20170118-三星证券-Doosan_Group_expectations_priced_in_too_early_13页_380kb

Sector Update Summary

Core Content

This document provides an analysis of the performance and valuation of Doosan Group affiliates, including Doosan Bobcat (DBI), Doosan Infracore (DI), Doosan Engine, and Doosan Heavy Industries & Construction (DHIC), focusing on their anticipated 4Q16 results and investment outlook.

Main Points

• Market Performance: Shares in Doosan Group affiliates have seen significant gains in 2016, driven by improved profitability expectations, especially for DBI and DI. However, the document suggests that these expectations have already been priced in.
• Valuation Analysis: The document indicates that shares in Doosan affiliates are trading at higher valuations compared to the broader market, with some trading above book value.
• 4Q16 Expectations: The analysis predicts that the 4Q16 results for the Doosan Group affiliates will likely underperform consensus, which may cause a reversal in share prices.
• Recommendations: The report recommends buying Doosan Bobcat (DBI) on weakness following the 4Q16 results, while maintaining a HOLD recommendation for the other affiliates due to limited upside and potential valuation pressure.

Key Information

Doosan Bobcat (DBI)

• Recommendation: BUY
• Target Price: KRW42,000
• Upside: +16%
• 4Q16 Outlook: Operating profit is expected to meet consensus, but pre-tax profit will miss due to one-off restructuring costs.
• Valuation: Fair value is estimated using Kubota's 2017 P/E multiple, with a focus on the company's dollar-denominated operations and potential for a weaker won to benefit share price.
• Performance: Sales are expected to remain stable, with operating profit slightly declining in 4Q16 compared to 3Q16.

Doosan Infracore (DI)

• Recommendation: HOLD
• Target Price: KRW9,000
• Upside: -1.5%
• 4Q16 Outlook: Operating profit is expected to meet consensus, but the company likely suffered a pre-tax loss due to costs related to the DBI IPO.
• Valuation: The implied EV/EBITDA for non-DBI operations is 15.7x, which is higher than the industry average of 12.1x.
• Performance: Non-DBI units are expected to underperform, and the company's valuation may be affected by the refinancing of perpetual bonds, which could increase P/B and negatively impact P/E.

Doosan Engine

• Recommendation: HOLD
• Target Price: KRW4,000
• Upside: +14%
• 4Q16 Outlook: Sales are expected to slightly exceed consensus, but earnings are unlikely to improve significantly due to industry downturn and pressure for price cuts.
• Valuation: The company's valuation is based on its link to commercial vessel deliveries, with P/E multiples showing a significant increase in 2017.
• Performance: Operating profit and pre-tax profit have shown volatility, with a notable drop in 4Q16 due to industry conditions.

Doosan Heavy Industries & Construction (DHIC)

• Recommendation: HOLD
• Target Price: KRW30,000
• Upside: +2.6%
• 4Q16 Outlook: Expected to miss both operating and pre-tax profit consensus due to weak subsidiary performance and one-off costs.
• Valuation: Shares are trading at a premium to its core business, and further rerating depends on a reduction in net debt.
• Performance: Orders improved in 2016, but sales growth is limited, and net debt is expected to rise in 4Q16.

Summary of Valuation Metrics

Investment Strategy

• Doosan Bobcat (DBI): Recommended for purchase on weakness due to its strong fundamentals and potential for improved shareholder returns.
• Doosan Infracore (DI): Maintained at HOLD due to overvaluation and slow improvement in non-DBI units.
• Doosan Engine: Recommended to hold due to limited earnings growth and potential price pressure from the shipbuilding industry.
• Doosan Heavy Industries & Construction (DHIC): Recommended to hold due to limited upside and the need for further debt reduction. Accumulation is advised on any correction from weak 4Q16 results.

Conclusion

The analysis highlights that while there are positive long-term prospects for Doosan Group affiliates, the current valuation reflects these expectations, and 4Q16 results may cause a short-term correction. Investors are advised to consider buying DBI on weakness, while maintaining a cautious stance on the other affiliates.