120130 Machinery SMC eng

Machinery

16

BHI (083650) Not rated

Note: Figures based on company guidance

Company overview: BHI makes HRSG for CCPPs, pulverized coal-fired boilers (PC-fired boilers) for thermal power plants, and balance of plant (BoP), an auxiliary system for thermal and nuclear power plants. The company achieved record orders of W706bn in 2011. Since Japan’s nuclear disaster, BHI saw a sharp rise in HRSG orders due to mounting demand for CCPP construction and it now ranks fourth in global HRSG market share, up from seventh in 2010. BHI currently supplies major builders and power generation EPC firms at home and abroad. The company also makes world-class power plant equipment through a technology tie-up with US-based Foster Wheeler (for HRSG in 2005 and PC-fired boilers in 2008). Record sales in 2012 after ~W700bn orders in 2011: Thanks to increased demand for HRSG, BHI’s orders reached a peak of W706bn in 2011, sharply up from W260.2bn in 2010. Major contributors to the record include all required HRSGs for Samsung C&T’s Qurayyah IPP project (W108bn) and Dongducheon IPP project (W90bn-100bn) and BoPs for KEPCO’s UAE nuclear power project (W70bn). Based on the 2011 orders, the company’s 2012 sales and OP are projected to grow 139% YoY to W550bn and 135.6% YoY to W38.5bn, respectively. With an orders backlog of W800bn, ~W500bn in sales is nearly confirmed and there is more upside depending on orders to be received in 1H12. Despite the rapid top-line growth, the company has very limited capital needs such as capex and working capital investment. This is because 1) most production is outsourced, meaning sales can grow without the need to build additional facilities, 2) possible bottlenecks during the engineering phase can be addressed by selectively taking orders mainly for large-scale projects and 3) parts suppliers, such as the fin tube maker Uniwel, are also making facility investments to prepare for more orders. Targeting orders of W1trn in 2012 backed by large demand for CCPP in Korea, US and Japan: In 2012, BHI’s goal for orders is W1trn (HRSG 50%, boilers 25% and BoP 25%). While aggressive, the target is quite plausible considering the growth of the HRSG market that has entered another boom phase. Several CCPP planned to be tendered in Korea (by POSCO Power and Yeosu CCPP) this year will require 11-14 HRSGs worth a combined ~W500bn. As POSCO E&C’s strategic partner for power plant equipment, BHI could receive at least 30% of the tenders for domestic projects. Japan is also planning to issue HRSG tenders worth ~W500bn as the country plans to meet some of the electricity demand by replacing the recently closed nuclear plants with CCPP. More good news for CCPP equipment makers is the US government’s recent announcement of environmental regulations on coal-fired plants. Demand for CCPP is expected to increase in the US as the country has secured a low-cost energy source from shale gas field development. We expect BHI to enter the US through a tie-up with Foster Wheeler, the license holder of the exclusive technology for the HRSGs made by BHI. Considering ongoing project bids, news of BHI winning orders in advanced markets is expected to arrive soon. Entering advanced markets like the US and Japan is significant in terms of diversifying export destinations as orders in the past mostly came from the Korean and ME markets.

Yr to Sales OP EBT NP EPS % chg EBITDA P/E EV/EBITDA P/B ROE

Dec (W bn) (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%)

2009A 266 26 23 23 1,728 0.0 33 15.1 13.3 4.2 34.1

2010A 173 20 26 22 1,687 (2.4) 28 12.4 12.1 2.8 25.1

2011F 230 16 21 16 1,258 (25.4) 25 16.9 14.6 2.5 15.8

2012F 550 38 42 33 2,525 100.8 50 9.6 7.9 2.2 26.1

Stock price (Jan 27, KRW) 25,900

Market cap (USD mn) 296

Shares outstanding (mn) 13

52W High/Low (KRW) 25,900/14,000

6M avg. daily turnover (USD mn) 2.4

Free float (%) 63.0

Foreign ownership (%) 0.7

2013F 704 56 60 46 3,596 42.4 69 6.7 5.3 1.7 28.7

Performance

1M 6M 12M

Absolute (%) 25.4 16.7 12.6

Rel. to Kospi (%p) 18.8 26.3 19.7

12MF PER trend

0.0

5.0

10.0

15.0

20.0

2007 2008 2009 2010 2011

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

12MF PER(LHS)

price(RHS)

(x) (KRW)

Machinery

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Knock on the PC-fired boiler market and it shall open: BHI will soon join the market for PC-fired boilers used in coal-fired power plants. The company has made steady efforts, such as hiring engineers and making boiler parts, to enter the market that has been dominated by Doosan Heavy and major players based in Japan and Europe. In addition, BHI has earned recognition for its technical prowess after it received qualification from KEPCO when bidding for the 870MW Yeongheung thermal power station in 2011. This year, BHI plans to bid for two plants (worth W300bn with total capacity of 500MW) at the Dongbu Green power station and to jointly enter the South American power plant market with POSCO E&C. Thus, the company is forecast to receive its first ever PC-fired boiler order this year. As PC-fired boiler projects are large in scale, this will be BHI’s next-generation growth engine once its bids pan out well.

Sales by product (YTD 3Q11) Steady expansion of exports to diverse destinations

Boiler69%

Condenser18%

Heat exchanger10%

Others3%

0

50

100

150

200

250

300

06 07 8 09 10 11F

Overseas Domestic

(W bn)

13.3% 39.3%

43.7%

45.5%

54.8%

68.0%

Source: Company data, Korea Investment & Securities Source: Company data, Korea Investment & Securities

Global HRSG market size and BHI’s share HRSG for CCPPs

0

5,000

10,000

15,000

20,000

25,000

2006 2007 2008 2009 2010 2011F

1

3

5

7

9

11

HRSG orders (LHS)

Market share (RHS)

(Mwe) (Rank)

Source: Company data, Korea Investment & Securities Source: Google, Korea Investment & Securities

Machinery

18

CCPP engineering

Source: Company data, Korea Investment & Securities

Nuclear power plant engineering

Source: Company data, Korea Investment & Securities

■ Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance

BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and +15% Underweight: Expected to give a return of -15% or less

■ Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months

Overweight: Recommend increasing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization.

Neutral: Recommend maintaining the sector’s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market

capitalization.

■ Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report.

■ Important Disclosures

As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of the companies mentioned in this report.

There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance. Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for the companies mentioned in this report in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from the companies mentioned in this report in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment banking services from the companies mentioned in this report in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in securities of the companies mentioned in this report at the time that the research report was published.

Korea Investment & Securities Co., Ltd. does not own over 1% of HY-Lok,Sung Kwang Bend,T.K.,BHI,Samkang M&T shares as of January 29, 2012. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analysts covering these companies nor their associates own any shares of as of January 29, 2012. Prepared by: Chulhee Cho

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