20080723-Mirae Asset-DSME (042660.KS)

All-Time High Earnings Despite Cost Pressure
2Q08 Revenue up 52% YoY and OP up 152% YoY
The company recorded all-time high revenue in 2Q08 of W2.6tn and OP of W189bn,
exceeding market consensus by 12% and 10%, respectively. We attribute the strongerthan-
expected revenue to: 1) increase in both number and prices of ships as production
capacity expanded; 2) product mix improvement with high-margin ships including LNGC
and super large containerships; and 3) depreciation of the Korean won. While OP
decreased 0.7%p QoQ due to increased prices of raw materials including steel plate,
we see the earnings of the company as a positive as margin reduction was less than
market expectations.
Non-operating loss decreased as equity method loss and loss on
valuation of currency forward contracts diminished
NP of the company increased 14% YoY, below the market consensus by 29%. This is
attributable to loss on valuation of currency forward contracts (W99.0bn). However, this
loss was W26.4bn less than that in 1Q08 (W125.4bn). The company also recorded
equity method gains of W5bn as its fully-owned Chinese block factory turned profitable.
The company recorded equity method losses of W11.0bn in 1Q08.
Industry’s highest earnings improvement in FY08
Operating margin should decrease due to increased steel price in 3Q08. However,
operating margin should rebound from 4Q08 as ship orders that were received at lofty
prices in 2006 should mainly be recognized as revenue in the quarter. Thus, investors
should focus on the earnings from 4Q08. Despite cost pressure, we estimate that
revenue should increase 38% YoY in FY08 on the back of aggressive capacity
expansion and increased ship prices and that EPS should increase 95% YoY in FY08
thanks to enhanced product mix and the increase in building high margin drillships.
Maintain TP of W70,000 and Top Pick status for DSME
We maintain our BUY rating and TP of W70,000. Our Investment points are: 1) that the
industry’s highest earnings improvement is expected in FY08 despite raw material price
hikes; and 2) that the company is the largest beneficiary of high oil prices as the
company has world-class competitiveness in the tanker and offshore project markets;
and 3) that M&A momentum will increase after the announcement of its sale in August.