHI on five F-LNG projects through 2020.
According to our checks, 13 new-build F-LNG projects are under consideration and
all should be awarded to the Korean big three, as they were the only bidders. We
estimate the total value of new-build F-LNG projects will amount to c.USD 20bn over
the next three to four years, providing a USD 5-6bn p.a. opportunity to the Korean big
three.
Figure 38: F-LNG new-build awards in the pipeline
USD 5-6bn p.a. opportunity for Korean big three
Project / Field Developer / Operator Region
Value
(USD bn)
Award
schedule Bidders
Prelude FLNG Shell Australia 3 2Q11 SHI (winner)
Kanowit LNG FPSO Petronas Malaysia 1 2Q12 DSME (winner)
Rotan LNG FPSO Petronas Malaysia 0.8 2H13-2014 SHI
GDF Bonaparte
Development
GDF Suez Australia 1.8 2H13-2014 HHI, DSME
N/A Petrobras Brazil 1.8 2014 SHI, DSME
Tamar gas filed Noble Energy, Delek Group, Ratio Oil Israel 5 2014 DSME
Cash-Maple LNG FPSO PTTEP Australia 2 2014 HHI, SHI, DSME
Browse Great Poseidon ConocoPhillips Australia 3.3 2014 SHI, DSME
PNG LNG FPSO Petromin PNG Holdings Papua New Guinea 1.3 2014 DSME
Abadi LNG INPEX Masela, Shell, ENRG Indonesia 2.3 2014-15 SHI
Sunrise Woodside Petroleum Australia 1.8 2014-15 SHI, DSME
Crux Shell Australia 1.8 2014-15 SHI
Scarborough gas field ExxonMobil Australia 2 2014-15 HHI, SHI, DSME
NA ConocoPhillips NA TBD 2014-15 SHI, DSME
Browse LNG Browse JV Australia TBD TBD SHI, DSME

Source: Companies, Upstream, Asiasis, Standard Chartered Research estimates



Equity Research l Korea shipbuilding

10 October 2013 21
Offshore rigs: Supply and demand
The big-three Korean shipbuilders command nearly 100% of the drillship market
the most value-added product in the offshore rigs segment. They have also recently
won orders for high-spec jack-ups, with ASPs of USD 500-650mn, compared to the
c. USD 200mn ASPs for jack-ups built by Singaporean shipyards.
Shortage of 93 modern jack-up rigs by 2015E
Our differentiated supply-demand analysis shows a shortfall of up to 93 modern jack-
up rigs (those under 30 years old) by 2015E. This is equivalent to three years of
global rig production. The situation has improved from a year ago, with 34 new jack-
up orders YTD. We also take a more conservative approach to our jack-up demand
forecast and now use a 2% CAGR through 2015, compared to 3% previously.
Figure 39: Potential shortage of 93 jack-up rigs by 2015E
Need modernisation, demand for high-spec jack-ups
Figure 40: Jack-up supply-demand situation
Jack-up renewal cycle from 2012





Source: ODS-Petrodata, Douglas-Westwood, Standard Chartered Research estimates

Source: ODS-Petrodata, Douglas-Westwood, Standard Chartered Research estimates

Shortage of 40 floaters by 2015E
Our supply-demand model for floaters (semi-submersibles and drillships) points to a
shortage of up to 40 units by 2015E if obsolete rigs (30 years or older) are unable to
meet health, safety, environment and quality requirements. This shortage represents
13% of 2015E demand and 1.2 years of global floater production.
Figure 41: Potential shortage of 40 floaters by 2015E Figure 42: Floaters supply-demand situation
Obsolete rigs unable to meet regulatory requirements



Source: ODS-Petrodata, Douglas-Westwood, Standard Chartered Research estimates

Source: ODS-Petrodata, Douglas-Westwood, Standard Chartered Research estimates

0
100
200
300
400
500
600
Supply Supply less rigs
35 yrs or older
Supply less rigs
30 yrs or older
Demand
u
n
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Potential shortage of 93
jackups by 2015E
100
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s

Demand
BULL
BEAR
BLUE: jack-ups < 30 yrs
potential
shortage
Total
supply
GREEN: jack-ups 30 yrs or >
0
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Supply Supply less rigs
35 yrs or older
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Potential shortage of 40
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Demand
BULL
BEAR
BLUE: floaters < 30 yrs
potential
shortage
Total supply
GREEN: floaters 30 yrs or >
Floaters, semi-sub and drillship, also in
tight situation
Jack-up renewal cycle: demand for
high-spec jack-ups
Equity Research l Korea shipbuilding

10 October 2013 22
Rising attrition of older rigs is evidence of fleet renewal
More rigs are being retired or converted to non-drilling support functions, which we
believe is further evidence of fleet renewal. Older rigs find it more difficult to secure
work, due to a lack of capability or perceived reliability. Tougher drilling
environments, such as extended-reach wells, and high-pressure, high-temperature
wells are also pushing demand for newer rigs.

Equity Research l Korea shipbuilding

10 October 2013 23
Commercial vessels: Back to normal
We expect the shipbuilding cycle for commercial vessels to normalise in
2013-16; we forecast an average 35,700k compensated gross tonnage (CGT)
of new-build p.a. after the digestion period in 2009-12.
Container ship demand is rebounding, led by demand for post-Panamax
class vessels, the strongest market among commercial vessels.
We expect stable demand for LNG carriers of c.30 units p.a. (or USD 5-6bn
p.a.) from US and Australian LNG projects, with 25 new LNG projects to
award LNG carrier orders by 2016E.
Koreas big-three shipbuilders have market shares of around 60% in
container ships and 70% in LNG carriers.
Normalisation of shipbuilding cycle
Digestion period ending
We agree that sector fundamentals are bottoming out, and early signs of a cycle
turnaround such as new-build orders and second hand prices are emerging. We
expect new-build orders to normalise back to an average of 35,700k CGT p.a. in
2013-16, after the 2009-12 digestion period.
Figure 43: Commercial vessel shipbuilding cycle
Bottoming-out, average 35,700k CGT in 2013-16E
Figure 44: Price trends of commercial vessels (by type)
Container ships, formerly the laggard, now rebounding first


Source: Clarksons, Standard Chartered Research estimates

Source: Clarksons, Standard Chartered Research

Container ships: USD 15bn p.a. till 2016E
Container ship demand bottoming out
We believe the price improvement in container ships is mainly due to: (1) the
bottoming out of a laggard; (2) the turnaround in developed markets economic
conditions (closely related to container demand); and (3) first-tier liners incentives to
realise economies of scale with bigger vessels in their fleets. Due to the Panama
Canal expansion in 2014, demand for post-Panamax container ships (larger than
10,000 TEU) is strong.
2013-16E orders > 1,500k TEU p.a., or three times 2012 orders
New orders in 8M13 have already surpassed 1,300k TEU, 3.2x 2012 new orders. We
expect new orders to exceed 1,500k TEU in 2013. More importantly, we expect
orders to remain strong for the next three years.
0
20,000
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60,000
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100,000
1
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New commercial vessel order
35,700
27,100
68,000
50,000
17,700
Globalization
China super-cycle
Digestion
Normalization
50
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Tanker (USD/DWT) Bulk carrier (USD/DWT)
Container (USD/TEU) Gas carrier (USD/DWT)
Equity Research l Korea shipbuilding

10 October 2013 24
Koreas big three: Positioned to benefit
Koreas big-three shipbuilders have a 60% global market share in container ships
and virtually 100% of the Panamax or larger sized-vessel market (VLPP). With strong
order momentum in large-size container ships, the big-three are well-positioned to
benefit as the cycle normalises.
Figure 45: Container ship new orders
Expect 42% p.a. growth in 2012-16
Figure 46: Container ship order breakdown
Post-Panamax accounts for 92% of contract value

Source: Clarksons, Standard Chartered Research estimates

Source: Clarksons, Standard Chartered Research

LNG carriers: USD 6-8bn p.a. till 2016E
Monetising USD 6-8bn p.a. opportunity in LNG carriers
We believe the biggest driver for LNG carrier demand will be US shale gas exports
from late 2013. Sabine Pass and Cove Point have started awarding LNG carriers. We
estimate Koreas big-three shipbuilders are positioned to monetise a USD 6-8bn p.a.
opportunity (30-40 units annually) in the LNG carrier new-build segment over the next
three years. In addition to US shale gas exports, Australia provides upside potential.

0
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Container new order
CAGR 42%
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Post-panamax Panamax Below-panamax
Equity Research l Korea shipbuilding

10 October 2013 25
Defining the commercial vessel cycle
Key drivers of commercial vessel cycle
We see four key drivers of the commercial vessel cycle: global GDP growth, freight
rates, the heavy plate price and interest rates (especially the ship financing rate).
Conservative stance, +2-3% YoY growth in USD/CGT
Based on our outlook for each driver, we have not factored in a meaningful recovery
in new-build prices, nor do we expect one in 2014 without a recovery in the shipping
industry. In 2013-14, we expect 2% YoY growth (in USD/CGT terms) for bulkers and
tankers and 3% YoY growth for container ships and gas carriers (LNG and LPG).
However, orders are bottoming out and we believe they will return to the normal level
of c.35,700k CGT p.a. in 2013-16. While we do not see downside potential for new-
build prices, the delayed interest rate up-cycle and sluggish steel plate prices are
headwinds to a new-build price up-cycle, in our view. However, the post-Panamax
container ship and LNG carrier segments remain healthy.
1. Global GDP growth
Globalisation
With globalisation, emerging markets have leveraged their cheap labour and natural
resources to soak up global manufacturing demand. Off-shoring has become a global
trend and we believe one of the major backdrops of the 2005-08 shipbuilding super-
cycle was Chinas growth potential as a global manufacturing powerhouse.
Off-shoring is be the main reason there is a stronger correlation between growth in
container ship demand (final product shipments-centric) and developed markets
GDP growth, whereas bulker demand (raw material shipments-centric) growth has a
higher correlation with emerging markets GDP growth.
Figure 47: Historical GDP growth vs. seaborne trade growth



Source: IMF, Standard Chartered Research
-4%
-2%
0%
2%
4%
6%
8%
10%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Y
o
Y

World Seaborne Trade World GDP growth
Shipping cycle is an early indicator
of the shipbuilding cycle
Equity Research l Korea shipbuilding

10 October 2013 26
Figure 48: Container demand growth GDP growth in
developed markets (OECD)
Figure 49: Bulker demand growth GDP growth in
emerging markets (BRIC)



Source: OECD, Clarksons, Standard Chartered Research

Source: IMF, Clarksons, Standard Chartered Research

2. Freight rates
Freight rates determine profitability
We estimate investment returns using assumptions on utilisation (80%), operating
period (20 years), financing structure (one third and two-thirds loans), interest rate
(6%), cost of equity of (11%) and tax rate (30%).
Figure 50: Freight rates
Daily rates bottoming out



Source: Clarksons, Standard Chartered Research

Expected investment returns and new-build prices
Over the past decade, investment returns (based on the annual freight rate for each
year) has correlated with new-build prices. When investment returns rise, vessels
become more attractive as an investment vehicle, leading to stronger order flows,
larger backlog and better pricing. This is how an up-cycle works.
Freight rates are determined by supply and demand. We believe the fundamentals of
freight rates are bottoming out; on the supply side, 2014-15 delivery remains weak,
while the demand side is improving with macroeconomic turnaround.
-10%
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0%
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10%
15%
20%
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Bulker World BRICS GDP growth
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Equity Research l Korea shipbuilding

10 October 2013 27
Figure 51: Capital cost-to-daily earnings
Worst is behind us
Figure 52: IRR by commercial vessel type
Post-Panamax containers and LNG carriers most profitable



Source: Clarksons, Standard Chartered Research

Source: Clarksons, Bloomberg, Standard Chartered Research estimates

3. Heavy plate prices
Mixed impact on new-build price
We see a mixed impact from softening heavy plate prices, which should have a
positive impact on current earnings (as raw material costs will be lower), but could
exert downward pressure on vessel prices, negatively affecting future earnings.
Limited downside from 2014E
We see downside risk to heavy plate prices with Hyundai Steel adding 2mtpa
capacity amid weakness in raw material prices in late 2013E. We forecast an 11%
YoY price correction in 2013. However, we expect heavy plate pricing to stabilise in
2014 (+1% YoY), as steelmakers try to improve profitability (we believe heavy plate is
loss-making at current prices) as demand bottoms.
Figure 53: Heavy plate price trend versus new-build price
Expect heavy plate price to bottom in 2013
Figure 54: Heavy plate price trend versus new-build price
Stabilised heavy plate pricing limits downside in new-build
prices





Source: POSCO, Clarksons, Standard Chartered Research estimates

Source: POSCO, Clarksons, Standard Chartered Research estimates
0
5
10
15
20
25
30
35
40
1
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200
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100
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POSCO domestic heavy plate (RHS)
-30%
-20%
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0%
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20%
30%
40%
50%
60%
1
9
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NB price index change
POSCO domestic heavy plate change
Strong steel pricing negative for
current earnings, but positive for new-
build prices (cost-push)
Equity Research l Korea shipbuilding

10 October 2013 28
Figure 55: Steel plate is a significant component of building costs

(% of building cost) Steel plate Other machinery
Offshore platform 5-7% 55-65%
LNG carrier 15% 25% or higher
Container 25-30% 15-20%
Tanker 40-45% 10-15%
Bulker 45% 10%

Source: Daewoo Shipbuilding & Marine Engineering, Standard Chartered Research estimates

4. Financial markets interest rates/ship financing
Key interest rates closely related to new-build prices
There has been a close relationship between key interest rates, such as US 3M
LIBOR and the ECB refinancing rate and new-build prices since 2001. Interest rates
determine the profitability of ship owners, given most use ship financing.
Interest rate up-cycle from 2015E
We expect an interest rate up-cycle to start from 1Q15E; we believe US 3M LIBOR
will remain at 0.25% in 2013-14 then jump to 1.00% in 2015 (see Economic Alert:
United State, dated 25 September 2013). While we think the lack of further interest
rate cuts limits downside to new-build prices, we need more time to see a full-fledged
recovery in new-build prices.
Figure 56: Interest rates versus new-build prices
Close relationship due to ship financing



Source: Bloomberg, Clarksons, Standard Chartered Research

Europeans are largest ship owners
European companies have ordered the most vessels in 2013 YTD, accounting for
46% of new-build order value (the highest level in the past five years). We believe
this is driven by the recovery in European macroeconomic conditions.
0
1
2
3
4
5
6
7
80
100
120
140
160
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200
220
1
9
9
9

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NB Price index ECB refinancing rate (RHS) US 3M LIBOR (RHS)
Delayed interest pick up is a headwind
Equity Research l Korea shipbuilding

10 October 2013 29
Figure 57: New-build order trend by owner countries

(USD bn) 2008 2009 2010 2011 2012 8M13
Greece 21.5 3 13.3 13.5 6.8 5.3
Germany 19.3 1.6 3 6.4 1.8 1.9
Norway 10.1 0.4 6.4 9.3 16.9 7.1
Other Europe 34.9 5 18.5 13.8 10.7 1.9
EUROPE subtotal 85.8 10 41.2 43 36.2 26.8
China 13.2 7.4 16.8 6.4 4.6 6.4
Japan 19.8 4 8.6 5.8 4.7 1.8
Korea 8.3 2 4.8 3 1.8 2.5
Other Asia 15.9 4 16.8 13.7 10 5.6
ASIA Subtotal 57.2 17.4 47 28.9 21.1 16.3
Middle East 10.4 2.6 2.4 3.9 2.5 0.6
Others 25.4 11.3 17.3 27.4 28.3 14.2
Global total 178.8 41.3 107.9 103.2 88.1 57.9
(as % of total)
Greece 12% 7% 12% 13% 8% 9%
Germany 11% 4% 3% 6% 2% 3%
Norway 6% 1% 6% 9% 19% 12%
Other Europe 20% 12% 17% 13% 12% 3%
EUROPE subtotal 48% 24% 38% 42% 41% 46%
China 7% 18% 16% 6% 5% 11%
Japan 11% 10% 8% 6% 5% 3%
Korea 5% 5% 4% 3% 2% 4%
Other Asia 9% 10% 16% 13% 11% 10%
ASIA subtotal 32% 42% 44% 28% 24% 28%
Middle East 6% 6% 2% 4% 3% 1%
Others 14% 27% 16% 27% 32% 25%
Global total 100% 100% 100% 100% 100% 100%

Source: Clarksons, Standard Chartered Research estimates


Equity Research l Korea shipbuilding

10 October 2013 30
Supply and demand of commercial vessels
Bulkers
Still digesting
We expect bulker new orders to grow 15% p.a. in 2012-16. The bulker market is still
in oversupply, with backlog as a percentage of fleet still hovering at around 30%. The
slowdown in Chinas steel demand and development of mines in China has
weakened long-term demand for bulkers, in our view.
Demolition remains high, with demolition age stable at 26-30 years. Vessels more
than 20 years old account for 7.9% of the existing fleet, according to Clarksons.
With another sizeable delivery of 60mn DWT (c.10% of the existing fleet), in 2013E,
we expect capacity digestion to continue through 2016. The bright side is that
deliveries fall significantly from 2014, suggesting some slowdown in supply growth.
Figure 58: Bulker new orders
15% p.a. growth in 2012-16E
Figure 59: Bulker backlog
Backlog-to-fleet remains around 30%


Source: Clarksons, Standard Chartered Research estimates

Source: Clarksons, Standard Chartered Research estimates

Figure 60: Deliveries and demolition Figure 61: Demolition age
No major change in demolition trends



Source: Clarksons, Standard Chartered Research estimates

Source: Clarksons, Standard Chartered Research




0
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2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3
E

2
0
1
4
E

2
0
1
5
E

2
0
1
6
E

m
n

D
W
T

Bulk new order
CAGR 15%
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
100
200
300
400
500
600
700
800
2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3
E

2
0
1
4
E

2
0
1
5
E

2
0
1
6
E

m
n

D
W
T

Bulker fleet
Backlog as % of fleet (RHS)
0
20
40
60
80
100
120
2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3
E

2
0
1
4
E

2
0
1
5
E

2
0
1
6
E

m
n

D
W
T

Delivery Demolition
0
50
100
150
200
250
300
350
400
Older than
30 yrs
26-30 yrs 21-25 yrs 16-20 yrs 11-15 yrs Younger
than 10 yrs
u
n
i
t
s

2011 2012 2013 YTD
Order growth 15% p.a. in 2012-16E
Equity Research l Korea shipbuilding

10 October 2013 31
Tankers
Strong demand supported by global oil and chemical trade
We expect tanker new orders to grow 18% p.a. in 2012-16. Tanker demand is less
sensitive to macroeconomic conditions than other vessels. The largest demand driver
is global oil and chemical trade volumes, in which we expect healthy growth over the
next decade due to growing oil and chemical trade from the US and Middle East.
Despite the strong new order growth, we expect a healthy supply and demand
situation in 2012-16 given the healthy backlog (backlog as a percentage of fleet
c.16% in 2013E) and stable demolition. Tankers are being demolished at a younger
age, and vessels older than 16 years account for 15.9% of the fleet, according to
Clarksons.
Figure 62: Tanker new orders
18% p.a. growth in 2012-6E
Figure 63: Tanker backlog
Backlog-to-fleet < 20%, healthy

Source: Clarksons, Standard Chartered Research estimates

Source: Clarksons, Standard Chartered Research estimates

Figure 64: Deliveries and demolition Figure 65: Demolition age
Demolition age decreasing

Source: Clarksons, Standard Chartered Research estimates

Source: Clarksons, Standard Chartered Research




0
10
20
30
40
50
60
70
80
90
100
2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3
E

2
0
1
4
E

2
0
1
5
E

2
0
1
6
E

m
n

D
W
T

Tanker new order
CAGR 18%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
100
200
300
400
500
600
2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3
E

2
0
1
4
E

2
0
1
5
E

2
0
1
6
E

m
n

D
W
T

Tanker fleet Backlog as % of fleet (RHS)
0
10
20
30
40
50
60
2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3
E

2
0
1
4
E

2
0
1
5
E

2
0
1
6
E

m
n

D
W
T

Delivery Demolition
0
20
40
60
80
100
Older than
30 yrs
26-30 yrs 21-25 yrs 16-20 yrs 11-15 yrs Younger
than 10 yrs
u
n
i
t
s

2011 2012 2013 YTD
Order growth 18% p.a. in 2012-16E

Beneficiary of US and Middle Easts
growing oil and chemical trade
Equity Research l Korea shipbuilding

10 October 2013 32
Container ships
Bottoming out, expect 2013 new orders of c.1,500k TEU
We expect container ship new orders to grow 42% p.a. in 2012-16. We continue to
expect a container shipping recovery in 2014-15, given sustainable demand
improvement from developed markets, mainly the US and Europe, and our view that
capacity control will kick in from 4Q13-1Q14.
New orders in 8M13 surpassed 1,300k TEU, 3.2x 2012 new orders. We expect 2013
new orders to exceed 1,500k TEU. More importantly, we expect orders to remain
strong for the next three years.
What drives strong container ship demand?
We believe the strong container ship demand YTD has been driven by first-tier
container liners reinforcing economies of scale. Order outflows from liners are more
closely linked to profitability than operating cash flow, in our view.
The profitability of first-tier container liners has rebounded from 3Q12, while laggards
are still struggling. The divergence is mainly driven by fleet composition, as we found
no major difference in freight rate and cost (bunker) among container liners.
Moreover, with Panama Canal expansion in 2014, liners are increasing orders for
post-Panamax container ships (larger than 10,000 TEU). In 8M13, 52% of container
ship new orders were for post-Panamax vessels, according to Clarksons.
Figure 66: Container ship new orders
Strong 42% p.a. growth in 2012-16E
Figure 67: Container ship order backlog
Healthy backlog, similar to pre-Chinese run-up



Source: Clarksons, Standard Chartered Research estimates

Source: Clarksons, Standard Chartered Research estimates

Figure 68: Deliveries and demolition Figure 69: Demolition age



Source: Clarksons, Standard Chartered Research estimates

Source: Clarksons, Standard Chartered Research
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3
E

2
0
1
4
E

2
0
1
5
E

2
0
1
6
E

'
0
0
0

T
E
U

Container new order
CAGR 42%
0%
10%
20%
30%
40%
50%
60%
0
5,000
10,000
15,000
20,000
25,000
2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3
E

2
0
1
4
E

2
0
1
5
E

2
0
1
6
E

'
0
0
0

T
E
U

Container fleet
Backlog as % of fleet (RHS)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3
E

2
0
1
4
E

2
0
1
5
E

2
0
1
6
E

m
n

D
W
T

Delivery Demolition
0
10
20
30
40
50
60
70
Older than
30 yrs
26-30 yrs 21-25 yrs 16-20 yrs 11-15 yrs Younger
than 10 yrs
u
n
i
t
s

2011 2012 2013 YTD
Post-Panamax orders
Container liners economies of scale
Order growth 42% p.a. in 2012-16E

Bottoming out, expect recovery from
2014
Equity Research l Korea shipbuilding

10 October 2013 33
Figure 70: Operating cash flow trend of liners
Healthy first-tier liners are placing post-Panamax orders
Maersk is making strong post-Panamax
orders, leveraging turnaround in
operating cash flow



Source: Bloomberg, Standard Chartered Research

-2,000
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
1
Q
1
0

2
Q
1
0

3
Q
1
0

4
Q
1
0

1
Q
1
1

2
Q
1
1

3
Q
1
1

4
Q
1
1

1
Q
1
2

2
Q
1
2

3
Q
1
2

4
Q
1
2

1
Q
1
3

2
Q
1
3

U
S
D

m
n

Maersk NOL Mitsui osk Hanjin
Maersk made an early turnaround
Equity Research l Korea shipbuilding

10 October 2013 34
LNG carriers
LNG carriers, from Australia to US
The recent strong order flow in LNG carriers is mainly due to Australian LNG
projects. So far, 46 vessels have been awarded for Gorgon and Ichtys, which are
scheduled to commence in 2014 and 2017, respectively. Korean shipbuilders have
won 29 of these vessels, or 74%, while Japanese shipbuilders have won seven
orders.
In late 2013 and 2014, the biggest driver for LNG carrier demand should be US shale
gas exports. Sabine Pass and Cove Point have started awarding LNG carriers.
Figure 71: Expected LNG projects and LNG carrier order status, 2014-20E
Strong LNG carrier orders from large LNG projects
Country Project 2014E 2015E 2016E 2017E 2018E 2019E 2020E
LNGC
order status
Australia Gorgon 1,500

Started

Arrow 1,600

Expected

AP LNG

1,400

Finished

Gladstone

780

Expected

Wheatstone

890

Expected

Ichthys

840

Started

Browse

1,000

Expected

Prelude

350

Expected

Scarborough

600

Expected

Sunrise

400

Expected
Pluto (#2)

500

Expected
US Sabine Pass

1,486

Started

Cove Point

675

Started

Free Port

945

Expected
Cameron

1,148

Expected
Nigeria Bras LNG (#1, #2) 1,000

Expected

NLNG (#7, #8)

1,700 Expected
Olokola LNG

2,200

Expected
Russia Yamal

1,500

Started

Shtokman

750

Expected
Pechora

260

Expected
Indonesia Donggi Senoro (#2)

200

Expected
Abadi

120

Expected
Norway Snohvit (#2)

420

Expected
Egypt Damietta (#2)

550

Expected
Libya Mellitah

Expected
Iran Pars LNG

1,000 Expected
Brazil Santos Basin

270

Expected
Venezuela Cran Mariscal de Ayacucho 470

Expected
Papua New Guinea PNG LNG 660

Started
Angola Angola LNG (#2)

520 Expected
Malaysia Kimanis

120

Expected
Total (tonnes) 5,230 2,890 3,230 6,904 2,180 2,200 3,220

Source: Media reports, Standard Chartered Research estimates
Strong order flows from Australian and
US LNG projects
Equity Research l Korea shipbuilding

10 October 2013 35
Competition from Japan
Japanese utility or trading companies are developing some US shale export projects
in cooperation with US energy producers. Some investors are concerned about
growing competition from Japanese shipyards as Japanese developers could prefer
Japanese builders.
However, we believe these concerns are somewhat overblown. Most Japanese
shipbuilders have not built LNG carriers in a decade, and thus lack competitiveness.
Since 2010, only 20% of LNG carriers have been built by Japanese shipbuilders,
mainly Mitsubishi Heavy Industries, Mitsui Shipbuilding and Kawasaki Heavy
Industries, while Korean shipbuilders have a 67% share over the same period. In
terms of new orders, Koreas big-three shipbuilders dominate the sector with a 73%
market share in 2013 YTD. Moreover, Samsung Heavy Industries recently won an
LNG carrier order from a Japanese developer.
Figure 72: 2013 YTD LNG carrier orders
Korean big three command a 73% market share
Country Shipyard Confirmed Optional Total M/S
Korea Hyundai Heavy 7 6 13 15%

Samsung Heavy 15 10 25 29%
DSME 7 18 25 29%
Others Japan 7 0 7 8%
China 10 5 15 18%
Total

46 39 85 100%
Source: Clarksons, Standard Chartered Research estimates

Figure 73: LNG carrier delivery schedule
81 LNG carriers scheduled for delivery in 2013-17E
Figure 74: Korean shipbuilders dominate





Source: Clarksons, Standard Chartered Research estimates

Source: Clarksons, Standard Chartered Research

Figure 75: Monthly LNG carrier orders (cumulative)
Good momentum in LNG carrier orders YTD



Source: Clarksons, Standard Chartered Research
0
10
20
30
40
50
60
2
0
0
0

2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3
E

2
0
1
4
E

2
0
1
6
E

2
0
1
6
E

2
0
1
7
E

u
n
i
t
s

Delivered Orderbook
81 units, or 72% of orderbook,
are built by Koreans
0
10
20
30
40
50
60
2
0
0
0

2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

9
M
1
3

u
n
i
t
s

Hyundai H.I. Samsung H.I. Daewoo
Hanjin H.I. Mitsubishi H.I. Mitsui SB
Kawasaki H.I. Hudong Zhonghua Others
Korean
shipbuilders'
share
0
10
20
30
40
50
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A
u
n
i
t
s

Korea Japan China Others
2011 2012 2013
Koreans dominate LNG carrier sector
Equity Research l Korea shipbuilding

10 October 2013 36
Competition in commercial vessels
Japan Korea China
Korea market share c.30%, but commands higher revenue share
Korean shipbuilders market share peaked at 33% in 2009 and has come down
slightly to 31% in 2013E (CGT terms, orderbook basis). Despite the decline in market
share, Korean shipbuilders have steadily moved into the high-end complex product
space, which they now dominate. Korean shipbuilders ASP is 3x above their
Chinese and Japanese competitors, as the Korean yards focus on post-Panamax
container ships, LNG carriers and offshore vessels (deepwater drilling rigs and
offshore platforms). Korean shipbuilders still command a revenue market share
above 31%, in our view.
FX movements
FX does not play a large role in the shipbuilding sector, in our view. As seen in
Japan, JPY weakness has not helped its shipbuilding industry. The Japanese market
share has stalled at 10-15%. We believe track record, product mix, and quality play
bigger roles in the shipbuilding sector, especially in the high-end complex product
space.
Figure 76: Product classification
Korean shipbuilders focus on high-end
Figure 77: Technological roadmap
No product overlap between Korea and China





Source: Standard Chartered Research

Source: Standard Chartered Research

Figure 78: Market share trend by order book
Korea maintains a 30% market share
Figure 79: Market share trend by new order wins
2013 new order growth from container ships and tankers

Source: Clarksons, Standard Chartered Research

Source: Clarksons, Standard Chartered Research
0%
10%
20%
30%
40%
50%
0
50
100
150
200
250
1
9
9
6

1
9
9
7

1
9
9
8

1
9
9
9

2
0
0
0

2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3

M
a
r
k
e
t

s
h
a
r
e

O
r
d
e
r
b
o
o
k

(
m
n

C
G
T
)

Korea Japan China Rest of Asia Europe Rest of World
Korea
Japan
China
0%
10%
20%
30%
40%
50%
0
20
40
60
80
100
1
9
9
6

1
9
9
7

1
9
9
8

1
9
9
9

2
0
0
0

2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3

M
a
r
k
e
t

s
h
a
r
e

N
e
w

o
r
d
e
r

(
m
n

C
G
T
)

Korea Japan China Rest of Asia Europe Rest of World
Korea
Japan
China
FX trends not a major threat to Korean
builders
Korea dominates high-end complex
product space
Equity Research l Korea shipbuilding

10 October 2013 37
Figure 80: Korea dominates high-end space
ASPc.USD 90mn, three times its regional competitors
Figure 81: Japanese market share FX movement
Market share stalled at 10-15% despite weakening currency


Source: Clarksons, Standard Chartered Research

Source: Clarksons, Standard Chartered Research

Industry restructuring
From 612 to 482
According to Clarksons, there were 612 shipyards during the industry's heyday. New
shipyards were opened to meet the strong demand in 2006-08. However, after five
years of digestion, there are 482 shipyards, a decline of 21.2% over the past five
years. Some shipyards have turned themselves into fix shops, modification centres or
block makers to survive in the industry downturn.
From 482 to 396
An even smaller numbers of shipyards have an order book. Of the 482 shipyards
listed in Clarksons, only 396 had remaining orders as of end-1Q13. While some
investors remain concerned on aggressive bidding from shipyards with no order
book, we believe potential clients are concerned about the shipyards quality and
delivery schedules.
From 396 to 114
According to Clarksons, only 114 shipyards, or 23.7% of registered shipyards, have
received orders YTD in 2013. We expect the restructuring in the industry to
accelerate as Chinese government bodies, both central and local, step in to solve
overcapacity and environmental issues in Chinas heavy industries, including steel
and shipbuilding.
0
30
60
90
120
150
0
50
100
150
200
250
1
9
9
6

1
9
9
7

1
9
9
8

1
9
9
9

2
0
0
0

2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3

A
S
P

(
U
S
D

m
n
)

N
e
w

o
r
d
e
r

(
U
S
D

m
n
)

Korea Japan China
Korea
China
Japan
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1
9
9
6

1
9
9
7

1
9
9
8

1
9
9
9

2
0
0
0

2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3

Y
o
Y

F
X

m
o
v
e
m
e
n
t

N
e
w

o
r
d
e
r

(
C
G
T

t
e
r
m
)

Japan M/S JPY-USD (RHS)
Equity Research l Korea shipbuilding

10 October 2013 38
Appendix I: Shipbuilders dockyards
Dockyard
Dockyards are places where ships are repaired and built. Only Koreas big-three
shipbuilders have dockyards longer than 500m, which are capable of building large-
scale structures such as F-LNG and FPSOs.
Figure 82: Shipbuilders dockyards
Company Category Name Size (L x W x D) Capacity
DSME D No.1 529m x 131m x 14.5m


D No.2 540m x 81m x 14.5m


F No.1 271m x 51.5m x 20.3m


F No.2 238m x 50m x 26.8m


F No.3 361m x 75m x 21m


F No.4 406m x 66.6m x 23.5m

F No.5 432mx 71.6m x 25.3m
SHI* D Dock No.1 283m x 46m


D Dock No.2 390m x 65m


D Dock No.3 640m x 98m


F G1 Dock 270m x 52m


F G2 Dock 400m x 55m


F G3 Dock 400m x 70m


F G4 Dock 420m x 70m

F G5 Dock 158m x 150m
HHI D Dock No.1 390m x 80m x12.7m


D Dock No.2 500m x 80m x 12.7m


D Dock No.3 672m x92m x 13.4m


D Dock No.4 380m x 65m x 12.7m 150,000 DWT

D Dock No.5 380m x 65m x 12m 70,000 DWT

D Dock No.6 260m x 43m x 12m


D Dock No.7 170m x 25m x 11m


D Dock No.8 460m x 70m x 12.7m


D Dock No.9 460m x 70m x 12.7m

Dock No.10 700m x 115m x 18m
Hyundai Mipo No. 1 Dock 380m x 65m x 12.5m 400,000DWT

No. 2 Dock 380m x 65m x 12.5m 400,000DWT

No. 3 Dock 380m x 65m x 12.5m 400,000DWT
No. 4 Dock 295m x 76m x 12.5m 350,000DWT
Keppel* D

380m x 80m 400,000 dwt

D No.1 Dock 350m x 60m 300,000 dwt

D No.2 Dock 300m x 60m 170,000 dwt

F No.1 Dock 90m x 32m 14,000 LT

F No.2 Dock 114m x 27m 5,000 LT

D Tuas Dock 350m x 66m 360,000 dwt

D Raffles Dock 355m x 60m 330,000 dwt
D Temasek Dock 301m x 52m 150,000 dwt
Sembcorp

Premier 384m x 64m x 9m 400,000 dwt

President 290m x 48m x 8.5m 150,000 dwt

KG VI 303m x 39.6m x 13.6m 100,000 dwt

Republic 202m x 42m x 8m 60,000 dwt
KFD 230m x 35m x 7.3m 65,000 dwt
Kawasaki D 130m x 15.7m x 5.5m 6,000 GT
Guangzhou No.1 360m 65m 13.3m


No.2 300m 74m 13.3m

*Depths were not available.
Source: Companies, Standard Chartered Research

Only the big three Korean shipbuilders
have dockyards longer than 500m
Equity Research l Korea shipbuilding

10 October 2013 39
Appendix II: Rig economics
Attractive investment
Recent announcements of rig-contracts with day rates close to the previous peak of
USD 600k are strong evidence that supply and demand dynamics remain
encouraging in the drilling space. Following the oil-spill accidents that triggered weak
new-build activities for offshore rigs, we think the structural demand for deepwater oil
E&P, and oil prices stabilising at c.USD 100/bbl will accelerate more new-build
demand for deepwater drilling rigs. The day rate for drilling rigs has soared to the
range of the previous peak cycle (USD 600k per day) with utilisation remaining as
high as 100%.
Multi-year awards for deepwater rigs (due to customers' anxiety to secure capacity)
should continue to be priced with a favourable day rate of USD 600-650k, which
enhances the attractiveness of rigs as an investment vehicle. We examined rig
investment returns, and found that the payback period has shortened to around four
years at current day rates (USD 600-650k) from seven to nine years in 2008-10.
We estimate the IRR of rig investment is currently 16.9% (assuming 30 years
operation at 95.0% utilisation, a tax rate of 12.0%, interest rate of 5.0%, 11% COE
and 6.6% WACC), the highest among all vessel types, and as attractive as bulk-
carrier investment in the period when the BDI was at 10,000pt.
Figure 83: Assumed financing structure

Cost Financing structure Tax rate

11.00% 33.00%
Debt 6.00% 67.00% 12.00%

Source: Standard Chartered Research estimates

Figure 84: Rig investment case
Drillships IRR c.17% and ROE c.52%

(USD) Per day
Annualised
@ 95% utilisation
Revenue 625,000 216,718,750
Operating cost 180,000 62,415,000
EBITDA 445,000 154,303,750
EBITDA margin 71%


New-build price 600,000,000
Depreciation 30-year straight with 10% salvage value 18,000,000

EBIT

136,303,750
EBIT margin 63%


Financing cost 20,100,000
Pre-tax income 116,203,750
Income tax @ 12% 13,944,450
Net income 102,259,300


ROA

17.00%
ROE

51.60%

*Operating cost of drillship c.USD 170,000-200,000 per day, according to Seadrill and Diamond Offshore.
Source: Seadrill, Diamond Offshore, Standard Chartered Research estimates

Highly lucrative:
Current IRR of rig investment = heyday
of bulk-carrier investment
High day-rate and low building cost =
attractive investment
Equity Research l Korea shipbuilding

10 October 2013 40
Order momentum should remain strong
We believe rig owners will quickly award rig new-build orders to secure early slots at
more attractive prices. Given the two to three year lag between order contracts and
actual deliveries, and the available slots for 2H15 deliveries (currently nine drillships
are scheduled to be delivered in 2015E compared to 22/21 in 2013E/2014E), we
expect new-build demand to resume from 2H13.

Equity Research l Korea shipbuilding

10 October 2013 41
Appendix III: Drillship charter status
Figure 85: Offshore drillers drillship charter contract status
Drillship status
Year
built
Drilling
depth Status Location Operator
Contract
start
Contract
end
Contract
day-rate
(USD)
Future
status
Transocean
Deepwater Champion 2010 40,000 Drilling US ExxonMobil 2012-03-16 2015-11-25 669,000 ExxonMobil
Deepwater Discovery 2000 30,000 Drilling Brazil Petrobras 2012-04-08 2013-08-31 496,000 BP
Deepwater Expedition 1999 30,000 Drilling Saudi Arabia Saudi Aramco 2012-12-10 2014-11-11 650,000 Saudi Aramco
Deepwater Frontier 1999 30,000 Drilling Australia ExxonMobil 2013-03-16 2014-02-01 534,000 ExxonMobil
Deepwater Millenium 1999 30,000 Drilling Kenya Anadarko 2013-07-02 2013-08-29 545,000 Anadarko
Deepwater Navigator 1971 30,000 Drilling Brazil Petrobras 2011-06-15 2016-02-27 374,000 Petrobras
Deepwater Pathfinder 1998 30,000 Drilling US Eni 2010-09-27 2015-04-30 678,000 Eni
Dhirubhai DW KG1 2009 35,000 Drilling India Reliance 2010-01-01 2014-07-25 510,000 Reliance
Dhirubhai DW KG2 2010 35,000 Drilling India Reliance 2010-10-01 2015-02-28 510,000 Reliance
Discoverer Americas 2009 40,000 Drilling Mozambique Statoil 2013-03-06 2013-09-05 585,000 Statoil
Discoverer Clear Leader 2009 40,000 Drilling US Chevron 2012-08-20 2014-09-01 566,000 Chevron
Discoverer Deep Seas 2001 35,000 Drilling US Murphy 2013-07-31 2016-07-31 595,000 Murphy
Discoverer Enterprise 1999 35,000 Drilling US BP 2013-01-28 2014-01-27 515,000 BP
Discoverer India 2010 40,000 Drilling US Chevron 2013-02-16 2013-09-01 499,000 Reliance
Discoverer Inspiration 2009 40,000 Drilling US Chevron 2010-03-11 2015-03-11 521,000 Chevron
Discoverer Luanda 2010 40,000 Drilling Angola BP 2011-01-15 2018-01-15 470,000 BP
Discoverer Seven Seas 1976 25,000 Drilling Indonesia Inpex 2013-06-05 2013-11-30 500,000 Inpex
Discoverer Spirit 2000 35,000 Drilling US Anadarko 2012-04-24 2014-06-30 546,000 Anadarko
GSF CR Luigs 2000 35,000 Drilling US BHP Billiton 2009-09-20 2014-02-28 536,000 BHP Billiton
GSF Explorer 1998 30,000 Drilling India ONGC 2013-07-23 2014-07-23 412,000 ONGC
GSF Jack Ryan 2000 35,000 Drilling Nigeria Total 2013-07-02 2014-07-01 425,000 Total
Petrobras 10000 2009 37,500 Drilling Brazil Petrobras 2011-02-16 2019-08-31 432,000 Petrobras
Deepwater Asgard 2013 40,000 Building

Deepwater Invictus 2013 40,000 Building

Ultra-Deepwater TBN1 2015

Building

Ultra-Deepwater TBN2 2015

Building

Ultra-Deepwater TBN3 2016

Building

Ultra-Deepwater TBN4 2016

Building

Noble
Noble Bully I 2011 40,000 Drilling US Shell 2012-10-16 2017-04-15 473,000 Shell
Noble Bully II 2011 40,000 Drilling Brazil Shell 2012-12-05 2022-04-10 472,000 Shell
Noble Discoverer 1976 20,000 Modification Korea Shell 2013-03-01 2014-02-28 244,000 Shell
Noble Don Taylor 2013 40,000 Inspection US

Shell
Noble Duchess 1975 25,000 Drilling India ONGC 2013-01-01 2015-05-13 180,000 ONGC
Noble Globetrotter I 2011 40,000 Drilling US Shell 2013-04-12 2022-05-30 443,000 Shell
Noble Globetrotter II 2013 40,000 Inspection Benin

Shell
Noble Leo Segerius 1981 20,000 Drilling Brazil Petrobras 2012-12-08 2017-02-15 302,000 Petrobras
Noble Muravienko 1982 20,000 Cold stacked US

Noble Phoenix 1979 25,000 Drilling Brazil Petrobras 2012-12-08 2015-05-08 290,000 Petrobras
Noble Roger Eason 1977 20,000 Drilling Brazil Petrobras 2013-08-05 2017-04-15 347,000 Petrobras
Ensco
Ensco DS-1 1999 31,500 Drilling Angola Total 2013-04-08 2016-01-25 355,000 Total
Ensco DS-2 2000 31,500 Drilling Angola Total 2013-01-27 2013-08-14 480,000 Total
Ensco DS-3 2010 40,000 Drilling US BP 2013-02-16 2016-06-30 490,000 BP
Ensco DS-4 2010 40,000 Drilling Brazil BP 2013-01-27 2016-07-24 550,000 BP
Ensco DS-5 2011 40,000 Drilling US Petrobras 2013-03-19 2016-07-18 435,000 Petrobras
Ensco DS-6 2012 40,000 Drilling Angola BP 2013-02-15 2018-02-14 522,000 BP
Ensco DS-7 2013 40,000 En route Angola

Total
Source: Companies, Riglogix, Bloomberg, Standard Chartered Research
Equity Research l Korea shipbuilding

10 October 2013 42
Figure 85: Offshore drillers drillship charter contract status in detail (contd)
Drillship status
Year
built
Drilling
depth Status Location Operator
Contract
start
Contract
end
Contract
day-rate
(USD)
Future
status
Diamond Offshore
Ocean Clipper 1977 25,000 Drilling Brazil Petrobras 2011-12-09 2015-12-02 308,000 Petrobras
Ocean Hawk 2013 40,000 Building US Anadarko 2013 2018 495,000

Ocean Black Hornet 2013 40,000 Building US Anadarko 2013 2018 495,000

Ocean Black Rhino 2014 40,000 Building

Ocean Black Lion 2014 40,000 Building

Seadrill
West Auriga 2013 37,000 Inspection US BP 2013 2019 565,000 BP
West Capella 2008 37,500 Drilling Nigeria Total 2009-03-10 2014-04-04 552,000 Total
West Gemini 2010 37,500 Drilling Angola Total 2012-09-23 2013-09-22 447,000 Total
West Polaris 2008 35,000 Drilling Angola Maersk Oil 2013-03-03 2014-03-03 642,000 ExxonMobil
West Vela 2013 37,000 Inspection US BP 2013 2019 565,000 BP
West Tellus 2013

Building

West Neptune 2014

Building

West Saturn 2014

Building

West Jupiter 2014

Building

West Carina 2014

Building

Vantage Drilling
Dalian Developer 2013 35,000 Ready stacked China

Platinum Explorer 2010 40,000 Drilling India ONGC 2010-12-29 2015-12-29 590,500 ONGC
Titanium Explorer 2012 40,000 Drilling US Petrobras 2012-12-07 2020-12-07 509,000 Petrobras
Tungsten Explorer 2013 40,000 En route Myanmar

PTTEP
Ocean Rig Asia
Ocean Rig Corcovado 2010 35,000 Drilling Brazil Petrobras 2012-05-15 2015-05-15 460,000 Petrobras
Ocean Rig Mykonos 2011 35,000 Drilling Brazil Petrobras 2012-03-22 2015-03-25 455,000 Petrobras
Ocean Rig Mylos 2013 40,000 En route Brazil



Repsol
Ocean Rig Olympia 2011 35,000 Drilling Gabon Total 2012-08-09 2015-08-13 585,000 Total
Ocean Rig Poseidon 2011 35,000 Drilling Angola Eni 2013-06-01 2016-06-01 638,000 Eni
Pacific Drilling

Pacific Bora 2010 37,500 Drilling Nigeria Chevron 2011-08-26 2014-08-25 474,700 Chevron
Pacific Khamsin 2013 40,000 En route Nigeria Chevron
Pacific Mistral 2011 37,500 Drilling Brazil Petrobras 2012-02-06 2015-02-06 458,000 Petrobras
Pacific Santa Ana 2011 40,000 Drilling US Chevron 2012-03-21 2017-04-28 488,900 Chevron
Pacific Scirocco 2011 40,000 Drilling Nigeria Total 2013-01-08 2014-01-07 474,750 Total
Source: Companies, Riglogix, Bloomberg, Standard Chartered Research


Equity Research l Korea shipbuilding

10 October 2013 43
Appendix IV: How the shipbuilding cycle
works
Backlog, new-build and earnings
How the shipbuilding cycle works
Our close examination of the shipbuilding cycle shows the underlying industry pricing
dynamics. In the early phase of a turnaround, clients (shipowners) have pricing
power over shipbuilders. Shipbuilders have incentives to fill their orderbooks up to
two years in advance (mainly due to concerns about operational sustainability) and
this incentive leads them to bid aggressively. Increased competition, due to the
aggressive bidding, keeps new-build prices low. However, shipbuilders become less
aggressive and more selective once they build a two-year backlog. Pricing power
then shifts to shipbuilders, and new-build prices start to rise. Historically, there is a
time lag of approximately six to nine months between the pick-up in order volume and
new-build price hikes.
Even after new-build prices rise, shipbuilders earnings remain low, as sales are
mainly recognised from orders won during the last downturn, i.e. when new-build
prices were weak. It normally takes another two years for shipbuilders earnings to
start to reflect better new-build pricing.
Early phases of a turnaround
We believe the commercial vessel market is in the very early phases of a turnaround.
A number of shipyards still need to build up their backlog. The current aggregate
backlog is 1.6 years in DWT terms (order backlog = 241,947 dwt versus 2012 output
= 153,793).
Figure 86: How the cycle works
Share prices react to backlog and movement in new-build prices



Source: Standard Chartered Research



Backlog-to-sales = 2.0x
Backlog-to-sales = 1.0x
BACKLOG NEW BUILD PRICE EARNINGS
Pricing power shifts
to shipyards
c.2 yrs
Time
I
n
d
e
x

Equity Research l Korea shipbuilding
10 October 2013 44
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t
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4

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H
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7
9
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4
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H
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C
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C
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7
9
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(
K
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S
,

%
)
H
y
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H
e
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%
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9
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S
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d
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M
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%
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:

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1
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7
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8
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4
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3
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1
%
B
U
L
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R
2
0
0
1
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%

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8
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7
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A
C
K
L
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k

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

Y
-
Y
)
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.
6
%
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3
3
.
0
%
3
3
.
6
%
7
5
.
1
%
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3
.
1
%
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0
.
3
%
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9
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2
%
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3
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9
%
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6
.
6
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4
%
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3
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7
%
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9
.
3
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.
0
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.
7
%
3
.
3
%
F
L
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E
T

(
B
O
Y
)
m
n

D
W
T
2
7
5
.
0
2
8
7
.
1
2
9
4
.
7
3
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9
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2
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.
3
3
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8
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9
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7
4
5
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2
5
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6
.
9
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9
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7
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.
8
7
1
6
.
8
7
2
3
.
9
7
3
5
.
3
-

D
E
L
I
V
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R
Y
m
n

D
W
T
2
0
.
7
1
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3
1
1
.
6
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9
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7
2
3
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4
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5
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8
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4
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9
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4
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4
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.
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8
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9
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.
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9
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6
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0
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6
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4
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1
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9
-

D
E
M
O
L
I
T
I
O
N
m
n

D
W
T
8
.
2
6
.
1
4
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2
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4
1
.
0
1
.
7
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5
5
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6
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0
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6
6
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5
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3
.
2
3
3
.
5
2
3
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5
2
3
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5
2
3
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5
2
3
.
5
F
L
E
E
T

(
E
O
Y
)
2
8
7
.
1
2
9
4
.
7
3
0
1
.
9
3
2
2
.
3
3
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4
.
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3
6
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8
3
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4
5
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.
2
5
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6
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9
6
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5
.
9
6
7
9
.
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7
1
6
.
8
7
2
3
.
9
7
3
5
.
3
7
5
3
.
8
(
%

Y
-
Y
)
4
.
4
%
2
.
7
%
2
.
4
%
6
.
8
%
6
.
9
%
6
.
7
%
6
.
5
%
6
.
6
%
1
0
.
0
%
1
6
.
9
%
1
4
.
7
%
1
0
.
4
%
5
.
4
%
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.
0
%
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.
6
%
2
.
5
%
(
B
a
c
k
l
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g

a
s

%

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f

F
l
e
e
t
)
1
2
.
4
%
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.
1
%
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0
.
6
%
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7
.
3
%
1
9
.
9
%
2
0
.
6
%
2
6
.
9
%
5
8
.
8
%
6
9
.
5
%
5
5
.
5
%
4
9
.
1
%
3
3
.
9
%
2
9
.
2
%
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0
.
6
%
3
1
.
9
%
3
2
.
1
%
K
o
r
e
a
n

B
i
g

4

N
e
w

O
r
d
e
r
H
y
u
n
d
a
i

H
e
a
v
y
k

C
G
T
6
7
1
8
0
0
0
0
1
7
5
1
,
0
0
8
5
2
8
4
0
8
4
9
6
0
0
4
5
0
5
0
0
5
5
0
5
7
5
S
a
m
s
u
n
g

H
e
a
v
y
k

C
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T
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
D
S
M
E
k

C
G
T
0
9
6
9
1
1
5
1
3
0
0
5
6
1
1
8
6
1
9
4
3
9
0
0
0
1
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2
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2
2
0
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3
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H
y
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n
d
a
i

M
I
P
O
k

C
G
T
0
0
0
0
0
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1
0
5
3
0
5
5
9
1
7
1
1
5
0
0
0
0
0
(
K
o
r
e
a
n

M
/
S
,

%
)
H
y
u
n
d
a
i

H
e
a
v
y
%
3
%
3
%
0
%
0
%
0
%
1
%
3
%
2
%
5
%
2
%
0
%
0
%
5
%
5
%
5
%
5
%
S
a
m
s
u
n
g

H
e
a
v
y
%
0
%
0
%
0
%
0
%
0
%
0
%
0
%
0
%
0
%
0
%
0
%
0
%
0
%
0
%
0
%
0
%
D
S
M
E
%
0
%
2
%
1
%
2
%
0
%
0
%
1
%
1
%
2
%
2
%
0
%
0
%
2
%
2
%
2
%
2
%
H
y
u
n
d
a
i

M
I
P
O
%
0
%
0
%
0
%
0
%
0
%
1
%
0
%
2
%
1
%
4
%
1
%
0
%
0
%
0
%
0
%
0
%
K
o
r
e
a
s
:

s
u
b
-
t
o
t
a
l
%
3
%
5
%
1
%
2
%
0
%
2
%
4
%
5
%
8
%
7
%
1
%
0
%
7
%
7
%
7
%
7
%

Equity Research l Korea shipbuilding
10 October 2013 45
F
i
g
u
r
e

8
7
:

S
u
p
p
l
y
-
d
e
m
a
n
d

m
o
d
e
l

(
c
o
n
t

d
)


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C
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Equity Research l Korea shipbuilding
10 October 2013 46
F
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8
7
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Equity Research l Korea shipbuilding
10 October 2013 47
F
i
g
u
r
e

8
7
:

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Equity Research l Korea shipbuilding

10 October 2013 48
Appendix VI: Price trends of commercial vessels
Figure 88: Bulker new-build prices Figure 89: Tanker new-build prices





Source: Clarksons, Standard Chartered Research

Source: Clarksons, Standard Chartered Research

Figure 90: Container ship new-build prices Figure 91: Gas carrier new-build prices





Source: Clarksons, Standard Chartered Research

Source: Clarksons, Standard Chartered Research

Figure 92: Bulker second-hand prices Figure 93: Tanker second-hand prices





Source: Clarksons, Standard Chartered Research

Source: Clarksons, Standard Chartered Research

0
20
40
60
80
100
120
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
U
S
D

m
n

Capesize 176-180k DWT Panamax 75-77k DWT
Handymax 56-58k DWT Handysize 25-30k DWT
0
20
40
60
80
100
120
140
160
180
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
U
S
D

m
n

VLCC 315-320k DWT Suezmax 156-158k DWT
Aframax 113-115k DWT Panamax 73-75k DWT
Handysize 37-47k DWT
0
20
40
60
80
100
120
140
160
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
U
S
D

m
n

Post Panamax 8500-9100 TEU Post Panamax 6600-6800 TEU
Panamax 5100 TEU Panamax 3400-3600 TEU
Sub-Panamax 2600-2900 TEU
0
50
100
150
200
250
300
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
U
S
D

m
n

LPG 78-84k CBM LPG 60k CBM
LPG 22-24k CBM LNG 160k CBM
0
20
40
60
80
100
120
140
160
180
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
U
S
D

m
n

Capesize 180k DWT Panamax 73k DWT
Handymax 56k DWT Handysize 28-30k DWT
0
20
40
60
80
100
120
140
160
180
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
U
S
D

m
n

VLCC 310k DWT Suezmax 160k DWT
Aframax 105k DWT Panamax 73k DWT
Handysize 47k DWT Handysize 37k DWT
Equity Research l Korea shipbuilding

10 October 2013 49
Figure 94: Container ship second-hand prices Figure 95: Second-hand versus new-build prices





Source: Clarksons, Standard Chartered Research

Source: Clarksons, Standard Chartered Research

Figure 96: Commercial vessel new-build price trends
(USD/CGT, %) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
New-build price
Tanker 1,481 1,619 2,113 2,574 2,690 2,938 3,237 2,481 2,239 2,189 2,055 1,972 2,011 2,051
Bulk carrier 1,185 1,344 1,814 2,108 2,105 2,740 3,021 2,105 1,960 1,831 1,604 1,575 1,606 1,638
Container 1,467 1,595 1,966 2,367 2,333 2,399 2,525 1,651 1,751 1,930 1,657 1,568 1,615 1,663
LPG carrier (75k cmb) 1,950 2,011 2,440 3,012 3,054 3,062 3,129 2,670 2,381 2,426 2,365 2,340 2,410 2,482
LNG carrier (123k cmb) 1,836 1,776 2,025 2,399 2,562 2,637 2,578 2,364 2,194 2,189 2,182 2,176 2,242 2,309
Price change (YoY)
Tanker -12.3% 9.3% 30.5% 21.8% 4.5% 9.2% 10.2% -23.3% -9.8% -2.3% -6.1% -4.0% 2.0% 2.0%
Bulk carrier -5.7% 13.4% 35.0% 16.2% -0.2% 30.2% 10.3% -30.3% -6.9% -6.6% -12.4% -1.8% 2.0% 2.0%
Container -11.6% 8.7% 23.3% 20.4% -1.5% 2.9% 5.2% -34.6% 6.1% 10.2% -14.1% -5.4% 3.0% 3.0%
LPG carrier (75k cmb) -5.0% 3.1% 21.3% 23.4% 1.4% 0.3% 2.2% -14.7% -10.8% 1.9% -2.5% -1.1% 3.0% 3.0%
LNG carrier (123k cmb) -8.7% -3.3% 14.0% 18.5% 6.8% 2.9% -2.2% -8.3% -7.2% -0.2% -0.3% -0.3% 3.0% 3.0%

Source: Clarksons, Standard Chartered Research estimates



0
10
20
30
40
50
60
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
U
S
D

m
n

Panamax 3200 TEU Sub Panamax 2300 TEU
Handy 1000 TEU Feedermax 700 TEU
Feeder 300 TEU
20%
40%
60%
80%
100%
120%
140%
160%
180%
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
%

VLCC Tanker 2nd hand as % of NB price
Capesize Bulker 2nd hand as % of NB price
Panamax Containership 2nd hand as % of NB price
Equity Research l Korea shipbuilding

10 October 2013 50

Daewoo Shipbuilding & Marine Engineering
A new chapter
We initiate coverage of Daewoo Shipbuilding & Marine
Engineering (DSME) with an Outperform rating.
We believe DSME is well positioned to capture some of the
USD 35bn p.a. opportunities we see for the big three
Korean shipbuilders in the commercial vessel (CV) and
offshore segments, leveraging its leadership in both areas.
The turnaround in earnings we expect from 2014 should be
a strong catalyst for the share price.
DSME is our top pick in the sector. We would view any
weakness in the share price as a buying opportunity.


n OUTPERFORM (initiating coverage)





A new chapter. We expect a strong turnaround in DSME earnings
from 2014, and forecast a 2013-15 earnings CAGR of 98.6%.
Concerns on profitability, subsidiaries and balance sheet are now
behind us, in our view. Its order backlog is shifting nicely from CV
to offshore facilities (both drilling and production platforms). CV
accounts for 31% of the backlog in 1H13 compared to 60% in
2010. We expect CV to account for 21% of backlog in 2015, with
CV business focusing on VLPP container ships (18,000+ TEU or
larger), which remain lucrative for the company.
Offshore platforms, a USD 20bn p.a. opportunity. DSME has
built a strong track record in offshore platforms, where we expect a
USD 15bn p.a. opportunity for the Korean big three. It is building
the Kanowit F-LNG for Petronas and according to local media
reports could soon win an F-LNG order in the Tamar LNG field
(from the Nobel Energy consortium). We believe the F-LNG
segment is another USD 5-6bn p.a. opportunity for DSME.
Container ships. DSME is a global leader in VLPP container
ships. It delivered its first VLPP (an 18,000 TEU vessel to Maersk)
in June 2013, and will deliver a vessel a month until end-2013. We
expect a significant learning effect to kick in. The post-Panamax
order outlook appears strong as container liners will compete for
economies of scale, and we believe the Panama Canal expansion
puts DSME in an attractive position to seize much of the USD
15bn p.a. opportunity we expect in 2013-16.
Top pick. We do not consider current valuation demanding. The
stock is trading at 13.2x 2014E PER and 1.4x 2014E PBR versus
2014E ROE of 10.4%. Our 12-month price target is KRW 45,000,
based on backlog and EBITDA the average of target EV/backlog
and EV/EBITDA. DSME is our sector top pick. Our price target is
27% above the present level.

Source: Company, Standard Chartered Research estimates

Share price performance


Source: Company, FactSet

PRICE as of 9 Oct 2013
KRW 35,350
PRICE TARGET
KRW 45,000
Bloomberg code Reuters code
042660 KS 042660.KS
Market cap 12-month range
KRW 6,766.0bn (USD 6,301mn) KRW 21,100 - 35,400
EPS adj est change NA
Year-end: December 2012 2013E 2014E 2015E
Sales (KRW bn) 14,058 14,842 15,072 15,241
EBITDA (KRW bn) 788 652 1,063 1,194
EBIT (KRW bn) 486 402 817 948
Pre-tax profit (KRW bn) 265 342 780 911
Net profit adj. (KRW bn) (38) 156 513 615
FCF (KRW bn) (2,126) (99) 610 603
EPS adj. (KRW) (199) 814 2,680 3,211
DPS (KRW) 250 500 500 500
Book value/share (KRW) 23,796 24,337 26,038 28,626
EPS growth adj. (%) nm nm 229.0 19.8
DPS growth (%) 1.2 100.0 0.0 0.0
EBITDA margin (%) 5.6 4.4 7.1 7.8
EBIT margin (%) 3.5 2.7 5.4 6.2
Net margin adj. (%) -0.3 1.1 3.4 4.0
Div. payout (%) -104.0 65.2 19.0 15.9
Net gearing (%) 113.6 116.3 100.3 83.0
ROE (%) -1.0 3.2 10.4 11.5
ROCE (%) 6.4 5.0 9.9 10.9
EV/sales (x) 0.7 0.8 0.8 0.7
EV/EBITDA (x) 12.3 18.7 11.1 9.5
PBR (x) 1.1 1.5 1.4 1.2
PER adj. (x) nm 43.4 13.2 11.0
Dividend yield (%) 0.9 1.4 1.4 1.4
20,000
29,000
38,000
10-12 1-13 4-13 7-13 10-13
Daewoo Shipbuilding & Marine Engineering
KOSPI INDEX (rebased)
Share price (%) -1 mth -3 mth -12 mth
Ordinary shares 11 30 39
Relative to index 10 19 38
Relative to sector - - -
Major shareholder Korea Development Bank (31.5%)
Free float 50%
Average turnover (USD) 30,447,046
James KP Hong
James.KP.Hong@sc.com
+82 2 3703 5164










Equity Research l Korea shipbuilding

10 October 2013 51
A new chapter
Earnings outlook
We factor in a strong profitability improvement in DSME from 2014E, mainly due to
the learning effect as it produces more 18,000 TEU container ships and offshore
production platforms. With limited downside potential from its struggling subsidiaries,
we expect a clear improvement in profitability from 2014.
Figure 97: DSME earnings outlook
(KRW bn, %) 1Q13 2Q13 3Q13E 4Q13E 1Q14E 2Q14E 3Q14E 4Q14E 2012 2013E 2014E 2015E
Revenue 3,259 4,088 3,636 3,859 3,798 3,798 3,798 3,678 14,058 14,842 15,072 15,241
YoY growth 6.3% 3.5% 14.7% -0.3% 16.5% -7.1% 4.5% -4.7% 1.1% 5.6% 1.5% 1.1%
Shipbuilding & offshore 3,150 3,987 3,489 3,613 3,607 3,607 3,607 3,549 13,386 14,239 14,369 14,374
Construction & others 285 346 456 702 482 482 482 444 1,858 1,789 1,889 2,053
Consolidation adjustment -176 -245 -309 -456 -290 -290 -290 -316 -1,186 -1,186 -1,186 -1,186
EBIT 67 127 94 114 189 215 210 203 486 402 817 948
YoY growth -62.9% 11.1% -45.9% 29.3% 181.3% 69.3% 124.0% 77.8% -55.3% -17.3% 103.2% 16.0%
Shipbuilding & offshore 63 139 129 145 151 159 166 170 435 476 646 719
Construction & others 3 9 13 21 12 12 12 11 -39 46 47 62
Consolidation adjustment 0 -21 -48 -51 26 44 32 22 91 -119 124 186
EBIT margin 2.1% 3.1% 2.6% 3.0% 5.0% 5.7% 5.5% 5.5% 3.5% 2.7% 5.4% 6.2%
Shipbuilding & offshore 2.0% 3.5% 3.7% 4.0% 4.2% 4.4% 4.6% 4.8% 3.2% 3.3% 4.5% 5.0%
Construction & others 1.1% 2.6% 2.8% 3.0% 2.5% 2.5% 2.5% 2.5% -2.1% 2.6% 2.5% 3.0%
Pre-tax profit 76 77 85 105 180 205 201 194 265 342 780 911
YoY growth -53.7% -8.7% -14.3% -370.8% 185.4% 215.4% 98.2% 61.0% -73.4% 56.9% 123.1% 154.9%
PBT margin 2.3% 1.9% 2.3% 2.7% 4.7% 5.4% 5.3% 5.3% 1.9% 2.3% 5.2% 6.0%
Net profit 49 53 65 81 138 158 155 149 176 247 600 701
YoY growth -60.5% -27.6% -22.5% -259.5% 241.8% 255.6% 98.2% 61.0% -72.9% 72.8% 135.1% 168.7%
NP margin 1.5% 1.3% 1.8% 2.1% 3.6% 4.2% 4.1% 4.1% 1.3% 1.7% 4.0% 4.6%
Source: Company, Standard Chartered Research estimates

Figure 98: Where we are versus consensus

2013E 2014E 2015E
(KRW bn, %) Us Consensus (Diff.) Us Consensus (Diff.) Us Consensus (Diff.)
Sales 14,842 14,805 0.3% 15,072 15,701 -4.0% 15,241 16,317 -6.6%
Operating profit 402 378 6.3% 817 715 14.2% 948 857 10.6%
Pre-tax profit 342 326 4.9% 780 689 13.2% 911 872 4.4%
Net profit 247 248 -0.4% 600 531 13.1% 701 669 4.9%
EBITDA 652 640 1.8% 1,063 990 7.3% 1,194 1,161 2.8%
OPM (%) 2.7% 2.6% 0.2ppt 5.4% 4.6% 0.9ppt 6.2% 5.3% 1.0ppt
NPM (%) 1.7% 1.7% 0.0ppt 4.0% 3.4% 0.6ppt 4.6% 4.1% 0.5ppt
Source: Company, Bloomberg, Standard Chartered Research estimates

Equity Research l Korea shipbuilding

10 October 2013 52
Order outlook
We expect DSME to benefit from VLPP container ship demand in 2013-16. It has
won six 18,000 TEU container ship orders YTD after winning 17 in 2012. DSME has
a strong relationship with Maersk, a leading container liner.
DSME has a strong track record in offshore platforms. It is building the worlds
second F-LNG, the Kanowit F-LNG, for Petronas. We expect another F-LNG order
win in the Tamar LNG field (from the Nobel Energy consortium) early next year.
In drilling rigs, DSME is climbing the learning curve on drillships and has won a high-
spec jack-up rig (c.USD 530mn) from Maersk Drilling.
Figure 99: DSME new order outlook
New orders (USD bn, %) 2010 2011 2012 2013E 2014E 2015E YTD progress % achieved
Shipbuilding 5.2 8.0 3.8 5.4 6.4 6.6 3.3 61%
LNG carriers

2.1 0.8 1.0 1.0 1.1

Container ships

4.7 0.0 2.4 3.4 3.5

Other*

1.2 3.0 2.0 2.0 2.0

Offshore 4.0 6.3 10.5 7.6 9.5 10.0 6.3 83%
Production facilities

1.7 6.4 3.0 4.7 5.0

Drilling rigs

4.0 3.5 4.0 4.2 4.4

Other

0.6 0.6 0.6 0.6 0.6

Total new orders 9.3 14.3 14.3 12.8 16.0 16.5 9.6 74%
YoY growth 158% 54% 0% -10% 25% 4%

*Tankers and other commercial vessels, specialty vessels.
Source: Company, Standard Chartered Research estimates

Valuation
Outperform rating, with a 12-month price target of KRW 45,000
We value DSEM using an average of EV/backlog and EV/EBITDA valuation
methodologies.
Our price target of KRW 45,000 implies 13.2x 2014E PER and 1.4x 2014E PBR. We
believe the share price has not yet fully reflected DSMEs turnaround and its growth
potential in the offshore platform business.
Based on EV/backlog, fair value is KRW 39,000.
Based on EV/EBITDA, fair vakue is KRW 51,000.
Global leader in VLPP
Strong track record in 18,000 TEU

Successful LNG-FPSO penetration

Equity Research l Korea shipbuilding

10 October 2013 53
EV/backlog
Our target operational EV/backlog is 23%, the average EV/backlog during 2012-2013
YTD. Since 2012, DSMEs offshore order wins have outpaced commercial vessel
orders, and its backlog has also turned offshore-centric.
Figure 100: EV/backlog
(KRW bn, %)

2014E
Modified backlog (A) 50,882
Target operational EV/backlog (B) 23%
Target operational EV (C) = (A) X (B) 11,703
Net debt (D) 4,345
Total market capitalisation (E) = (C) - (D) 7,458
Shares outstanding (mn) (F) 191
Fair value per share (E) / (F) KRW 39,000
Source: Company, Standard Chartered Research estimates

EV/EBITDA
We apply 13.2x for target operational EV/EBITDA in valuing the company. Our target
valuation multiple is in line with DSMEs mid-cycle EV/EBITDA during 2012-2013
YTD.
Figure 101: EV/EBITDA
(KRW bn)

2014E
2014E EBITDA (A) 1,063
Target operational EV/EBITDA (x) (B) 13.2
Target operational EV (C) = (A) X (B) 14,032
Net debt (D) 4,345
Total market capitalisation (E) = (C) - (D) 9,687
Shares outstanding (mn) (F) 191
Fair value per share (E) / (F) KRW 51,000
Source: Company, Standard Chartered Research estimates

Figure 102: Historical EV/backlog trend Figure 103: Historical EV/EBITDA trend



Source: Company, Standard Chartered Research estimates Source: Company, Standard Chartered Research estimates
0%
10%
20%
30%
40%
2001 2003 2005 2007 2009 2011 2013
E
V
/
m
o
d
i
f
i
e
d

b
a
c
k
l
o
g


0
4
8
12
16
20
2001 2003 2005 2007 2009 2011 2013
E
V
/
E
B
I
T
D
A

(
x
)

Equity Research l Korea shipbuilding

10 October 2013 54
Figure 104: DSME EV/modified backlog Figure 105: DSME EV/EBITDA



Source: Company, Bloomberg, Standard Chartered Research estimates Source: Company, Bloomberg, Standard Chartered Research estimates

Figure 106: Historical PBR trend Figure 107: Historical PER trend



Source: Company, Standard Chartered Research estimates Source: Company, Standard Chartered Research estimates

Potential risk
Figure 108: Shareholding structure, as of 2Q13


Source: Bloomberg

According to local media reports, Korea Development Bank, DSMEs main
shareholder has decided to sell 31.46% of DSMEs shares via open bid in 1H14. This
could be an ongoing share overhang issue. However, the companys fundamentals
remain strong and its competitiveness is well aligned with market demand.
0
3,000
6,000
9,000
12,000
15,000
2001 2003 2005 2007 2009 2011 2013
K
R
W

b
n

EV (KRWbn) x0.10 x0.15
x0.19 x0.24 x0.28
0
3,000
6,000
9,000
12,000
15,000
2001 2003 2005 2007 2009 2011 2013
K
R
W

b
n

EV (KRWbn) x2.3 x4.8
x7.0 x11.2 x15.3
0
10,000
20,000
30,000
40,000
50,000
60,000
2001 2003 2005 2007 2009 2011 2013
K
R
W

DSME x0.7 x1.0
x1.3 x1.6 x1.9
0
10,000
20,000
30,000
40,000
50,000
60,000
2001 2003 2005 2007 2009 2011 2013
K
R
W

DSME x5.0 x10.0
x15.0 x20.0 x25.0
Korea
Development Bank
32%
FSAC
17%
NPS
8%
DSME
1%
Others
42%
Equity Research l Korea shipbuilding

10 October 2013 55

Source: Company, Standard Chartered Research estimates


Income statement (KRW bn) Cash flow statement (KRW bn)
Year-end: Dec 2011 2012 2013E 2014E 2015E Year-end: Dec 2011 2012 2013E 2014E 2015E
Sales 13,903 14,058 14,842 15,072 15,241 EBIT 1,089 486 402 817 948
Gross profit 1,634 1,136 1,000 1,464 1,600 Depreciation & amortisation 372 302 250 246 246
SG&A (545) (650) (598) (646) (652) Net interest 63 (20) (40) (40) (40)
Other income 0 0 0 0 0 Tax paid (548) (173) (173) (173) (173)
Other expenses 0 0 0 0 0 Changes in working capital (843) (1,338) (298) 61 (47)
EBIT 1,089 486 402 817 948 Others 715 (1,283) (98) (159) (189)
Net interest 17 (20) (18) (40) (40) Cash flow from operations 848 (2,026) 43 752 745
Associates (71) 1 (5) (6) (6)
Other non-operational (37) (202) (37) 8 8 Capex (100) (100) (142) (142) (142)
Exceptional items 0 0 0 0 0 Acquisitions & Investments 0 0 0 0 0
Pre-tax profit 998 265 342 780 911 Disposals 0 0 0 0 0
Taxation (349) (89) (95) (179) (209) Others 215 92 (90) (92) (92)
Minority interests (686) (222) (100) (98) (98) Cash flow from investing 115 (9) (232) (235) (235)
Exceptional items after tax 0 0 0 0 0
Net profit (38) (46) 147 503 604 Dividends (95) (47) 0 (96) (96)
Issue of shares 0 0 0 0 0
Net profit adj. (31) (38) 156 513 615 Change in debt (1,080) 1,443 (32) 34 34
EBITDA 1,461 788 652 1,063 1,194 Other financing cash flow 141 364 (54) 0 0
Cash flow from financing (1,034) 1,760 (86) (62) (62)
EPS (KRW) (199) (240) 767 2,627 3,154
EPS adj. (KRW) (163) (199) 814 2,680 3,211 Change in cash (71) (275) (275) 456 449
DPS (KRW) 247 250 500 500 500 Exchange rate effect 0 0 0 0 0
Avg fully diluted shares (mn) 191 191 191 191 191 Free cash flow 748 (2,126) (99) 610 603
Balance sheet (KRW bn) Financial ratios and other
Year-end: Dec 2011 2012 2013E 2014E 2015E Year-end: Dec 2011 2012 2013E 2014E 2015E
Cash 542 267 (8) 448 897 Operating ratios
Short-term investments 430 453 467 481 481 Gross margin (%) 11.8 8.1 6.7 9.7 10.5
Accounts receivable 4,943 3,883 3,906 3,768 3,810 EBITDA margin (%) 10.5 5.6 4.4 7.1 7.8
Inventory 752 1,198 1,284 1,262 1,265 EBIT margin (%) 7.8 3.5 2.7 5.4 6.2
Other current assets 951 1,359 1,435 1,457 1,474 Net margin adj. (%) -0.2 -0.3 1.1 3.4 4.0
Total current assets 7,618 7,160 7,083 7,416 7,926 Effective tax rate (%) 35.0 33.7 27.8 23.0 23.0
Sales growth (%) 6.7 1.1 5.6 1.5 1.1
PP&E 6,504 6,219 6,206 6,109 6,109 Net income growth (%) nm nm nm 242.4 20.0
Intangible assets 123 133 128 122 122 EPS growth (%) nm nm nm 242.4 20.0
Associates and JVs 19 61 55 49 49 EPS growth adj. (%) nm nm nm 229.0 19.8
Other long-term assets 2,396 2,549 2,625 2,704 2,704 DPS growth (%) -50.0 1.2 100.0 0.0 0.0
Total long-term assets 9,042 8,962 9,014 8,984 8,984
Efficiency ratios
Total assets 16,660 16,122 16,097 16,400 16,910 ROE (%) -0.9 -1.0 3.2 10.4 11.5
ROCE (%) 16.0 6.4 5.0 9.9 10.9
Short-term debt 2,776 2,972 2,972 2,972 2,972 Asset turnover (x) 0.9 0.9 0.9 0.9 0.9
Accounts payable 6,340 4,904 4,773 4,693 4,704 Op. cash/EBIT (x) 0.8 -4.2 0.1 0.9 0.8
Other current liabilities 404 296 313 318 321 Depreciation/capex (x) 2.9 3.0 1.7 1.7 1.7
Total current liabilities 9,520 8,173 8,058 7,982 7,997 Inventory days 22.1 27.5 32.7 34.1 33.8
Accounts receivable days 124.2 114.6 95.8 92.9 90.7
Long-term debt 1,601 2,470 2,438 2,472 2,472 Accounts payable days 123.7 158.8 127.6 126.9 125.7
Convertible bonds 0 0 0 0 0
Deferred tax 378 332 332 332 332 Leverage ratios
Other long-term liabilities 659 593 611 629 629 Net gearing (%) 85.2 113.6 116.3 100.3 83.0
Total long-term liabilities 2,638 3,395 3,381 3,434 3,434 Debt/capital (%) 61.3 68.5 67.3 64.7 61.1
Interest cover (x) 9.3 3.1 3.5 6.8 7.9
Total liabilities 12,158 11,568 11,440 11,416 11,431 Debt/EBITDA (x) 2.6 6.2 8.3 5.1 4.6
Current ratio (x) 0.8 0.9 0.9 0.9 1.0
Shareholders funds 4,502 4,554 4,658 4,983 5,479
Minority interests 0 0 0 0 0 Valuation
EV/sales (x) 0.7 0.7 0.8 0.8 0.7
Total equity 4,502 4,554 4,658 4,983 5,479 EV/EBITDA (x) 6.7 12.3 18.7 11.1 9.5
EV/EBIT (x) 9.0 20.0 30.3 14.4 11.9
Total liabilities and equity 16,660 16,122 16,097 16,400 16,910 PER (x) nm nm 46.1 13.5 11.2
PER adj. (x) nm nm 43.4 13.2 11.0
Net debt (cash) 3,836 5,175 5,418 4,996 4,548 PBR (x) 1.0 1.1 1.5 1.4 1.2
Year-end shares (mn) 191 191 191 191 191 Dividend yield (%) 0.7 0.9 1.4 1.4 1.4
Equity Research l Korea shipbuilding

10 October 2013 56

Samsung Heavy Industries
Industry leader
We initiate coverage of Samsung Heavy Industries (SHI)
with an Outperform rating.
SHI should benefit from first-mover advantage in the F-LNG
and Oil-FPSO segments. It is leveraging a learning effect in
drillships and LNG carriers, where it is a global leader.
From 2013 we expect SHIs order wins to rise to over USD
14bn.
SHI is an industry leader, but is trading below regional
peers. However, we see robust growth potential in the
offshore segment, which we believe justifies a re-rating.


n OUTPERFORM (initiating coverage)





Industry leader. SHI is the leader in the offshore segment, and is
building the worlds first F-LNG (the Prelude F-LNG, for Shell) and
Oil-FPSO (the Egina project, for Total). We believe its capability in
FPSO units mean it is well-positioned to capture much of the USD
15bn p.a. opportunity we expect in the global offshore platform
market over 2013-19. SHI is working closely with Shell in
developing F-LNG (exclusive order agreement), the platforms that
are a game changer in the global LNG industry.
Solid drillship and LNG carrier orders. SHI has two strong cash
cows drillships and LNG carriers. We expect a strong learning
effect in both products, which should enable the company to
deliver solid earnings growth. We expect SHI to win orders for 10
drillships (c.USD 500mn each) and 14 LNG carriers (c.USD
200mn each) p.a. in 2014-16. It recently won two high-spec jack-
up orders from Statoil (c.USD 650mn each, three times more than
jack-ups built by Singaporean shipyards).
Orders set to rise. Despite having the highest earnings visibility
among Koreas big three, SHI has been trading at a discount to
peers, mainly due to weak top-line growth. However, we believe it
is entering another growth stage driven by offshore drilling and
platform opportunities. In 2013, we expect order wins to reach
USD 14.3bn (+49% YoY), and remain in the USD 15bn range in
2014-16.
Deserves re-rating. We think SHI deserves a valuation re-rating.
The shares are trading at 10.2x 2014E PER and 1.4x 2014E PBR
compared to 2014E ROE of 14.9%. We value the company based
on backlog and EBITDA the average of target EV/backlog and
EV/EBITDA. Our 12-month price target is KRW 55,000, which
implies 24% upside potential.

Source: Company, Standard Chartered Research estimates

Share price performance


Source: Company, FactSet

PRICE as of 9 Oct 2013
KRW 44,500
PRICE TARGET
KRW 55,000
Bloomberg code Reuters code
010140 KS 010140.KS
Market cap 12-month range
KRW 10,279.5bn (USD 9,573mn) KRW 29,800 - 44,500
EPS adj est change NA
Year-end: December 2012 2013E 2014E 2015E
Sales (KRW bn) 14,489 15,220 15,660 16,156
EBITDA (KRW bn) 1,491 1,572 1,593 1,784
EBIT (KRW bn) 1,189 1,280 1,306 1,496
Pre-tax profit (KRW bn) 1,063 1,402 1,304 1,495
Net profit adj. (KRW bn) 811 1,036 1,004 1,151
FCF (KRW bn) (1,527) 1,168 1,515 1,305
EPS adj. (KRW) 3,515 4,489 4,350 4,986
DPS (KRW) 469 500 500 500
Book value/share (KRW) 22,871 27,247 31,095 31,731
EPS growth adj. (%) 7.2 27.7 -3.1 14.6
DPS growth (%) 0.1 6.6 0.0 0.0
EBITDA margin (%) 10.3 10.3 10.2 11.0
EBIT margin (%) 8.2 8.4 8.3 9.3
Net margin adj. (%) 5.6 6.8 6.4 7.1
Div. payout (%) 13.4 10.3 11.5 10.0
Net gearing (%) 14.3 -0.9 -16.8 -26.4
ROE (%) 16.3 19.5 14.9 15.9
ROCE (%) 17.8 16.0 14.6 15.1
EV/sales (x) 0.7 0.7 0.6 0.5
EV/EBITDA (x) 6.3 6.5 5.7 4.5
PBR (x) 1.7 1.6 1.4 1.4
PER adj. (x) 10.5 9.9 10.2 8.9
Dividend yield (%) 1.3 1.1 1.1 1.1
30,000
38,000
46,000
10-12 1-13 4-13 7-13 10-13
Samsung Heavy Industries KOSPI INDEX (rebased)
Share price (%) -1 mth -3 mth -12 mth
Ordinary shares 6 19 25
Relative to index 5 8 24
Relative to sector - - -
Major shareholder Samsung Electronics (17.6%)
Free float 76%
Average turnover (USD) 39,624,085
James KP Hong
James.KP.Hong@sc.com
+82 2 3703 5164










Equity Research l Korea shipbuilding

10 October 2013 57
Industry leader
Earnings outlook
We have factored in improving profitability for SHI. Our above consensus earnings
forecasts from 2014 are mainly driven by offshore production platforms.
Figure 109: SHI earnings outlook
(KRW bn, %) 1Q13 2Q13 3Q13E 4Q13E 1Q14E 2Q14E 3Q14E 4Q14E 2012 2013E 2014E 2015E
Revenue 3,888 3,798 3,729 3,805 3,946 3,946 3,946 3,821 14,489 15,220 15,660 16,156
YoY growth 9.9% 13.3% -8.1% 7.5% 1.5% 3.9% 5.8% 0.4% 8.2% 5.0% 2.9% 3.2%
Shipbuilding & Offshore 3,806 3,600 3,553 3,542 3,755 3,755 3,755 3,695 13,634 14,500 14,961 15,472
Construction & others 167 163 210 284 205 205 205 189 856 824 803 788
Consolidation adjustment -86 36 -34 -20 -14 -14 -14 -63 -1 -104 -104 -104
EBIT 440 286 272 282 345 300 392 270 1,189 1,280 1,306 1,496
YoY growth 30.7% 8.2% -15.9% 6.8% -21.7% 4.7% 43.8% -4.3% 2.5% 7.7% 2.0% 14.6%
Shipbuilding & Offshore 472 324 327 333 353 353 353 347 1,338 1,456 1,406 1,547
Construction & others 6 2 7 9 7 7 7 6 35 24 26 25
Consolidation adjustment -38 -40 -61 -60 -15 -60 32 -84 -184 -199 -127 -760
EBIT margin 11.3% 7.5% 7.3% 7.4% 8.7% 7.6% 9.9% 7.1% 8.2% 8.4% 8.3% 9.3%
Shipbuilding & Offshore 12.4% 9.0% 9.2% 9.4% 9.4% 9.4% 9.4% 9.4% 9.8% 10.0% 9.4% 10.0%
Construction & others 3.5% 1.4% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 4.1% 2.9% 3.2% 3.2%
Pre-tax profit 383 288 257 266 344 299 391 269 1,063 1,402 1,304 1,495
YoY growth 16.7% 15.3% -25.8% 121.3% -10.2% 4.1% 52.5% 1.4% 0.6% 31.8% -6.9% 6.7%
PBT margin 9.9% 7.6% 6.9% 7.0% 8.7% 7.6% 9.9% 7.0% 7.3% 9.2% 8.3% 9.3%
Net profit 300 215 198 205 265 230 301 207 811 1,126 1,004 1,151
YoY growth 20.3% 11.5% -28.4% 179.5% -11.8% 7.0% 52.5% 1.4% 7.2% 38.8% -10.8% 2.2%
NP margin 7.7% 5.7% 5.3% 5.4% 6.7% 5.8% 7.6% 5.4% 5.6% 7.4% 6.4% 7.1%
Source: Company, Standard Chartered Research estimates

Figure 110: Where we are versus consensus

2013E 2014 2015E
(KRW bn, %) Us Consensus (Diff.) Us Consensus (Diff.) Us Consensus (Diff.)
Sales 15,220 15,052 1.1% 15,660 15,364 1.9% 16,156 15,818 2.1%
Operating profit 1,280 1,261 1.5% 1,306 1,201 8.7% 1,496 1,263 18.5%
Pre-tax profit 1,402 1,230 14.0% 1,304 1,203 8.4% 1,495 1,256 19.0%
Net profit 1,126 938 20.1% 1,004 916 9.7% 1,151 956 20.4%
EBITDA 1,572 1,532 2.6% 1,593 1,507 5.7% 1,784 1,555 14.7%
OPM (%) 8.4% 8.4% 0.0ppt 8.3% 7.8% 0.5ppt 9.3% 8.0% 1.3ppt
NPM (%) 7.4% 6.2% 1.2ppt 6.4% 6.0% 0.5ppt 7.1% 6.0% 1.1ppt
Source: Company, Bloomberg, Standard Chartered Research estimates

Equity Research l Korea shipbuilding

10 October 2013 58
Order outlook
In 2014-16, we expect SHI to win orders for 10 drillships (c.USD 500mn each) and 14
LNG carriers (c.USD 200mn each) a year. We see potential upside risk for drilling
rigs, from jack-up orders. SHI recently won two high-spec jack-up orders from Statoil.
The price tags of these jack-ups are three times greater than those for jack-ups built
by Singaporean shipyards.
In addition to stable drilling rig and LNG carrier orders, we expect SHI to win two F-
LNG orders a year. Shell and SHI have been working on the worlds first F-LNG and
SHI has an exclusive order contract with Shell. Moreover, SHI is working with Total
on the worlds first Oil-FPSO (for the Egina project).
We believe these orders are highly lucrative and give SHI first-mover advantages in
these new high-end segments.
Figure 111: SHI new order outlook
New order (USD bn, %) 2010 2011 2012 2013E 2014E 2015E YTD % achieved
Shipbuilding 6.0 5.7 1.3 4.5 5.0 5.0 3.4 76%
LNG carriers 0.7 3.6 0.8 3.0 2.9 2.8 2.8 92%
Container ships 2.0 1.5 0.0 1.2 1.8 1.9 0.6 47%
Tankers 3.3 0.6 0.5 0.3 0.3 0.3 0.1 32%
Offshore 3.8 9.2 8.3 9.8 10.3 10.8 8.6 87%
Production facilities 1.7 3.3 3.4 4.5 4.7 5.0 3.3 73%
Drilling rigs 1.6 5.7 4.9 5.0 5.3 5.5 5.0 100%
Others 0.4 0.3 0.0 0.3 0.3 0.3 0.3 90%
Total new orders 9.7 14.9 9.6 14.3 15.3 15.7 12.0 84%
YoY growth 595% 53% -36% 49% 7% 3%
Source: Company, Standard Chartered Research estimates

Valuation
Outperform rating, with a 12-month price target of KRW 55,000
We value SHI by applying EV/backlog and EV/EBITDA valuations then averaging
them.
Our price target of KRW 55,000 implies 10.2x 2014E PER and 1.4x 2014E PBR. We
believe the current share price does not fully reflect SHIs growth potential in the
lucrative offshore platform business.
Based on EV/backlog, fair value is KRW 51,000.
Based on EV/EBITDA, fair value is KRW 59,000.
Drillships and LNG carriers are
SHIs cash cows

First-mover advantages in F-LNG,
Oil-FPSO and high-spec jack-ups

Equity Research l Korea shipbuilding

10 October 2013 59
EV/backlog
We apply a target operational EV/backlog of 20%, the average EV/backlog in 2011-
2013 YTD. Since 2011, SHIs offshore order wins have outpaced commercial vessel
orders, and its backlog has also turned offshore-centric.
Figure 112: EV/backlog
(KRW bn, %)

2014E
Modified backlog (A) 49,476
Target operational EV/backlog (B) 20%
Target operational EV (C) = (A) X (B) 10,118
Net debt (D) -1,588
Total market capitalisation (E) = (C) - (D) 11,706
Shares outstanding (mn) (F) 231
Fair value per share (E) / (F) KRW 51,000
Source: Company, Standard Chartered Research estimates

EV/EBITDA
We apply a target operational EV/EBITDA of 7.5x, SHIs mid-cycle EV/EBITDA
during the 2007-08 China super-cycle. We see significant growth potential for SHI in
the offshore segment (drilling rigs and production platforms), and believe this justifies
our high target valuation multiple.
Figure 113: EV/EBITDA
(KRW bn)

2014E
2014E EBITDA (A) 1,593
Target operational EV/EBITDA (x) (B) 7.5
Target operational EV (C) = (A) X (B) 11,949
Net debt (D) -1,588
Total market capitalisation (E) = (C) - (D) 13,537
Shares outstanding (mn) (F) 231
Fair value per share (E) / (F) KRW 59,000
Source: Company, Standard Chartered Research estimates

Figure 114: Historical EV/backlog trend Figure 115: Historical EV/EBITDA trend



Source: Company, Standard Chartered Research estimates Source: Company, Standard Chartered Research estimates
0%
10%
20%
30%
40%
2001 2003 2005 2007 2009 2011 2013
E
V
/
m
o
d
i
f
i
e
d

b
a
c
k
l
o
g

-6
-3
0
3
6
9
12
2001 2003 2005 2007 2009 2011 2013
E
V
/
E
B
I
T
D
A

(
x
)

Equity Research l Korea shipbuilding

10 October 2013 60
Figure 116: SHI EV/modified backlog Figure 117: SHI EV/EBITDA




Source: Company, Bloomberg, Standard Chartered Research estimates Source: Company, Bloomberg, Standard Chartered Research estimates

Figure 118: Historical PBR trend Figure 119: Historical PER trend



Source: Company, Standard Chartered Research estimates Source: Company, Standard Chartered Research estimates

Potential risks
SHIs product portfolio is skewed towards specialty-vessels and the offshore
segment. We see potential downside risk if the commercial vessel market recovers
faster than we expect. Another potential risk could arise from Samsung Groups
restructuring. While SHI is not deeply involved in the groups cross-holding structure,
SHI is not free from potential risks from Samsung Groups ongoing restructuring

0
3,000
6,000
9,000
12,000
15,000
2001 2003 2005 2007 2009 2011 2013
K
R
W

b
n

EV (KRW bn) x0.15 x0.18
x0.21 x0.25 x0.28
0
3,000
6,000
9,000
12,000
15,000
2001 2003 2005 2007 2009 2011 2013
K
R
W

b
n

EV (KRW bn) x4.2 x5.7
x7.7 x9.1 x11.1
0
10,000
20,000
30,000
40,000
50,000
60,000
2001 2003 2005 2007 2009 2011 2013
K
R
W

SHI x1.1 x1.4
x1.7 x2.0 x2.3
0
10,000
20,000
30,000
40,000
50,000
60,000
2001 2003 2005 2007 2009 2011 2013
K
R
W

SHI x6.0 x8.0
x10.0 x12.0 x14.5
Equity Research l Korea shipbuilding

10 October 2013 61

Source: Company, Standard Chartered Research estimates


Income statement (KRW bn) Cash flow statement (KRW bn)
Year-end: Dec 2011 2012 2013E 2014E 2015E Year-end: Dec 2011 2012 2013E 2014E 2015E
Sales 13,392 14,489 15,220 15,660 16,156 EBIT 1,160 1,189 1,280 1,306 1,496
Gross profit 1,763 1,935 2,028 2,101 2,312 Depreciation & amortisation 372 302 292 288 288
SG&A (681) (729) (748) (796) (816) Net interest 106 (18) 8 8 8
Other income 77 (17) 0 0 0 Tax paid (548) (173) 0 0 0
Other expenses 0 0 0 0 0 Changes in working capital 696 (1,646) (180) 292 (65)
EBIT 1,160 1,189 1,280 1,306 1,496 Others (740) (1,080) (132) (278) (322)
Net interest (71) 56 (56) (65) (67) Cash flow from operations 1,046 (1,427) 1,268 1,615 1,405
Associates (32) (0) (1) (1) (1)
Other non-operational 0 (181) 178 65 67 Capex (100) (100) (100) (100) (100)
Exceptional items 0 0 0 0 0 Acquisitions & Investments 0 0 0 0 0
Pre-tax profit 1,056 1,063 1,402 1,304 1,495 Disposals 0 0 0 0 0
Taxation (299) (252) (275) (300) (344) Others 261 272 (9) (9) (9)
Minority interests 0 0 0 0 0 Cash flow from investing 115 (9) (282) (283) (283)
Exceptional items after tax 0 0 0 0 0
Net profit 757 811 1,126 1,004 1,151 Dividends (108) (108) (115) (115) (115)
Issue of shares 0 0 0 0 0
Net profit adj. 757 811 1,036 1,004 1,151 Change in debt (1,080) 1,443 (94) 4 4
EBITDA 1,532 1,491 1,572 1,593 1,784 Other financing cash flow 389 224 0 0 0
Cash flow from financing (799) 1,559 (209) (112) (112)
EPS (KRW) 3,277 3,513 4,876 4,348 4,984
EPS adj. (KRW) 3,279 3,515 4,489 4,350 4,986 Change in cash 362 123 777 1,220 1,010
DPS (KRW) 469 469 500 500 500 Exchange rate effect 0 0 0 0 0
Avg fully diluted shares (mn) 231 231 231 231 231 Free cash flow 946 (1,527) 1,168 1,515 1,305
Balance sheet (KRW bn) Financial ratios and other
Year-end: Dec 2011 2012 2013E 2014E 2015E Year-end: Dec 2011 2012 2013E 2014E 2015E
Cash 806 929 1,706 2,926 3,935 Operating ratios
Short-term investments 565 293 302 311 311 Gross margin (%) 13.2 13.4 13.3 13.4 14.3
Accounts receivable 3,986 5,033 5,073 4,894 5,049 EBITDA margin (%) 11.4 10.3 10.3 10.2 11.0
Inventory 540 699 735 755 771 EBIT margin (%) 8.7 8.2 8.4 8.3 9.3
Other current assets 3,527 3,322 3,489 3,590 3,704 Net margin adj. (%) 5.7 5.6 6.8 6.4 7.1
Total current assets 9,424 10,276 11,305 12,475 13,770 Effective tax rate (%) 28.3 23.7 19.6 23.0 23.0
Sales growth (%) 2.3 8.2 5.0 2.9 3.2
PP&E 5,408 5,278 5,263 5,223 5,223 Net income growth (%) -14.8 7.2 38.8 -10.8 14.6
Intangible assets 86 38 32 26 26 EPS growth (%) -14.8 7.2 38.8 -10.8 14.6
Associates and JVs 0 6 5 4 4 EPS growth adj. (%) -14.8 7.2 27.7 -3.1 14.6
Other long-term assets 1,495 1,037 1,069 1,101 1,101 DPS growth (%) 0.3 0.1 6.6 0.0 0.0
Total long-term assets 6,990 6,359 6,369 6,354 6,354
Efficiency ratios
Total assets 16,414 16,635 17,674 18,829 20,124 ROE (%) 17.9 16.3 19.5 14.9 15.9
ROCE (%) 19.6 17.8 16.0 14.6 15.1
Short-term debt 1,684 925 925 925 925 Asset turnover (x) 0.8 0.9 0.9 0.9 0.8
Accounts payable 4,982 4,664 4,549 4,675 4,774 Op. cash/EBIT (x) 0.9 -1.2 1.0 1.2 0.9
Other current liabilities 3,873 3,545 3,723 3,831 3,952 Depreciation/capex (x) 2.9 3.0 2.9 2.8 2.8
Total current liabilities 10,539 9,133 9,197 9,431 9,651 Inventory days 17.1 18.0 19.8 20.1 20.1
Accounts receivable days 127.0 113.6 121.2 116.2 112.3
Long-term debt 100 814 721 724 724 Accounts payable days 117.6 140.2 127.5 124.2 124.6
Convertible bonds 0 0 0 0 0
Deferred tax 29 43 43 43 43 Leverage ratios
Other long-term liabilities 1,102 981 1,010 1,041 1,041 Net gearing (%) 21.1 14.3 -0.9 -16.8 -26.4
Total long-term liabilities 1,231 1,839 1,774 1,808 1,808 Debt/capital (%) 30.4 23.2 19.4 17.5 15.7
Interest cover (x) 5.4 44.2 13.5 13.9 15.6
Total liabilities 11,770 10,972 10,971 11,239 11,459 Debt/EBITDA (x) 1.5 1.2 1.1 1.0 0.9
Current ratio (x) 0.9 1.1 1.2 1.3 1.4
Shareholders funds 4,644 5,283 6,294 7,183 7,330
Minority interests (0) 380 408 407 1,335 Valuation
EV/sales (x) 0.8 0.7 0.7 0.6 0.5
Total equity 4,644 5,663 6,702 7,590 8,665 EV/EBITDA (x) 6.8 6.3 6.5 5.7 4.5
EV/EBIT (x) 8.9 7.9 8.0 6.9 5.3
Total liabilities and equity 16,414 16,635 17,673 18,829 20,123 PER (x) 11.5 10.5 9.1 10.2 8.9
PER adj. (x) 11.5 10.5 9.9 10.2 8.9
Net debt (cash) 978 810 (60) (1,277) (2,286) PBR (x) 1.4 1.7 1.6 1.4 1.4
Year-end shares (mn) 231 231 231 231 231 Dividend yield (%) 1.2 1.3 1.1 1.1 1.1
Equity Research l Korea shipbuilding

10 October 2013 62

Hyundai Heavy Industries
A late-cycle play
We initiate coverage of Hyundai Heavy Industries (HHI) with
an In-Line rating.
Notwithstanding HHIs strong order wins YTD, its earnings
turnaround has been slower than the market expected. We
believe the market is overestimating ROE accretion
possibilities.
We think the slower-than-expected earnings recovery could
lead to profit taking after the recent rally in the share price.
We recommend investors focus on DSME and SHI, which
we consider better positioned to capture the USD 50bn p.a.
opportunity in shipbuilding new orders we expect over the
next few years.


n IN-LINE (initiating coverage)





Slow recovery. We think the market has overestimated ROE
accretion possibilities for HHI and its CV-centric subsidiaries.
Notwithstanding its strong order wins YTD, we remain cautious on
order quality, mainly due to slower-than-expected increases in
new-build prices for most CV types (except for post-Panamax
container ships and MR tankers). Without a full-fledged recovery in
new-build prices, we think HHI could disappoint the market with a
slower-than-expected earnings recovery.
Cost competitiveness maintained. We believe HHI is the most
cost competitive Korean shipbuilder, leveraging its largest capacity
(HHI, Hyundai Mipo Dockyard and Hyundai Samho Heavy
Industries) and vertical integration (engines and machinery).
However, among the big three, it is also the most exposed to
competition from second-tier Korean shipbuilders and regional
shipbuilders. We could see HHI turn more profit-sensitive after
reaching a two-year order backlog, which we expect to happen
around mid-2014.
Demanding valuation. We consider valuation quite demanding at
23.4x 2014E PER and 1.0x 2014E PBR versus 2014E ROE of
4.2%. Our 12-month price target is KRW 280,000, based on
backlog and EBITDA the average of target EV/backlog and
EV/EBITDA. We apply the mid-cycle valuation multiples from the
last upturn (2009-11). In EV/EBITDA terms, HHI is already trading
near its historical high, while we see no fundamental support for a
re-rating.

Source: Company, Standard Chartered Research estimates

Share price performance


Source: Company, FactSet

PRICE as of 9 Oct 2013
KRW 267,000
PRICE TARGET
KRW 280,000
Bloomberg code Reuters code
009540 KS 009540.KS
Market cap 12-month range
KRW 20,292.0bn (USD 18,898mn) KRW 172,000 - 271,500
EPS adj est change NA
Year-end: December 2012 2013E 2014E 2015E
Sales (KRW bn) 54,974 55,282 56,603 57,061
EBITDA (KRW bn) 3,000 2,217 2,402 2,705
EBIT (KRW bn) 1,993 1,242 1,437 1,751
Pre-tax profit (KRW bn) 1,436 1,014 1,207 1,472
Net profit adj. (KRW bn) 184 776 868 1,050
FCF (KRW bn) (4,549) 2,311 333 310
EPS adj. (KRW) 2,421 10,216 11,426 13,821
DPS (KRW) 4,000 4,000 4,000 4,000
Book value/share (KRW) 272,521 269,326 278,010 289,710
EPS growth adj. (%) -92.8 321.9 11.8 21.0
DPS growth (%) -42.9 0.0 0.0 0.0
EBITDA margin (%) 5.5 4.0 4.2 4.7
EBIT margin (%) 3.6 2.2 2.5 3.1
Net margin adj. (%) 0.3 1.4 1.5 1.8
Div. payout (%) 165.2 39.2 35.0 28.9
Net gearing (%) 111.6 114.5 110.6 104.6
ROE (%) 0.9 3.8 4.2 4.9
ROCE (%) 7.9 4.6 5.3 6.2
EV/sales (x) 0.8 0.8 0.8 0.8
EV/EBITDA (x) 14.5 19.7 18.2 16.0
PBR (x) 0.9 1.0 1.0 0.9
PER adj. (x) 109.6 26.1 23.4 19.3
Dividend yield (%) 1.5 1.5 1.5 1.5
170,000
225,000
280,000
10-12 1-13 4-13 7-13 10-13
Hyundai Heavy Industries KOSPI INDEX (rebased)
Share price (%) -1 mth -3 mth -12 mth
Ordinary shares 10 44 9
Relative to index 8 32 8
Relative to sector - - -
Major shareholder Hyundai Heavy Industries (19.4%)
Free float 59%
Average turnover (USD) 50,732,884
James KP Hong
James.KP.Hong@sc.com
+82 2 3703 5164










Equity Research l Korea shipbuilding

10 October 2013 63
Steady but slow
Earnings outlook
We remain cautious on HHI, especially on its shipbuilding and oil refinery businesses,
which we expect to account for 66% of 2014 sales. As we expect steel plate prices to
be flat in 2014, we see little room for profitability improvement in the shipbuilding
business. In the oil refinery business, we expect a weak cash refining margin of USD
3.8/barrel in 2014 (USD 4.2/ barrel in 2013E).
Figure 120: HHI earnings outlook
(KRW bn, %) 1Q13 2Q13 3Q13E 4Q13E 1Q14E 2Q14E 3Q14E 4Q14E 2012 2013E 2014E 2015E
Revenue 13,143 13,091 13,301 15,747 13,971 13,562 13,497 15,572 54,974 55,282 56,603 57,061
YoY growth -5.7% -4.4% 0.8% 11.4% 6.3% 3.6% 1.5% -1.1% 2.3% 0.6% 2.4% 0.8%
Shipbuilding (incl. drillships) 4,182 4,447 4,121 4,760 4,656 4,616 4,304 4,909 17,788 17,509 18,485 18,715
Offshore & Engineering 1,054 1,239 1,226 1,651 1,030 1,181 1,122 1,621 4,382 5,170 4,954 4,954
Engine & Machinery 342 422 358 199 416 438 463 250 2,011 1,322 1,567 1,567
Industrial Plant 232 260 511 1,078 516 496 643 1,047 1,431 2,081 2,702 2,702
Construction Equipment 960 1,029 1,042 2,385 1,210 1,165 1,040 2,022 3,791 5,416 5,437 5,439
Electric-Electro Systems 626 731 795 644 733 881 879 775 2,873 2,796 3,269 3,269
Renewable Energy 84 57 69 125 121 77 82 111 337 334 391 391
Oil Refinery 5,468 4,664 4,952 4,676 5,083 4,455 4,723 4,610 21,499 19,760 18,871 19,062
Finance 154 177 157 178 161 186 165 187 634 666 699 734
Others 42 64 70 51 44 68 74 42 227 227 227 227
EBIT 378 289 280 295 354 360 347 376 1,994 1,242 1,437 1,751
YoY growth -61.0% -19.4% -52.8% 313.1% -6.3% 24.5% 23.8% 27.4% -56.0% -37.7% 15.7% 21.8%
Shipbuilding (incl. Drillship) 67 93 91 117 116 120 125 156 1,041 368 518 749
Offshore & Engineering 71 142 85 116 75 89 90 133 318 414 386 426
Engine & Machinery 38 43 39 25 50 55 63 37 347 145 204 251
Industrial Plant 14 20 41 92 39 35 42 47 106 167 162 122
Construction Equipment 69 86 89 218 111 111 94 174 276 460 489 517
Electric-Electro Systems -4 2 1 1 0 18 22 26 -75 0 65 163
Renewable Energy -15 -5 -5 -8 -7 -4 -4 -4 -106 -33 -20 0
Oil Refinery 197 59 109 103 95 83 88 86 308 427 351 409
Finance 8 10 9 12 13 19 17 21 95 40 70 95
Others -67 -160 -178 -380 -138 -164 -189 -299 -316 -744 -789 -981
EBIT margin 2.9% 2.2% 2.1% 1.9% 2.5% 2.7% 2.6% 2.4% 3.6% 2.2% 2.5% 3.1%
Shipbuilding (incl. Drillships) 1.6% 2.1% 2.2% 2.5% 2.5% 2.6% 2.9% 3.2% 5.9% 2.1% 2.8% 4.0%
Offshore & Engineering 6.7% 11.5% 6.9% 7.0% 7.3% 7.5% 8.0% 8.2% 7.3% 8.0% 7.8% 8.6%
Engine & Machinery 11.2% 10.1% 11.0% 12.5% 12.0% 12.5% 13.5% 14.6% 17.2% 11.0% 13.0% 16.0%
Industrial Plant 6.1% 7.6% 8.0% 8.5% 7.5% 7.0% 6.5% 4.5% 7.4% 8.0% 6.0% 4.5%
Construction Equipment 7.1% 8.3% 8.5% 9.1% 9.2% 9.5% 9.0% 8.6% 7.3% 8.5% 9.0% 9.5%
Electric-Electro Systems -0.6% 0.2% 0.1% 0.2% 0.0% 2.0% 2.5% 3.3% -2.6% 0.0% 2.0% 5.0%
Renewable Energy -17.8% -9.5% -7.0% -6.6% -6.0% -5.5% -5.0% -3.6% -31.6% -10.0% -5.0% 0.0%
Oil Refinery 3.6% 1.3% 2.2% 2.2% 1.9% 1.9% 1.9% 1.9% 1.4% 2.2% 1.9% 2.1%
Finance 5.0% 5.9% 6.0% 7.0% 8.0% 10.0% 10.5% 11.3% 14.9% 6.0% 10.0% 13.0%
Others -158.5% -248.2% -254.4% -750.2% -311.0% -242.0% -256.2% -713.8% -138.8% -327.2% -346.8% -431.0%
Pre-tax profit 347 92 282 294 300 304 288 315 1,437 1,014 1,207 1,510
YoY growth -54.7% -56.1% -72.1% -153.8% -13.3% 231.8% 2.3% 6.9% -62.9% -29.4% 19.0% 25.1%
PBT margin 2.6% 0.7% 2.1% 1.9% 2.2% 2.2% 2.1% 2.0% 2.6% 1.8% 2.1% 2.6%
Net profit 318 98 206 215 220 222 211 230 185 776 868 1,088
YoY growth -35.8% -25.7% -70.4% -163.5% -31.0% 126.3% 2.3% 6.9% -92.8% 319.1% 11.8% 25.2%
NP margin 2.4% 0.7% 1.5% 1.4% 1.6% 1.6% 1.6% 1.5% 0.3% 1.4% 1.5% 1.9%
Source: Company, FactSet, Standard Chartered Research estimates
Equity Research l Korea shipbuilding

10 October 2013 64
Figure 121: Where we are versus consensus

2013E 2014E 2015E
(KRW bn, %) Us Consensus (Diff.) Us Consensus (Diff.) Us Consensus (Diff.)
Sales 55,282 52,680 4.9% 56,603 54,309 4.2% 57,061 55,936 2.0%
Operating profit 1,242 1,424 -12.8% 1,437 1,566 -8.2% 1,751 2,007 -12.8%
Pre-tax profit 1,014 1,078 -5.9% 1,207 1,428 -15.5% 1,510 1,812 -16.7%
Net profit 769 830 -7.4% 915 1,030 -11.2% 1,144 1,324 -13.6%
EBITDA 2,217 2,521 -12.1% 2,402 2,787 -13.8% 2,705 3,157 -14.3%
OPM (%) 2.2% 2.7% -0.5ppt 2.5% 2.9% -0.3ppt 3.1% 3.6% -0.5ppt
NPM (%) 1.4% 1.6% -0.2ppt 1.6% 1.9% -0.3ppt 2.0% 2.4% -0.4ppt
Source: Company, FactSet, Standard Chartered Research estimates

Order outlook
Most leveraged to commercial vessel cycle
HHI is the worlds largest shipbuilder in terms of nameplate capacity. With two
commercial vessel-centric shipyards under its umbrella (Hyundai Mipo Dockyard and
Hyundai Samho Industries), it is somewhat difficult for HHI to adapt itself to the
changing environment in the shipbuilding sector.
Of Koreas big-three shipbuilders, HHI is the most leveraged to the commercial
vessel cycle. However, we continue to believe a full-fledged recovery in the
commercial vessel cycle is distant.
Figure 122: HHI shipbuilding/offshore platform order outlook
New order 2010 2011 2012 2013E 2014E 2015E YTD % achieved
Total orders: Commercial and Offshore units 63 52 42 52 62 62 33
Drillships units

11 2 2 2 2

Semi-submersibles units

1 1 1 1 1

Tankers units 25 4 3 10 15 15 5

Bulkers units 22

4

Containers units

19 10 15 20 20 10

LNG vessels units

8 7 5 10 10 2

Others units 10 6 15 15 10 10 9
Commercial sub-total (incl. drillship) units 57 48 38 48 58 58 31
Fixed Platform/Floaters units 2 3 2 2 2 2 2

Subsea pipelines units 4 1 2 2 2 2 0
Offshore subtotal units 6 4 4 4 4 4 2
Total orders USD bn 7.1 15.4 8.2 13.4 13.5 13.7 12.4 93%
Commercial vessels (incl. drillships) USD bn 4.1 10.9 6.1 7.4 7.5 7.7 6.8 91%
Offshore USD bn 3.1 4.5 2.1 6.0 6.0 6.0 5.7 94%
Source: Company, Standard Chartered Research estimates

Valuation
In-Line rating, with a 12-month price target of KRW 280,000
We value HHI by applying EV/backlog and EV/EBITDA methodologies, then
averaging them.
Our price target of KRW 280,000 implies 23.4x 2014E PER and 1.0x 2014E PBR.
We believe the current share price has fully reflected HHIs ROE accretion potential.
Based on EV/backlog, fair value is KRW 307,000.
Based on EV/EBITDA, fair value is KRW 253,000.
Commercial vessel-centric
Equity Research l Korea shipbuilding

10 October 2013 65
EV/backlog
We apply a target operational EV/backlog of 41%, its mid-cycle EV/backlog multiple
during the 2009-11 upturn (before the Hyundai Oilbank acquisition). We have found
no clear evidence that HHIs portfolio or business model have change since the last
cycle.
While the EV/backlog valuation methodology is appropriate for deriving the intrinsic
value of order-driven businesses (such as construction and shipbuilding), it is
inappropriate for the companys oil refinery business, Hyundai Oilbank. We value this
business separately using EV/EBITDA. We apply a 2014E EV/EBITDA multiple of
8.5x on Hyundai Oilbank, the same multiple we use for S-Oil.
Figure 123: EV/backlog
(KRW bn, %)

2014E
Modified backlog (A) 64,129
Target operational EV/backlog (B) 41%
Target operational EV (C) = (A) X (B) 26,293
2014E EBITDA, Hyundai Oilbank (D) 609
Target operational EV/EBITDA (x) (E) 8.5
Target operational EV, Hyundai Oilbank (F) = (D) X (E) 5,175
Net debt (G) 8,147
Total market capitalisation (H) = (C) + (F) - (G) 23,321
Shares outstanding (mn) (I) 76
Fair value per share (H) / (I) KRW 307,000
Source: Company, Standard Chartered Research estimates

EV/EBITDA
We apply a target operational EV/EBITDA of 12.4x, its mid-cycle EV/EBITDA multiple
in 2011-2013 YTD, in valuing HHIs operations except for the oil refinery business.
Figure 124: EV/EBITDA
(KRW bn)

2014E
2014E EBITDA (A) 1,793
Target operational EV/EBITDA (x) (B) 12.4
Target operational EV (C) = (A) X (B) 22,148
2014E EBITDA, Hyundai Oilbank (D) 609
Target operational EV/EBITDA (x) (E) 8.5
Target operational EV, Hyundai Oilbank (F) = (D) X (E) 5,175
Net debt (G) 8,147
Total market capitalisation (H) = (C) + (F) - (G) 19,176
Shares outstanding (mn) (I) 76
Fair value per share (H) / (I) KRW 253,000
Source: Company, Standard Chartered Research estimates

Equity Research l Korea shipbuilding

10 October 2013 66
Figure 125: Historical EV/backlog trend Figure 126: Historical EV/EBITDA trend



Source: Company, Standard Chartered Research estimates Source: Company, Standard Chartered Research estimates

Figure 127: HHI EV/modified backlog Figure 128: HHI EV/EBITDA




Source: Company, Bloomberg, Standard Chartered Research estimates Source: Company, Bloomberg, Standard Chartered Research estimates

Figure 129: Historical PBR trend Figure 130: Historical PER trend



Source: Company, Standard Chartered Research estimates Source: Company, Standard Chartered Research estimates

Potential risks
HHI has a diversified business portfolio. We have factored our bearish view on
regional refineries into HHIs oil refinery business (Hyundai Oilbank). Unexpected oil
price movements and strong gross refining margins are potential risks to our
estimates.
0%
10%
20%
30%
40%
50%
60%
70%
80%
2001 2003 2005 2007 2009 2011 2013
E
V
/
m
o
d
i
f
i
e
d

b
a
c
k
l
o
g

0
2
4
6
8
10
12
14
2001 2003 2005 2007 2009 2011 2013
E
V
/
E
B
I
T
D
A

(
x
)

0
10,000
20,000
30,000
40,000
50,000
60,000
2001 2003 2005 2007 2009 2011 2013
K
R
W

b
n

EV (KRW bn) x0.29 x0.37
x0.51 x0.64 x0.86
0
10,000
20,000
30,000
40,000
50,000
60,000
2001 2003 2005 2007 2009 2011 2013
K
R
W

b
n

EV (KRW bn) x1.0 x3.0
x8.8 x11.0 x12.4
0
100,000
200,000
300,000
400,000
500,000
600,000
2001 2003 2005 2007 2009 2011 2013
K
R
W

HHI x0.8 x1.2
x1.6 x2.0 x2.4
0
100,000
200,000
300,000
400,000
500,000
600,000
2001 2003 2005 2007 2009 2011 2013
K
R
W

HHI x3.0 x8.0
x13.0 x18.0 x23.0
Equity Research l Korea shipbuilding

10 October 2013 67

Source: Company, Standard Chartered Research estimates


Income statement (KRW bn) Cash flow statement (KRW bn)
Year-end: Dec 2011 2012 2013E 2014E 2015E Year-end: Dec 2011 2012 2013E 2014E 2015E
Sales 53,712 54,974 55,282 56,603 57,061 EBIT 4,536 1,993 1,242 1,437 1,751
Gross profit 6,927 4,643 4,029 4,135 4,560 Depreciation & amortisation 938 1,007 974 965 954
SG&A (2,391) (2,650) (2,787) (2,698) (2,808) Net interest 70 (606) (527) (626) (724)
Other income 0 0 0 0 0 Tax paid 0 0 0 0 0
Other expenses 0 0 0 0 0 Changes in working capital (3,449) (7,466) 1,675 (272) (514)
EBIT 4,536 1,993 1,242 1,437 1,751 Others (5,040) (5,853) 1,764 (147) (375)
Net interest (52) (214) (192) (225) (273) Cash flow from operations 504 (3,459) 3,453 1,630 1,606
Associates (148) (369) (19) (5) (5)
Other non-operational (247) (987) 786 0 0 Capex (1,627) (1,090) (1,142) (1,297) (1,297)
Exceptional items (212) 1,013 (803) 0 0 Acquisitions & Investments 0 0 0 0 0
Pre-tax profit 3,876 1,436 1,014 1,207 1,472 Disposals 0 0 0 0 0
Taxation (1,133) (1,215) (245) (292) (365) Others 260 281 (113) (117) (121)
Minority interests (184) (36) 8 (46) (57) Cash flow from investing (1,367) (809) (1,255) (1,413) (1,417)
Exceptional items after tax 0 0 0 0 0
Net profit 2,559 184 776 868 1,050 Dividends (429) (245) (245) (245) (245)
Issue of shares (50) 156 0 0 0
Net profit adj. 2,559 184 776 868 1,050 Change in debt 1,059 2,567 236 (463) (463)
EBITDA 5,473 3,000 2,217 2,402 2,705 Other financing cash flow 14 1,287 44 45 47
Cash flow from financing 594 3,766 35 (663) (661)
EPS (KRW) 33,671 2,421 10,216 11,426 13,821
EPS adj. (KRW) 33,671 2,421 10,216 11,426 13,821 Change in cash (269) (502) 2,233 (447) (472)
DPS (KRW) 7,000 4,000 4,000 4,000 4,000 Exchange rate effect 0 0 0 0 0
Avg fully diluted shares (mn) 76 76 76 76 76 Free cash flow (1,123) (4,549) 2,311 333 310
Balance sheet (KRW bn) Financial ratios and other
Year-end: Dec 2011 2012 2013E 2014E 2015E Year-end: Dec 2011 2012 2013E 2014E 2015E
Cash 1,610 1,108 3,341 2,894 2,422 Operating ratios
Short-term investments 2,310 2,356 2,356 2,356 2,356 Gross margin (%) 12.9 8.4 7.3 7.3 8.0
Accounts receivable 9,745 12,785 13,821 14,151 14,265 EBITDA margin (%) 10.2 5.5 4.0 4.2 4.7
Inventory 6,478 6,191 5,695 5,523 5,526 EBIT margin (%) 8.4 3.6 2.2 2.5 3.1
Other current assets 2,290 2,839 3,214 3,330 3,396 Net margin adj. (%) 4.8 0.3 1.4 1.5 1.8
Total current assets 23,076 25,279 28,427 28,254 27,966 Effective tax rate (%) 29.2 84.7 24.2 24.2 24.8
Sales growth (%) 43.8 2.3 0.6 2.4 0.8
PP&E 15,565 12,956 13,224 13,656 14,099 Net income growth (%) -38.4 -92.8 321.9 11.8 21.0
Intangible assets 2,324 2,224 2,124 2,024 1,924 EPS growth (%) -38.4 -92.8 321.9 11.8 21.0
Associates and JVs 973 904 884 879 873 EPS growth adj. (%) -38.4 -92.8 321.9 11.8 21.0
Other long-term assets 7,063 7,911 8,025 8,141 8,262 DPS growth (%) 109.1 -42.9 0.0 0.0 0.0
Total long-term assets 25,924 23,995 24,256 24,699 25,158
Efficiency ratios
Total assets 49,001 49,273 52,683 52,953 53,124 ROE (%) 14.9 0.9 3.8 4.2 4.9
ROCE (%) 20.5 7.9 4.6 5.3 6.2
Short-term debt 22,229 20,323 22,852 22,307 21,462 Asset turnover (x) 1.1 1.1 1.1 1.1 1.1
Accounts payable 15,016 11,523 13,852 13,807 13,462 Op. cash/EBIT (x) 0.1 -1.7 2.8 1.1 0.9
Other current liabilities (11,754) (9,672) (10,974) (10,874) (10,503) Depreciation/capex (x) 0.5 0.8 0.8 0.7 0.7
Total current liabilities 25,491 22,174 25,730 25,241 24,421 Inventory days 44.9 45.9 42.3 39.0 38.4
Accounts receivable days 67.8 74.8 87.8 90.2 90.9
Long-term debt 2,938 3,900 3,927 3,954 3,982 Accounts payable days 118.8 96.2 90.4 96.2 94.8
Convertible bonds 0 0 0 0 0
Deferred tax 1,340 1,471 1,515 1,560 1,607 Leverage ratios
Other long-term liabilities 1,055 1,017 1,043 1,069 1,096 Net gearing (%) 129.6 111.6 114.5 110.6 104.6
Total long-term liabilities 5,334 6,388 6,484 6,584 6,685 Debt/capital (%) 107.0 89.4 99.4 94.8 88.6
Interest cover (x) 15.7 5.1 3.7 3.6 3.6
Total liabilities 30,824 28,562 32,214 31,824 31,106 Debt/EBITDA (x) nm 8.2 11.5 11.0 9.6
Current ratio (x) 0.9 1.1 1.1 1.1 1.1
Shareholders funds 18,177 20,712 20,469 21,129 22,018
Minority interests 0 0 0 0 0 Valuation
EV/sales (x) 1.0 0.8 0.8 0.8 0.8
Total equity 18,177 20,712 20,469 21,129 22,018 EV/EBITDA (x) 9.7 14.5 19.7 18.2 16.0
EV/EBIT (x) 11.8 21.8 35.2 30.4 24.7
Total liabilities and equity 49,001 49,273 52,683 52,953 53,124 PER (x) 11.8 109.6 26.1 23.4 19.3
PER adj. (x) 11.8 109.6 26.1 23.4 19.3
Net debt (cash) 23,557 23,115 23,438 23,367 23,022 PBR (x) 1.1 0.9 1.0 1.0 0.9
Year-end shares (mn) 76 76 76 76 76 Dividend yield (%) 1.8 1.5 1.5 1.5 1.5
Equity Research l Korea shipbuilding

10 October 2013 68
Disclosures appendix
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard
Chartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, SCB)
and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES.

Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and
attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other
subject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views
contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
Where disclosure date appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the
date of the report, unless otherwise stated.




23,000
28,290
33,580
38,870
44,160
49,450
Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13
KRW Recommendation and price target history for Samsung Heavy Industries

Date Recommendation Price target Date Recommendation Price target Date Recommendation Price target

Source: FactSet prices, SCB recommendations and price targets

176,000
250,200
324,400
398,600
472,800
547,000
Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13
KRW Recommendation and price target history for Hyundai Heavy Industries

Date Recommendation Price target Date Recommendation Price target Date Recommendation Price target

Source: FactSet prices, SCB recommendations and price targets

20,050
25,610
31,170
36,730
42,290
47,850
Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13
KRW Recommendation and price target history for Daewoo Shipbuilding & Marine Engineering

Date Recommendation Price target Date Recommendation Price target Date Recommendation Price target

Source: FactSet prices, SCB recommendations and price targets

Recommendation Distribution and Investment Banking Relationships
Equity Research l Korea shipbuilding

10 October 2013 69


% of covered companies
currently assigned this rating
% of companies assigned this rating with which SCB has provided
investment banking services over the past 12 months
OUTPERFORM 54.1% 14.5%
IN-LINE 34.2% 13.6%
UNDERPERFORM 11.7% 8.2%
As of 30 September 2013

Research Recommendation

Terminology Definitions
OUTPERFORM (OP) The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months
IN-LINE (IL)
The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next
12 months
UNDERPERFORM (UP) The total return on the security is expected to underperform the relevant market index by 5% or more over the next 12 months

SCB uses an investment horizon of 12 months for its price targets.

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Equity Research l Korea shipbuilding

10 October 2013 70
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