35 - Doosan Heavy Industries & Construction - Things Can Only Get Better

Rating
Starts at
Buy
Target price
Starts at
KRW 49,000
Closing price
24 March 2014
KRW 33,250
Potential upside
+47.4%

Anchor themes
A positive outlook for long-term
earnings growth is emerging from
higher backlog growth. We
expect further backlog growth
from the growing power-plant
market due to rising global power
demand.

Nomura vs consensus
Our TP is 14% higher than
consensus.

Research analysts

Korea Engineering & Construction
Michael Na - NFIK
michael.na@nomura.com
+82 2 3783 2334
Hans Park - NFIK
hans.park@nomura.com
+82 2 3783 2342

Key company data: See page 2 for company data and detailed price/index chart

Doosan Heavy Industri es &
Constructi on 034020.KS 034020 KS
EQUITY: ENGINEERING & CONSTRUCTION

Things can only get better
Thirst for electricity cannot be quenched without
nuclear power
Action: initiate with Buy
We initiate coverage of Doosan Heavy Industries & Construction (DH) at Buy
with a TP of KRW49,000. The stock has been on a downward path for more
than three years, falling 65% from its peak in early 2010. We attribute the fall
to slower new power plant equipment and EPC new orders, deteriorating
fundamentals of subsidiaries, and increased uncertainty about the long-term
growth prospects of nuclear power due to the catastrophic failure at the
Fukushima Nuclear Power Plant. However, we think the negatives are already
priced into the shares and see greater upside risk.
Catalysts: new order growth, revival of nuclear power energy, recovery
in housing market
We expect DHs new orders to rebound to KRW9trn from the low base of
KRW5.8trn in 2013. Given that we expect the long awaited orders from Shin
Gori #5&6 (KRW2.1trn) and Nghi Son coal power plants (EPC, KRW1.6trn) to
be realized in 2014F, we think our new orders assumption is rather
conservative. It would appear that investors have written off nuclear power
energy as a major source of electricity due to safety issues and proliferation of
unconventional natural gas. However, experience has shown utilities that they
should diversify. In our opinion, plans to restart nuclear power plants in Japan
confirms our belief that nuclear energy is likely to remain a key source of
electricity. Lastly, we think that DHs subsidiaries no longer impose a
significant risk to it.
Valuation: TP of KRW49,000
We derive our TP of KRW49,000 by using SOTP valuation methodology. We
apply peer group EV/EBITDA of 10x to DHs derived core operation value and
then add the value of its subsidiaries at a 30% holding company discount (see
Fig. 1 for details).

31 Dec FY12 FY13F FY14F FY15F
Currency (KRW) Actual Old New Old New Old New
Revenue (bn) 9,627 19,208 19,295 20,135
Reported net profit (bn) 38 69 196 332
Normalised net profit (bn) 38 69 196 332
FD normalised EPS 306.39 468.47 1,730.88 2,922.75
FD norm. EPS growth (%) -88.0 52.9 269.5 68.9
FD normalised P/E (x) 108.5 N/A 71.0 N/A 19.2 N/A 11.4
EV/EBITDA (x) 12.7 N/A 14.2 N/A 11.6 N/A 10.2
Price/book (x) 0.8 N/A 0.8 N/A 0.7 N/A 0.7
Dividend yield (%) 2.3 N/A 2.3 N/A 2.1 N/A 2.1
ROE (%) 0.8 1.5 4.2 6.8
Net debt/equity (%) 63.2 205.9 189.2 171.2
Source: Company data, Nomura estimates
Global Markets Research

26 March 2014
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Doosan Heavy Industries & Construction 26 March 2014

2
Key data on Doosan Heavy Industries & Construction
Incomestatement(KRWbn)
Year-end 31 Dec FY11 FY12 FY13F FY14F FY15F
Revenue 8,496 9,627 19,208 19,295 20,135
Cost of goods sold -7,250 -8,241 -16,076 -16,152 -16,858
Gross profit 1,245 1,386 3,132 3,143 3,277
SG&A -719 -792 -2,174 -2,128 -2,082
Employee share expense

Operating profit 526 595 958 1,015 1,195

EBITDA 705 802 1,155 1,368 1,537
Depreciation -143 -160 -107 -263 -252
Amortisation -37 -47 -91 -91 -91
EBIT 526 595 958 1,015 1,195
Net interest expense -164 -184 -574 -575 -551
Associates & JCEs 505 -301 -8 -8 -8
Other income -486 -123 -306 -62 -20
Earnings before tax 381 -12 70 370 616
Income tax -119 27 -51 -108 -168
Net profit after tax 262 15 19 262 448
Minority interests 13 23 50 -66 -116
Other items

Preferred dividends

Normalised NPAT 275 38 69 196 332
Extraordinary items

Reported NPAT 275 38 69 196 332
Dividends -67 -67 -80 -74 -74
Transfer to reserves 207 -29 -10 122 257

Valuation and ratio analysis

Reported P/E (x) 11.0 93.8 67.5 18.0 10.6
Normalised P/E (x) 11.0 93.8 67.5 18.0 10.6
FD normalised P/E (x) 13.0 108.5 71.0 19.2 11.4
FD normalised P/E at price target (x) 18.0 150.1 98.2 26.6 15.7
Dividend yield (%) 2.3 2.3 2.3 2.1 2.1
Price/cashflow (x) 264.3 11.2 9.6 4.3 4.6
Price/book (x) 0.7 0.8 0.8 0.7 0.7
EV/EBITDA (x) 5.2 12.7 14.2 11.6 10.2
EV/EBIT (x) 6.2 21.7 17.2 15.7 13.1
Gross margin (%) 14.7 14.4 16.3 16.3 16.3
EBITDA margin (%) 8.3 8.3 6.0 7.1 7.6
EBIT margin (%) 6.2 6.2 5.0 5.3 5.9
Net margin (%) 3.2 0.4 0.4 1.0 1.6
Effective tax rate (%) 31.3 na 73.2 29.1 27.3
Dividend payout (%) 24.5 175.8 115.1 37.8 22.4
Capex to sales (%) 4.0 3.4 1.8 1.8 1.7
Capex to depreciation (x) 2.4 2.1 3.2 1.3 1.3
ROE (%) 6.5 0.8 1.5 4.2 6.8
ROA (pretax %) 11.5 2.3 5.0 3.9 4.6

Growth (%)

Revenue -58.4 13.3 99.5 0.5 4.4
EBITDA -67.6 13.7 44.0 18.4 12.4
EBIT -61.1 13.1 61.1 5.9 17.7
Normalised EPS 99.1 -88.3 39.1 275.4 68.9
Normalised FDEPS

-88.0 52.9 269.5 68.9

Per share

Reported EPS (KRW) 3,027.99 354.40 492.88 1,850.07 3,124.00
Norm EPS (KRW) 3,027.99 354.40 492.88 1,850.07 3,124.00
Fully diluted norm EPS (KRW) 2,554.70 306.39 468.47 1,730.88 2,922.75
Book value per share (KRW) 45,072.42 42,566.51 43,907.84 45,057.91 47,481.92
DPS (KRW) 750.00 750.00 750.00 700.00 700.00
Relative performance chart (one year)
Source: ThomsonReuters, Nomura research
(%) 1M 3M 12M
Absolute (KRW) -8.9 -4.9 -20.8
Absolute (USD) -9.2 -6.5 -17.8
Relative to MSCI Korea -7.9 -0.2 -20.9
Market cap (USDmn) 3,275.3
Estimated free float (%)
52-week range (KRW) 48000/31700
3-mth avg daily turnover
(USDmn)
15.66
Major shareholders (%)
Doosan 44.8
NPS 5.5
Source: Thomson Reuters, Nomura research

Notes


3
Cashflow(KRWbn)
Year-end 31 Dec FY11 FY12 FY13F FY14F FY15F
EBITDA 705 802 1,155 1,368 1,537
Change in working capital -563 -263 -1,123 220 -20
Other operating cashflow -129 -171 477 -716 -700
Cashflow from operations 14 368 509 872 817
Capital expenditure -339 -331 -340 -340 -340
Free cashflow -325 37 169 532 477
Reduction in investments

671 0 0 0
Net acquisitions

Reduction in other LT assets

-68 -20 88 21
Addition in other LT liabilities

-73 -217 37 47
Adjustments -901 -579 162 -37 -47
Cashflow after investing acts -1,226 -12 94 620 498
Cash dividends -67 -67 -80 -74 -74
Equity issue -49 1 700 0 0
Debt issue 628 437 2,844 -305 -289
Convertible debt issue

Others -20 -7 0 0 0
Cashflow from financial acts 492 363 3,464 -379 -363
Net cashflow -734 351 3,558 241 134
Beginning cash 1,518 783 1,134 1,809 2,049
Ending cash 784 1,134 4,693 2,049 2,184
Ending net debt 2,789 2,847 9,597 9,051 8,627

Balancesheet(KRWbn)
As at 31 Dec FY11 FY12 FY13F FY14F FY15F
Cash & equivalents 783 1,134 1,809 2,049 2,184
Marketable securities 72 27 27 27 27
Accounts receivable 2,863 2,903 5,752 5,778 6,030
Inventories 457 556 2,424 2,213 2,309
Other current assets 1,088 1,098 1,098 1,098 1,098
Total current assets 5,264 5,719 11,109 11,165 11,647
LT investments 4,355 3,729 3,729 3,729 3,729
Fixed assets 2,690 2,674 6,075 5,946 5,823
Goodwill 0 0 0 0 0
Other intangible assets 1,158 1,211 4,826 4,942 5,062
Other LT assets 123 191 1,921 1,833 1,812
Total assets 13,589 13,524 27,660 27,615 28,074
Short-term debt 2,085 1,407 5,864 5,654 5,461
Accounts payable 3,500 3,320 6,652 6,683 6,975
Other current liabilities 491 557 818 822 857
Total current liabilities 6,076 5,284 13,334 13,159 13,294
Long-term debt 1,487 2,574 5,541 5,446 5,350
Convertible debt

Other LT liabilities 1,229 1,156 939 976 1,023
Total liabilities 8,792 9,015 19,814 19,581 19,667
Minority interest 26 4 3,185 3,251 3,367
Preferred stock 0 0 0 0 0
Common stock 529 529 529 529 529
Retained earnings 3,553 3,514 3,311 3,433 3,691
Proposed dividends

Other equity and reserves 688 462 821 821 821
Total shareholders' equity 4,771 4,506 4,661 4,783 5,041
Total equity & liabilities 13,589 13,524 27,660 27,615 28,074

Liquidity (x)

Current ratio 0.87 1.08 0.83 0.85 0.88
Interest cover 3.2 3.2 1.7 1.8 2.2

Leverage

Net debt/EBITDA (x) 3.95 3.55 8.31 6.61 5.61
Net debt/equity (%) 58.5 63.2 205.9 189.2 171.2

Activity (days)

Days receivable

109.6 82.2 109.1 107.0
Days inventory

22.5 33.8 52.4 49.0
Days payable

151.4 113.2 150.7 147.9
Cash cycle 0.0 -19.3 2.9 10.8 8.1
Notes

Notes


4
Contents

5
8
Earnings outlook for 2014-15F
11 Electricity demand can only grow and so will

Doosans power business
20 Housing market turning; Doosans major risk factor
to diminish
26
Company overview
27
Appendix A-1


5
Initiate with Buy
Negati ves already priced into the shares
We initiate coverage of Doosan Heavy Industries & Construction (DH) at Buy with a TP
of KRW49,000. The stock has been on a downward path for more than three years
falling 65% from its peak in early 2010. We contribute the fall to slower new power plant
equipment and EPC new orders, deteriorating fundamentals of subsidiaries (Doosan
E&C, Doosan Infracore, and Doosan Engine), and increased uncertainty about the long-
term growth prospects of nuclear power due to the catastrophic failure at the Fukushima
Nuclear Power Plant. However, we think the negatives are already priced into the shares
and see greater upside risk.
New order growth
We expect DHs new orders to rebound to KRW9trn from its low base of KRW5.8trn in
2013. Given that we expect the long awaited orders from Shin Gori #5&6 (KRW2.1trn)
and Nghi Son coal power plants (EPC, KRW1.6trn) to be realized in 2014F, we think our
new order assumption is rather conservative.
Revi val of nuclear power energy
It seems as if investors have written off nuclear power energy as a major source of
electricity due to the safety issues and proliferation of unconventional natural gas.
However, past experience has shown utilities that they should always try to diversify. In
our view, the Japanese governments plan to restart nuclear power plants in Japan
confirms our belief that nuclear energy will likely remain as a key source of electricity.
We should note that fossil fuel fired power plants are vulnerable to fuel cost fluctuation,
emit more carbon dioxide, and are often less reliable than nuclear power. We do not
think that energy importing countries would give up nuclear power and jeopardise their
energy security given the increasing reliance on imported fuel.
Affiliate risk declining
After a series of capital injections, merger with Doosan Mecatec, and HRSG business
transfer from Doosan Heavy to Doosan E&C, we think that the risk of insolvency has
declined significantly. More important, we think Doosan E&C will turn around as we
expect a recovery in the domestic housing market. As well, we believe that Doosan
Heavys own housing project Trimage should be completed without much loss.
We are buying into financial and operational leverage
We are not overly excited about DHs operating profit growth. However, given that the
company is highly leveraged financially and operational, the mere normalization of its
core operation and a reduction in debt servicing burden should deliver DHs performance
going forward, assuming that we are not headed into a global recession, which would
derail the normalization of its core operation.
2Q14F would be a good time for investors to add to their positions
We estimate the bulk of new orders for 2014F should be realized in 2H14 considering
the pipeline such as Shin Gori #5 & #6, which will likely catalyze the stock. That said, we
think that the best time for investors to add to their positions would be 2Q14. In our view,
1Q14F results may disappoint because of the potential loss on a derivative contract it
entered into with Doosan E&Cs preferred shareholders. However, if the shares correct
in 1H14, we would advise investors to accumulate further.


6
Valuation
TP of KRW49,000
We value Doosan Heavy on SOTP methodology. Although all its subsidiaries are
consolidated given its firm control, we think it is more appropriate to treat the subsidiaries
as investment assets rather than part of its core business given that DH owns less than
50% of Doosan Infracore (the key subsidiary) and Doosan Engine.

Fig. 1: SOTP valuation
Note: * Global peer group EV/EBITA multiple is used
Source: Nomura estimates
Risks
First-quarter results likely to impose short-term risk
We see downside risk to 1Q14F earnings due to the derivative contract the company
entered into with investors who hold redeemable convertible preferred shares of Doosan
E&C. If Doosan E&Cs share price falls below KRW17,600, then DH would incur an
unrealized loss on this derivative contract. Every KRW1,000 decline in the share price
would result in a loss of KRW23bn for DH. Doosan E&Cs current share price (as of
March 24) is KRW16,800, which translates into a KRW25bn loss for DH.
Delay in domestic housing market recovery
Although we expect a recovery in the domestic housing market, the delay in the housing
market and subsequent failure of major housing projects such as Trimage could
present a risk to our bullish call.

Fig. 2: Doosan Heavy P/E chart
Source: QuantiWise, Nomura estimates
Fig. 3: Doosan Heavy P/B chart
Source: QuantiWise, Nomura estimates

(KRWbn) 2014F
2014 EBITDA 700
Target EV/EBITDA multiple (peer goup multiple) 10*
Value of core operation 7,000
Doosan Infracore (042670KS) 914
Doosan E&C (011160KS) 524
Doosan Engine (082740KS) 177
Value of subsidiaries at 30% holding company discount 1,615
Enterprise value 8,615
-Net debt 3,350
Equity value 5,265
Shares outstanding 106
Per share value 49,000
0
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7
Fig. 4: Doosan Heavy Peer valuation
Source: Bloomberg, Nomura estimates
Note: All numbers are based on Bloomberg consensus estimates except for Doosan Heavy, which are Nomuras estimates; share prices are as of 24 March 2014 close.

Fig. 5: Doosan Heavy: share price and key events
Source: QuantiWise, Nomura research

Company Bloomberg Ticker Rating Market cap Share px
US$mn Loc curr 14F 15F 14F 15F 14F 15F 14F 15F 14F 15F
Doosan Heavy 034020 KS Equity Buy 3,350 33,250 19.2 11.4 0.7 0.7 11.6 10.2 4.2 6.8 2.1 2.1
Hyundai Heavy Industries 009540 KS Equity Buy 14,744 206,000 23.5 13.2 0.8 0.8 14.6 11.3 3.4 6.0 1.1 1.1
Samsung C&T 000830 KS Equity Buy 8,527 57,900 19.2 16.4 0.8 0.8 15.8 14.0 4.1 4.6 0.9 0.9
Hyundai E&C 000720 KS Equity Not Rated 5,561 53,800 9.6 8.1 1.1 1.0 6.4 5.6 12.3 13.1 1.0 1.1
Daewoo E&C 047040 KS Equity Not Rated 2,971 7,540 12.7 10.4 1.0 0.9 11.9 10.6 8.1 9.1 1.2 1.2
Daelim Industrial 000210 KS Equity Neutral 2,746 82,200 9.8 7.4 0.6 0.6 7.4 5.8 6.5 8.1 0.6 0.6
Samsung Engineering 028050 KS Equity Reduce 2,562 68,200 na 11.3 2.5 2.2 14.8 10.2 12.4 19.0 2.0 2.5
GS E&C 006360 KS Equity Buy 1,664 34,750 18.3 8.9 0.6 0.6 16.2 10.2 3.4 6.4 1.0 1.4
Domestic peer average 15.5 10.8 1.1 1.0 12.4 9.7 7.2 9.5 1.1 1.2
Siemens SIE GY Equity Buy 116,214 95 14.0 12.4 2.6 2.4 9.1 8.3 19.0 19.7 3.4 3.6
Mitsubishi Heavy Indus. 7011 JP Equity Neutral 18,150 550 13.6 14.7 1.2 1.2 8.6 7.6 8.8 8.3 1.4 1.6
AREVA AREVA FP Equity Notrated 9,292 18 31.3 19.1 1.4 1.3 10.9 9.1 2.4 5.4 1.1 1.1
Alstom ALO FP Equity Reduce 8,604 20 7.9 8.2 1.1 1.0 5.7 5.8 14.2 13.0 2.8 3.4
Bharat Heavy Electricals BHEL IN Equity Reduce 7,593 188 12.6 13.9 1.4 1.3 8.6 9.4 13.8 10.5 2.5 2.3
IHI Corp 7013 JP Equity Buy 6,352 429 19.3 17.5 2.0 1.9 10.1 9.0 10.9 11.7 1.2 1.3
Dongfang Electric 1072 HK Equity Not Rated 4,029 12 9.1 8.7 1.0 0.9 5.9 5.7 11.3 10.9 1.6 1.7
Foster Wheeler FWLT US Equity Not Rated 3,120 32 16.4 13.5 3.0 2.4 8.6 7.3 23.0 22.1 0.0 na
Toshiba Plant 1983 JP Equity Neutral 1,461 1,529 14.1 13.0 1.4 1.3 5.0 4.5 10.1 10.2 1.0 1.0
Overseas peer average 15.4 13.4 1.7 1.5 8.0 7.4 12.6 12.4 1.7 2.0
Global peer average 15.4 12.3 1.4 1.3 10.0* 8.4 10.2 11.1 1.4 1.6
PE ratio PB ratio EV/EBITDA ROE YIELD
0
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(KRW)
Acquire
Doosan
Infracore
Acquire
Bobcat
Credit risk from
Doosan Engine
Acquire
Scoda Power
UAEnuclear
plant order intake
Nuclear accident
in Fukushima
Yanbu 3 desalination
order intake
Bailout
Doosan E&C
Treasury
stock sale

8
Earnings outlook for 2014-15F
Parent company
Power division
We expect sales in the Power business to decline by 7.3% y-y to KRW6.1tr on an
operating profit margin of 8.0% in FY14F, 1) as we expect revenue recognition from
large-scale projects such as UAE NPP to reach the final stage, and 2) disappointing
order intake during 2012-13 will likely put a damper on near-term top-line prospects.
However, despite the sales decline, operating margin should hold up in FY14F, as
current order backlog mix contains relatively high margin projects. We believe the
earnings of the power business is likely to recover from 2015F on the back of increasing
order intakes; DH won an EPC project regarding a coal plant in Vietnam (Vinh Tan4)
which amounts to KRW1.6tr in size in December 2013 and expects to win a similar scale
project during 1H14.
Water division
We forecast a slight increase in sales (KRW782bn,+0.5% y-y) and operating profits
(KRW35bn, +1.0% y-y) in 2014F for water business. According to Global Water
Intelligence and the company forecast, the desalination plant market is expected to grow
by 59.7% to 1,754 million imperial gallons per day( MIGD), (equivalent to 4,500m)
during 2013-17F (vs 1,098MIGD during 2008-12). We expect the water business to be
able to enjoy a solid growth in the growing market.

Fig. 6: Power business OP and OPM trends & forecasts
Fig. 7: Water business OP and OPM trends & forecasts

C/F, Cons, etc division
We expect earnings from C/F, Cons, etc business would trend lower for the next 3-5
years as the company has decided against undertaking any PF (project financing)
involved construction projects. We find the move affirmative as it would allow the
company to avoid taking on an excessive financial risk. Construction accounts for more
than 50% of divisional sales volumes, and general construction (vs. contract-based
construction), which usually requires project financing comprise about 60% of total
construction revenues. As the company aims to exit from the general construction
business within the next 3-5 years, more than 30% (50% x 60%) of the top line would be
eliminated over time. The company noted that it will continue to maintain its contract-
based construction business. The company generates about 35% of divisional earnings
from casting & forging (C&F) business (as of 2013). The C&F business provides casted
and foraged parts mainly to Doosan Engine, and therefore has a similar earnings trend
with Doosan Engine. We believe earnings from the C&F business will recover next year
(2015F) after bottoming in 2014F along with earnings of Doosan Engine (explained
further below).

5.0%
6.0%
7.0%
8.0%
9.0%
200
280
360
440
520
600
2011 2012 2013 2014F 2015F
OP (LHS) OPM (RHS)
(KRWbn)
3.0%
3.5%
4.0%
4.5%
5.0%
20
23
26
29
32
35
38
2011 2012 2013 2014F 2015F
OP (LHS) OPM (RHS)
(KRWbn)

9
Subsidiaries
Doosan Infracore
In 2014F, we expect sales and operating profits of Doosan Infracore to rise by 2.9% and
29.3%, respectively to KRW7.96tr and KRW478bn on the back of 1) increasing
excavator sales in China; 2) solid earnings from Bobcat, its 100% owned subsidiary and
3) a turnaround of engine business. Doosan Infracore plans to solidify its medium- and
small-size excavator line-up in the China market, and that would help the company to
recover market share, in our view.

Fig. 8: C/F, Cons, etc OP and OPM trends & forecasts
Fig. 9: Doosan Infracore OP and OPM trends & forecasts

Doosan Construction
We expect sales of Doosan Construction to increase by 1.2% in 2014F to KRW2.38tr on
operating profit of 2% (vs. 0.0% in 2013). We believe domestic construction market has
bottomed, and expect the market to recover in the next 3-5 years on the back of: 1)
enhanced affordability, 2) rising natural demand, and 3) housing inventory that has
fallen, 4) Jeonse property becoming scarce and 5) mortgage rates at historically low
levels. (Our view on the Korean construction market is explained in further detail on
pages 21-26)
Doosan Engine
We estimate that Doosan Engine will post an operating loss of KRW12bn in 2014F
(turned to red y-y) due to order intake during 1Q-2Q13 with negative margin, in our view
However, we expect Doosan Engine to post profits from 2015F (operating profit of
KRW25bn in 2015F) on the back of 1) increasing order intake on container and tanker
from Deawoo Shipbuilding and Samsung Heavy Industries; 2) rise in engine ASP (up 5-
8% starting from 4Q13) and 3) newly added sales from nitrogen oxide reduction
equipment (a sample has been provided to Samsung Heavy Industries sales to be
gradually increase up to 5% of total sales).

Fig. 10: Doosan Construction OP and OPM trends &
forecasts
Fig. 11: Doosan Engine OP and OPM trends & forecasts


-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
(60)
(40)
(20)
0
20
40
60
80
100
2011 2012 2013 2014F 2015F
OP (LHS) OPM (RHS)
(KRWbn)
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
300
400
500
600
700
2011 2012 2013 2014F 2015F
OP (LHS) OPM (RHS)
(KRWbn)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0
50
100
150
200
250
300
350
2011 2012 2013 2014F 2015F
OP (LHS) OPM (RHS)
(KRWbn)
-35.0%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
-500
-400
-300
-200
-100
0
100
2011 2012 2013 2014F 2015F
OP (LHS) OPM (RHS)
(KRWbn)

10

Fig. 12: Doosan Heavy Earnings trends and forecasts
Note: 2011 and 2012 earnings are restated based on the changed consolidation policy implemented as of 2013, and
therefore, the above numbers are different from the ones in the financial tables on pages 1-2.

Deri vati ve contract regarding RCPS issued by Doosan E&C - swing in net income
Doosan E&C issued KRW400bn redeemable convertible preferred shares (RCPS) in
December 2013. In order to back up Doosan E&C, DH entered into a derivative contract
with investors who purchased the RCPS that the company will pay the difference
between Daewoo E&Cs share price and strike price (KRW17,600) per share for 22.7mn
RCPS issued by Doosan E&C to investors on the settlement date (16 December 2016),
if Daewoo E&C shares are trading higher than the strike price. If Daewoo E&Cs share
price trades lower than the strike price on settlement date, investors would pay the
different between the strike price and the share price to DH for the total RCPS.
Regarding the derivative contract, DH marks to market on a quarterly basis. For 1Q14
YTD, Doosan E&Cs price fell by 11.3% to KRW16,800 (as of March 24) from
KRW17,800 on 31 December 2013. We estimate Doosan Heavy to record unrealised
losses of KRW25.0bn {(KRW17,800 KRW16,800) x 22.7mn RCPS} for the quarter. As
we anticipate a recovery of the domestic housing market going forward, we expect
Doosan E&Cs price to trend higher. If that is the case, DH will likely unwind the
unrealised losses, in our view.

(Wbn) 2011 2012 2013 2014F 2015F
Total Sales 21,412 21,274 19,208 19,295 20,135
% y-y na -1% -10% 0% 4%
Power 5,612 7,180 6,566 6,087 6,134
Water 807 927 782 785 807
C/F, Cons, etc 1,741 1,341 1,194 1,117 1,090
Doosan Heavy 8,159 9,448 8,541 7,989 8,274
Doosan Infra 8,463 8,158 7,737 7,963 8,267
Doosan Construction 2,783 2,377 2,355 2,384 2,467
Doosan Engine 2,007 1,379 744 1,092 1,231
Gross profit 3,138 3,064 3,132 3,143 3,277
GPM 14.7% 14.4% 16.3% 16.3% 16.3%
Operating profit 1,178 586 958 1,015 1,195
% y-y na -50% 63% 6% 18%
Power 299 534 524 481 509
Water 26 28 35 35 36
C/F, Cons, etc 77 -46 -44 -34 -14
Doosan Heavy 403 516 515 482 531
Doosan Infra 680 362 370 478 546
Doosan Construction 299 70 1 48 74
Doosan Engine -309 -449 57 -12 25
OPM 5.5% 2.8% 5.0% 5.3% 5.9%
Power 5.3% 7.4% 8.0% 7.9% 8.3%
Water 3.3% 3.0% 4.4% 4.5% 4.5%
C/F, Cons, etc 4.4% -3.4% -3.7% -3.0% -1.3%
Doosan Heavy 4.9% 5.5% 6.0% 6.0% 6.4%
Doosan Infra 8.0% 4.4% 4.8% 6.0% 6.6%
Doosan Construction 10.8% 2.9% 0.0% 2.0% 3.0%
Doosan Engine -15.4% -32.6% 7.7% -1.1% 2.0%
Net income 262 15 19 262 448
Net profit margin 1.2% 0.1% 0.1% 1.4% 2.2%

11
Electricity demand can only grow and so
will Doosans power business
Non-OECD countries to drive growth
World electricity demand to double by 2040
World electricity demand is projected to double between 2010 and 2040, growing at an
annual rate of 2.4%, according to the US Energy Information Administration (EIA). This is
faster than any other final energy source. Electricitys share of total final energy demand
is expected to continue to rise. Much of this growth should come from growth in
electricity demand in the non-OECD counties, which is expected to grow at an average
annual rate of 3.6% from 2010 to 2040 based on a study conducted by the EIA.

Fig. 13: Electricity market outlook

Source: WEO, Company data, Nomura research

Coal-fired power plant capacity to grow
Despite the proliferation of unconventional natural gas, coal-fired power plant capacity is
expected to grow through 2040. It should remain as the largest source of world power
generation through 2040, according to EIA. However, we think that the estimate may
differ if there are major changes to the greenhouse gas emission policy.

Fig. 14: Coal-fired power plant capacity forecasts

Source: WEO, company data, Nomura research

Nuclear power plant capacity to double
EIA expects nuclear power plant capacity to increase from 2,620 billion kilowatt-hours in
2012 to 5,492 billion kilowatt-hours in 2040, as market concerns about energy security
and greenhouse gas emissions support growth. The EIA noted that it has considered the
Fukushima disaster for the purpose of forecasts.

1,033
1,348
321
1022
413
502
1,351
1,845
2,084
2,473
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2000 2010 2020F
Hydro Renewable Nuclear Gas Coal/Oil (GW)
3,559
5,202
7,190
0
500
1,000
1,500
2,000
2,500
2000 2015F 2020F
N.America Europe Asia MENA China India Others (GW)
1,649
2.012
2,119
Emerging
Market
1,085GW
1,594GW
(47%)

12
Fig. 15: Nuclear power plant capacity forecasts
Source: WEO, company data, Nomura research

Renewable energy to remain dismal
Although we expect renewable energy to grow rapidly, we do not think it can replace any one
of aforementioned major energy sources in our life time and remain as a supplementary
energy source. While solar power is taking off, we do not think that the added solar energy
capacity is nowhere near replacing what traditional energy source can supply.
Tesla provides upside risk
Gigafactory to change the game
We believe electricity demand could grow faster if electric vehicle (EV) prices fall swiftly.
Despite the skeptics, Teslas CEO Elon Musk believes that he can produce a mass
market electric sedan, now referred to as the Model E. The price target for the Model E is
below USD40,000, which is one-third less than the price of the Model S that Tesla
successfully commercialized. In order to cut costs, Tesla plans to build a so called
Gigafactory. According to Tesla, the Gigafactory is designed to reduce cell costs
quickly, and produce more lithium-ion batteries per year than were produced globally last
year. By the end of the first year of production, the company expects to have driven
down the per KWh cost of its electric car battery pack by over 30%. Given that the
battery comprises roughly 30% of the cost of an electric vehicle, a 30% decline in battery
cost is a must to produce a mass-market electric vehicle, in our view.
Electric vehicle to grow exponentially
If Gigafactory is successful and Elon Musk can bring down battery prices by more than
30%, then we think that EV growth could be much stronger than what the market
currently expects. We believe EVs are attractive since they can reduce dependence on
petroleum and tap into a source of electricity that is often domestic and relatively
inexpensive, and can also decarbonise the transport sector. As Tesla speeds up the
evolution of EVs we think other existing car makers have no choice but to bring electric
vehicles into the market. BMW has already jumped into the game with a BMW i3 model
that costs roughly US$41,000. We expect more to come.

Fig. 16: Electric vehicle growth forecasts by Solar & Energy
Solar & Energy is optimistic about the future of electric vehicles
Source: Solar & Energy

0
100
200
300
400
500
600
2000 2015F 2020F
N.America E.Europe MENA China
S.Korea Others Europe Japan
(GW)
413
446
502
Decreasing
area:
187 162
(13%)
Increasing
area:
226 340
(50%)
0
5
10
15
20
2010 2012 2014F 2016F 2018F 2020F
US Japan EU Australia Korea China Etc
(Mn units)
CAGR: 33.8%

13
Fig. 17: Electric vehicle specifications
Mass market EV is already here
Source: Company data, Nomura research
Nuclear power making a comeback
Cleaner energy than natural gas
Market concerns about clean air is one of the main reasons that 70 reactors are under
construction around the world including five in the US, in our view. Nuclear energy is by
far the largest source of electricity that doesnt emit any air pollution and the only one
that can produce large amounts of electricity around the clock. According to Nuclear
Energy Institute, greenhouse gas emissions of nuclear power plants are among the
lowest of any electricity generation method and on a lifecycle basis are comparable to
wind, hydro-electricity and biomass. We note that lifecycle emissions of natural gas
generation are 36x greater than nuclear. In addition, nuclear power eliminates other
sources of pollution such as soot, which causes lung diseases.

Fig. 18: Lifecycle CO2 emissions from electric sources
Lifecycle emissions of natural gas generation are 36x greater than nuclear
Source: Nuclear Energy Institute, Nomura research

More reliable than natural gas
We also note that nuclear power plants can produce electricity more reliably than natural
gas. Nuclear energy facilities have the highest capacity factor among all electricity
sources. The net capacity factor of a power plant is the ratio of its actual output over a
period of time, to its potential output if it were possible for it to operate at full nameplate
capacity indefinitely. This is a crucial measure of reliability and a plants online
performance.

BMW i3 Leaf Focus Electric Tesla Model S
Manufacturer BMW Nissan Ford Tesla
Country Germany Japan US US
MSRP (USD) 41,350 28,800-34,840 39,200 69,900-94,900
Battery capacity (kWh) 22 24 23 60/85
Range on full charge (km) 190 160 140 368
Horsepower (hp) 170 107 160 302
Fuel economy (city, km/L) n/a 55 47 34
Fuel economy (highway, km/L) n/a 46 42 38
Fuel economy (average, km/L) n/a 51 44 36
Basic warranty 3years 3years/57,936km 3years/57,936km 4years/80,467km
Source: each company
14 15 17 18
39 46
622
1041
0
200
400
600
800
1000
1200
S
o
l
a
r
H
y
d
r
o
N
u
c
l
e
a
r
W
i
n
d
G
e
o
t
h
e
r
m
a
l
B
i
o
m
a
s
s
N
a
t
u
r
a
l

G
a
s
C
o
a
l
Tons of carbon dioxide
equivalent per gigawatt-hour

14
Fig. 19: Average capacity factors by energy source (2009)
Source: U.S. Energy Information Administration, Nomura research

Still more affordable than natural gas
Understandably, with the proliferation of unconventional natural gas it seems that
investors have written off nuclear power plants as a major source of electricity in the
future. Shale gas is not just a cheap and abundant energy source, but it can also be
used in combined cycle generators that are efficient and easily permitted. However, we
should not forget that fossil fuels are subject to a higher fluctuation in prices that could
threaten energy security of a nation especially the countries that have to import the fuel
source. However, nuclear energy is not subject to unpredictable fuel cost fluctuation or
over-dependence on foreign suppliers. Nuclear energy has price stability because fuel
accounts for just 31% of projection costs vs. 80-90% for coal and natural gas fired power
plants, according to Nuclear Energy Institute.

Fig. 20: Cost breakdown by power generation type (2012)

Fig. 21: US electricity total production costs
Even with proliferation of shale gas, nuclear power is still cheaper
Fig. 22: US electricity fuel costs
Even with proliferation of shale gas, nuclear power is still cheaper

7.8
33.9
39.8
42.2
63.8
90.3
0
10
20
30
40
50
60
70
80
90
100
petroleum Other
renewables
Hydro Natural gas Coal Nuclear
%
78%
86%
31%
42%
22%
11%
69%
31%
15%
8%
4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Coal Gas Nuclear Nuclear Feul
Component Cost
Fuel
Fuel
Fuel
O&M
O&M
O&M
Uranium
Enrichment
WasteFund
Fabrication
Conversion
0
5
10
15
20
25
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
Coal
Gas
Nuclear
Petroleum
C/KWh
0
5
10
15
20
25
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
Coal
Gas
Nuclear
Petroleum
C/KWh

15
Experience has shown utilities that they should diversify
Relative to a natural gas power plant, setting up a nuclear power plant seems to be a
hard-sell considering the high initial capital investment (roughly USD15bn) and the
difficulty in getting permission from the neighbouring communities to set it up. However,
if natural gas were to win by default and utilities were to eliminate their coal and nuclear
power facilities, we think utility CEOs would be likely have some sleepless nights going
forward. Even in todays low-cost natural gas environment, we think utilities should
diversify to hedge against future risks such as: 1) a sharp pick-up in fossil fuel costs, 2)
disruption in fuel supply due to geopolitical risk, and 3) severe weather conditions that
are disruptive to fossil fuel and renewable energy power plants to name few. Nuclear
energy facilities that ran at nearly 100% capacity throughout the spell of arctic weather
earlier this year helped carry the record-breaking demand for electricity, according to
Nuclear Energy Institute.
Safe energy source that became safer
Safe energy relati vely
The catastrophic failure of Fukushimas nuclear power plant caused the world community
to pause and to re-examine its nuclear energy options. However, we note that other
conventional power plants also have profound safety implications for both operational
risks and public health. Further, there have been more fatalities associated with other
conventional power plants than nuclear power plants, as shown below.

Fig. 23: Accidents in energy chains for electricity 1996-2000
Source: World Nuclear Association, Nomura research

Chernobyl and Fukushima
There have been only three significant accidents which occurred in the history of nuclear
energy: 1) Three Mile Island in 1979, 2) Chernobyl in 1989 and 3) Fukushima in 2011. Of
all these accidents and incidents, only the Chernobyl and Fukushima accidents resulted
in radiation doses to the public greater than those resulting from the exposure to natural
sources, according to World Nuclear Association. Chernobyl did not have a containment
structure like those used in the West or in post-1980 Soviet designs. Fukushima reactors
did shut down automatically and cooled as designed until the tsunami swamped them.
Improvements since Fukushima accident
Assessment of the aspects of nuclear plant safety highlighted by the Fukushima accident
is being applied to the 143 nuclear reactors in the EUs 27 member states, as well as
those in any neighbouring states that have decided to take part, according to the
Western European Nuclear Regulators Association (WENRA). These comprehensive
and transparent nuclear risk and safety assessments, the so-called stress tests,
involved targeted reassessment of each power reactors safety margins in the light of
extreme natural events, such as earthquakes and flooding, as well as on loss of safety
functions and severe accident management following any initiating event. The scope of
the reassessment takes into account the issues that have been directly highlighted by
the events in Fukushima. In accident scenarios, regulators consider the means to protect
against loss of core cooling as well as cooling of used fuel in storage, and loss of
containment integrity and core melting including consequential effects such as hydrogen
accumulations.
Fatalities Fatalities/Twy Fatalities Fatalities/Twy
Coal 2,259 157 18,000 597
Natural Gas 1,043 85 1,000 111
Hydro 14 3 30,000 10,285
Nuclear - - 31 48
Non-OECD OECD

16
Giving up nuclear boosts pollution and fuel costs
Japan plans to restart closed nuclear reactors
In the wake of the catastrophic failure at the Fukushima nuclear plant, Japans
government decided to phase out nuclear power. Other governments, notably Germany,
followed Japans lead. But in February this year, the Japanese government reversed
course issuing a draft energy plan that includes restarting idled nuclear reactors. Since
the nuclear plants were shut down, combined fuel costs for Japans nine regional power
companies will almost double to 7.5trn yen (USD74bn) this fiscal year from the year
before the Fukushima accident, the Japanese trade ministry predicted.

Fig. 24: World nuclear capacity as of January 2014

Fig. 25: Nuclear capacity forecasts by region and country
Source: International Energy Outlook, Nomura research
Fig. 26: Global nuclear power capacity
Source: International Atomic Energy Agency, Nomura research

Country Number of Nuclear Units Nuclear Capacity (MW) Nuclear Generation (BkWh) Nuclear Fuel Share (Percent)
Argentina 2 935 5.9 4.7
Armenia 1 375 2.1 26.6
Belgium 7 5,927 38.5 51
Brazil 2 1,884 16.1 3.1
Bulgaria 2 1,906 14.9 31.7
Canada 19 13,500 91.0 15.3
China 19 14,860 98.2 2
Czech RP 6 3,804 28.6 35.3
Finland 4 2,752 22.1 32.6
France 58 63,130 404.9 74.8
Germany 9 12,068 94.1 16.1
Hungary 4 1,889 14.9 45.9
India 21 5,308 29.7 3.6
Iran 1 915 1.3 0.6
Japan 50 44,215 17.1 2.1
Korea Rep. 23 20,739 143.5 30.4
Mexico 2 1,330 8.4 4.7
Netherlands 1 482 3.7 4.4
Pakistan 3 725 5.3 5.3
Romania 2 1,300 11.5 19.4
Russia 33 23,643 165.6 17.8
Slovakia 4 1,816 14.4 53.8
Slovenia 1 688 5.2 36
South Africa 2 1,860 12.4 5.1
Spain 8 7,567 58.7 20.5
Sweden 10 9,474 61.5 38.1
Switzerland 5 3,308 24.4 35.9
Taiwan, China 6 5,028 38.9 18.4
U.K. 16 9,231 64.0 18.1
U.S. 100 98,560 769.3 19
Ukraine 15 13,107 84.8 46.2
Total 436 372,326 2,351.0 12.3
0
20
40
60
80
100
120
140
160
180
O
E
C
D

E
u
r
o
p
e
O
E
C
D

A
m
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K
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i
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a
I
n
d
i
a
O
t
h
e
r

N
o
n
-
O
E
C
D
2010 2040
(GW)
320
330
340
350
360
370
380
1
9
9
5
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
Nuclear Power Capacity Trend (GW)

17
Enough nuclear power projects for all
Saudi Arabia and Jordan
Saudi Arabia plans to construct 16 nuclear power reactors over the next 20 years at a
cost of more than US$80bn, with the first reactor scheduled to be on line in 2022,
according to The National (11 November 2013). Construction would commence in 2017
for completion in 2022. Jordan has selected Russia as the preferred bidder for its first
nuclear power plant, with a view towards a 2020 operation date. Final sites have not yet
been determined in either country.
Turkey
Russian state company Rosatom will build the US$20bn Akkuyu nuclear plant, which will
be fully operational by 2023, according to AMSAmed (13 March 2014). Turkey also plans
to build a second nuclear plant in the port city of Sinop on the Black Sea coast with a
Franco-Japanese consortium.
Finland
Russian state company Rusatoms affiliate, Rusatom Overseas, intends to finance the
construction of the Fennovoimas (a Finnish nuclear consortium) Hanhikivi-1 nuclear
power plant with construction planned to start in 2015, according to ITAR-TASS (25
February 2014). According to the report, the cost of the project is EUR6.5bn, with
EUR1.6bn contributed by Fennovoima and the Rusatom Overseas financing the
remainder.
China
Chinese state-owned utility, China Power Investment, plans to construct two new nuclear
reactors in the eastern coastal province of Shandong at an estimated cost of $5.1 billion,
according to OILPRICE (2 March 2014). Currently, China has 31 reactors under
construction.
India
France has decided to work together with Indias Jaitapur Nuclear Power Plant to build 6
European Pressurised Nuclear Reactors in five villages in the coastal Ratnagiri district of
Maharashtra, according to Economic Times (15 Dec 2013). France has decided to
provide a 25-year loan at 4.8% interest for Rs 6 per unit.
Japan
The estimated cost to restart Japans nuclear power plants is greater than $12.3 billion.
There are 46 reactors on the coastlines throughout Japan undergoing tougher safety
standards, according to Bloomberg (11 March, 2014). Japan currently has two reactors
under construction, but another three which were likely to start building by mid-2011,
have been deferred.

Fig. 27: Korean consortiums nuclear power plant project biddings
Source: Various news articles (including on Thomson Reuters and in Yonhap), Nomura research

Country Size Description
UAE 5,600MW Plans to bid on NPP projects due to positive feedback on APR 1400
Finland 3,000MW
A bid is submitted by Korean consortium by 2013.
5 bidders in total / GE-Hitachi, Toshiba, Mitsubishi, Areva KHNP and TVO are accessing whether
APR1400 abides Finish regulations
The bidding phase for Olkiluoto is nearly completion bid comparisons are being prepared
and then TVO and its owners will decide how the projects will move ahead
South Africa 3,000MW
Korean consortium is trying to participate in
South Africa's government plans to build 6 NPPS by 2030
Poland 3,000MW Plans to bid
Vietnam 2,800NW
In 2012, Korean government was selected as the preferred bidder.
Currently under reviewing
Saudi Arabia 2,800MW
Saudi Arabian government plans to build 16 NPPS by 2030.
Korean consortium is likely to participate bidding for 2 NPPs in 2014

18
Korea electricity demand growing faster than expected
Demand growth outpacing supply growth
The Korean government announced its long-term power supply plan last year. As the
electricity reserve ratio continue to dwindle faster than the previous projection it seems
that the government is concerned about electricity shortage. The plan calls for an
increase in reserve ratio to 22%. The electricity reserve ratio fell to only 3.8% in 2012.

Fig. 28: Electricity reserve capacity in Korea
Source: Ministry of Knowledge and Economy, Nomura research
Fig. 29: Korea GDP growth and Electricity consumption
growth

Further upside risk to electricity demand
The government now estimates electricity demand to show a 2.2% CAGR through 2027
vs. previous estimate of 1.9%. We expect electricity demand growth could further
surprise to the upside if the government does not rationalize the electricity price and
continue to provide subsidy on industrial use electricity.

Fig. 30: Electricity bill comparison Household (2011)
Fig. 31: Electricity bill comparison Industrial (2011)

The government to add more supply
In order to meet increased demand outlook and the increase in reserve ratio target, the
government plans to increase new supply. New projects have been added to the existing
growth plan. The new additions will cost roughly KRW16trn to build through 2022.
Moreover, the government decided to keep the previously planned new additions to the
nuclear capacity.
Doosan to supply equipments for most of them
Given that Doosan is the only domestic company that could supply the power plant
equipments we expect Doosan to supply more than 50% of all plant equipments going
into these new plants. For nuclear plants, Doosan should supply 100% of the
equipments.
3.8
0
2
4
6
8
10
12
14
16
18
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
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6
2
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7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
(%)
11.8
7.6
8.0
5.4
6.3
6.5
4.9
5.7
4.5
2.4
10.1
4.8
8.8
4.0
7.2
2.8
4.6
4.0
5.2
5.1
2.3
0.3
6.3
3.6
0
2
4
6
8
10
12
14
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
Korea GDPgrowth
Electricity consumption growth
(%)
100
294
133
107
211
238
0
50
100
150
200
250
300
350
Korea Japan USA Canada France UK
(Korea electricityprice = 100)
OECD avg.
100
259
101 101
176
184
0
50
100
150
200
250
300
Korea Japan USA Canada France UK
(Korea electricityprice = 100)
OECD avg.

19
Doosans market share could rise
We believe that the probability of Doosan increasing market share is fairly high within the
domestic market given that the government want to localize the sourcing for gas
turbines. Although, Doosan does make gas turbines, the larger capacity turbines are still
sourced from foreign companies such as GS, Siemens, Alstom, and Mitsubishi. The
government decided to provide support to Doosan to develop larger size gas turbines by
2018 and put into commercial usage by 2020.

Fig. 32: Power plants construction schedule (in the pipeline)

Types Project Completion date Capacity (MW)
LNG Dangjin #5 Dec-15 950
Youngnam Jun-16 400
Daewoo Pocheon #1 Oct-16 940
Yeoju Jun-17 950
ShunPyungtaek (Pending) Nov-17 900
Tongyoung #1 (Pending) Dec-17 920
LNG-Total 5,060
Coal Youngheung #7 Dec-18 870
Shinseicheon #1 Dec-18 870
NSP IPP #1 Oct-18 1,000
NSP IPP #2 Apr-19 1,000
G-Project #1 Apr-19 1,000
G-Project #2 Oct-19 1,000
Youngheung #8 Jun-19 870
Shinseicheon #2 Jun-19 500
Dongyang Power #1 Dec-19 1,000
Dongbu Haslla #1 Dec-19 1,000
Dongbu Haslla #2 Jun-20 1,000
Dongyang Power #2 Jul-21 1,000
Coal-Total 11,110
Nuclear Shin Gori #3 Dec-13 1,400
Shin Gori #4 Sep-14 1,400
Shin Uljin #1 Apr-17 1,400
Shin Boryung #2 Jun-17 1,000
Shin Uljin #2 Apr-18 1,400
Shin Gori #5 Dec-19 1,400
Shin Uljin #3 Jun-21 1,400
Shin Uljin #4 Jun-22 1,400
Nuclear Total 15,200

20
Housing market turning; Doosans major
risk factor to diminish
Housing exposure no longer imposes risk
Doosan E&C can survi ve on its own
After a series of capital injections, merger with Doosan Mecatec, and HRSG business
transfer from Doosan Heavy to Doosan E&C, we think the risk of insolvency has declined
significantly. More important, Doosan E&C should turn around as we expect a recovery
in the domestic housing market.
Doosan Heavys own housing project Trimage near Seoul Forest should
breakeven
The company noted that the pre-sale of Trimage near Seoul Forest should start in 1H14
and the construction should be completed by 2017. Given that we expect housing market
recovery to continue and the luxury apartment called Galleria Foret near where Trimage
will be built saw a sharp rebound in price in recent months after hitting the bottom in
2013 we think that the project should not make losses for Doosan Heavy.
Housing affordability improved
Disposable incomes and home prices back to 1999 levels
We believe domestic housing prices were very affordable in 1999 given that housing
prices fell to the 1989 level right after the Asian Financial Crisis. Korea household
disposable income growth has been outpacing that of home price growth since 2010 (or
falling in Seoul), and now both are back to their 1999 levels.
Jeonse-to-value ratio surpasses the level seen in 2000
Moreover, we believe the Jeonse-to-value ratio also indicates a bottoming of home
prices. Of note, the Jeonse-to-value ratio surpassed the level seen in 2000 when the
home price recovery started.

Fig. 33: Home price index
March 2013 = 100
Source: Kookmin Bank, Nomura research
Fig. 34: Home price % change y-y
Home prices were most affordable in 1999

30
40
50
60
70
80
90
100
110
87 89 91 93 95 97 99 01 03 05 07 09 11 13
Nationwide
Seoul
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
87 89 91 93 95 97 99 01 03 05 07 09 11 13
Nationwide
Seoul

21
Fig. 35: Home prices vs. disposable income
Affordability is back to the 1999 level

Source: Kookmin Bank, BOK, Nomura research
Fig. 36: Jeonse-to-value ratio trends
Jeonse-to-value ratio higher than the level seen in 2000 when the home
price recovery started
Source: Budongsan 114, Nomura research

Home prices havent kept up with inflation since 1988
If we were to set 1988 as a base year, then it seems like housing prices have not even
kept up with inflation. We should note that housing prices were relatively cheap in the
late-1990s with significant new supply coming into the market with new satellite cities
being built around Seoul and also because of the Asian Financial Crisis.

Fig. 37: Home prices vs. consumer prices
Jan1988=100
Fig. 38: Home Affordability Index trends
Affordability improving continuously since 2008

Korea is not too expensive relati ve to other countries
Despite half of the total domestic population living in Seoul and the metropolitan areas, it
appears Koreas housing prices are comparable with other developed countries.
Although Seouls price-to-income ratio looks relatively expensive at 9.4x, if we were to
account for the homes that have mortgages outstanding then the multiple falls to 7.8x. In
addition, the metropolitan area (Gyeonggi province) price-to-income ratio is even lower
at 6.6x.

80
100
120
140
160
180
200
220
240
260
280
300
320
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Nationwide
Seoul
Disposable income
70.2
72.3
35
40
45
50
55
60
65
70
75
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Total
Small
Medium
Large
(%)
-25
-15
-5
5
15
100
150
200
250
300
88 93 98 03 08 13
(Seoul house price - CPI)Gap (RHS)
Seoul house price (LHS)
6 other larger cities (LHS)
CPI (LHS)
(%)
100
110
120
130
140
150
160
170
180
D
e
c
-
0
8
M
a
r
-
0
9
J
u
n
-
0
9
S
e
p
-
0
9
D
e
c
-
0
9
M
a
r
-
1
0
J
u
n
-
1
0
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
r
-
1
2
J
u
n
-
1
2
S
e
p
-
1
2
D
e
c
-
1
2
M
a
r
-
1
3
J
u
n
-
1
3
S
e
p
-
1
3
Total Apartments

22
Fig. 39: Major cities price-to-income ratio (2013)

Note: (Mortgage) = only the homes that have mortgage with Kookmin Bank
Source: Performance Urban Planning, Kookmin Bank, Nomura research
Fig. 40: Major countries price-to-income ratio(2013)

Source: Performance Urban Planning, Kookmin Bank, Nomura research
Housing natural demand rising
Natural demand on the rise
Based on Kookmin Banks research, it takes roughly 10 years for married couples to buy
their first house in Korea. That said, the number of couples married for 10 years (natural
demand, statistically) should continue to pick up in 1H14F, based on our analysis, and
hence, we expect housing demand to increase.

Fig. 41: Number of marriages
Number of marriages started to pick up from 2H03
Source: Korea statistics, Nomura research
Fig. 42: # of couples married for 10 yrs vs. home prices
Natural demand impacts home prices
Source: Korea statistics, Kookmin Bank, Nomura research

Home ownership and penetration have worsened since GFC
As per Korea Statistics data, home ownership has declined since the GFC (only 39% in
the 30s age group own houses). In fact, the housing penetration ratio is still below 100%
for Seoul and metropolitan areas (110% is considered sufficient).

6.2 6.2 6.2
6.6
7.7 7.8 7.8 7.8
8.3
9.4 9.5
13.5
0
2
4
6
8
10
12
14
16
N
e
w

Y
o
r
k
L
A
I
n
c
h
e
o
n

G
y
e
o
n
g
g
i
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o
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y
o
S
e
o
u
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(
M
o
r
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a
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)
S
a
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F
r
a
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i
s
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L
o
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d
o
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S
y
d
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e
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o
u
l
V
a
n
c
o
u
v
e
r
H
o
n
g
K
o
n
g
(%)
3.1
3.6
4.8
5.1
5.3
5.6
0
1
2
3
4
5
6
US Canada Korea UK Japan Australia
(%)
24,000
26,000
28,000
30,000
32,000
34,000
36,000
38,000
D
e
c
-
8
9
D
e
c
-
9
1
D
e
c
-
9
3
D
e
c
-
9
5
D
e
c
-
9
7
D
e
c
-
9
9
D
e
c
-
0
1
D
e
c
-
0
3
D
e
c
-
0
5
D
e
c
-
0
7
D
e
c
-
0
9
D
e
c
-
1
1
D
e
c
-
1
3
-15%
-10%
-5%
0%
5%
10%
15%
20%
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
2
0
1
4
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
9
2
0
2
0
YoY Chg of couples married
for 10 years (12m MA, LHS)
Seoul housing price chg (real,
YoY, RHS)

23
Fig. 43: Home ownership by age group
For the 30s age group, home ownership is only 39%
Source: Korea statistics, Nomura research
Fig. 44: Housing penetration ratio
Number of homes divided by number of households
Source: Budongsan 114, Nomura research

Number of households to grow 6% per annum on average through 2030F
According to Korea statistics, the domestic number of households is expected to grow
steadily until 2030F. Although population growth has slowed already and will likely start
to fall, contribution of household members and average number of household members
will continue to decrease. As the average number of household members decreases,
housing demand will continue to increase.

Fig. 45: Number of households
One and two person households is increasing rapidly
Source: Korea Statistics, Nomura estimates
Fig. 46: Household formation continues
# of households to grow 6% per annum on average through 2030F
Source: Korea Statistics, Nomura estimates
Housing inventory has fallen
Supply in prime locations has declined
Since the GFC, total annual home supply has not declined much. However, supply in
prime locations has declined sharply, especially in Seoul. Although many redevelopment
projects started in Seoul during the housing boom years (2001-08), they are either on
hold or have been scrapped altogether due to falling home prices since the GFC.
Unsold units have declined sharply
Moreover, based on CEIC data, we note that unsold home inventory has declined
significantly since the GFC. And most existing unsold homes are located in areas that
may not see much demand even if the Korea housing market recovers, because they are
located in areas that are less desirable, in our view.

56%
54%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
~20 20~29 30~39 40~49 50~59 60~69 70~ Total
2005 2010
90
92
94
96
98
100
102
104
2005 2006 2007 2008 2009 2010 2011 2012
Nationwide Seoul metropolitan Seoul
0
500
1,000
1,500
2,000
2,500
1980 1990 2000 2010 2020F 2030F
one person two three & over
(Household)
0
1
2
3
4
5
0%
5%
10%
15%
20%
25%
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
2
0
1
5
F
2
0
2
0
F
2
0
2
5
F
2
0
3
0
F
# of household growth (LHS)
# of merbers per household (RHS)
(person)

24
Fig. 47: Unsold home trends
Unsold homes have declined sharply
Source: CEIC, Nomura research
Fig. 48: Completed and unsold homes
Many of them are located in less desirable locations
Source: CEIC, Nomura research
Jeonse property becoming scarce
Jeonse-to-value ratio continues to rise
The Jeonse-to-value ratio has been rising rapidly and we expect will likely rise
continuously going forward as landlords continue to convert Jeonse property into semi-
Jeonse or monthly rental property, thus decreasing the supply of Jeonse (lump-sum rent
payment) property.
Renters forced to buy as Jeonse property becomes scarce
Based on our market survey, it is likely becoming more difficult to find Jeonse properties.
Real estate agents that we interviewed noted that more landlords are converting Jeonse
property into semi-Jeonse or monthly rental property. According to Budongsan 114 (a
local property market research house), the Jeonse-to-monthly rent conversion rate is
7.0% as of December 2012 (down from 7.2% in December 2011). Real estate agents
noted that some renters are being forced to buy homes instead of paying monthly rents
given the current high Jeonse-to-monthly rent conversion rate.

Fig. 49: Apartment Jeonse index
March 2013 = 100
Fig. 50: Jeonse price % change y-y
Jeonse prices rising sharply

0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Seoul metropolitan Provincial
0
10,000
20,000
30,000
40,000
50,000
60,000
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Unsold completed homes
60
70
80
90
100
110
05 07 09 11 13
Nationwide
Seoul
-8%
-4%
0%
4%
8%
12%
16%
20%
05 07 09 11 13
Nationwide
Seoul

25
Mortgage rate at historically low levels
Attracti ve mortgage rate and high monthly rents
Mortgage rates are currently as low as 3.7% (as of Dec 2013) vs. a monthly rent of 5-6%
of house prices, based on our estimates. This makes buying a house a more attractive
choice over renting, if Jeonse is not an available option, in our view. Hence, as long as
mortgage rates remain low while monthly rent remains at current high levels, we believe
more people are likely to buy, which would support housing prices at a sustained level.

Fig. 51: Domestic mortgage rates and CD rates
Mortgage rates at historical low levels
Source: BOK, Nomura research
Fig. 52: Domestic housing prices vs. loan growth

Source: BOK, KB Budongsan

2
3
4
5
6
7
8
S
e
p
-
0
1
M
a
y
-
0
2
J
a
n
-
0
3
S
e
p
-
0
3
M
a
y
-
0
4
J
a
n
-
0
5
S
e
p
-
0
5
M
a
y
-
0
6
J
a
n
-
0
7
S
e
p
-
0
7
M
a
y
-
0
8
J
a
n
-
0
9
S
e
p
-
0
9
M
a
y
-
1
0
J
a
n
-
1
1
S
e
p
-
1
1
M
a
y
-
1
2
J
a
n
-
1
3
S
e
p
-
1
3
CD Rate Mortgage loan rate
(%)
-5
0
5
10
15
20
25
30
2005 2007 2009 2011 2013
Mortgage loan
Home price
Seoul & metropolitan home price
(YoY,%)

26
Company overview
Doosan Heavy Industries & Construction is mainly engaged in supplying industrial
facilities to both domestic and international plant markets.
The parent company operates in three business divisions: Power division, which provide
equipments for power generation plants including nuclear, coal, etc; Water division,
which provides engineering procurement and construction (EPC) services of seawater
desalination plants and water treatment systems; casting & forging and construction, etc
which manufactures crankshaft, and other industrial parts, and constructs roads,
apartments, etc.
There are three listed subsidiaries whose earnings are subject to be consolidated
Doosan Infracore, Doosan Engineering & Construction, and Doosan Engine. Doosan
Infracore engaged in manufacture of industrial machineries such as excavator, etc;
Doosan E&C constructs roads, highway, apartments, etc; Doosan Engine engaged in
manufacture of marine diesel engines.

Fig. 53: Doosan Heavy Sales breakdown (2013)
Fig. 54: Doosan Heavy OP breakdown (2013)
Note: C/F, Cons, etc business incurred losses during 2013, therefore is not shown in
the chart

Fig. 55: Doosan Group Shareholding structure
Power 34%
Water 4%
C/F, Cons,
etc 6%
Doosan
Infra 40%
Doosan
Construction
12%
Doosan
Engine 4%
Power 53%
Water 4%
Doosan Infra
37%
Doosan
Construction
0%
Doosan
Engine 6%

27
Appendix A-1
Analyst Certification
I, Hans Park, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any
or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures

The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more
Nomura Group companies.
Materially mentioned issuers

Issuer Ticker Price Price date Stock rating Sector rating Disclosures
Doosan Heavy Industries
& Construction 034020 KS KRW 33,250 24-Mar-2014 Buy N/A A4,A5,A6,A10

A4 The Nomura Group had an investment banking services client relationship with the issuer during the past 12 months.
A5 The Nomura Group has received compensation for investment banking services from the issuer in the past 12 months.
A6 The Nomura Group expects to receive or intends to seek compensation for investment banking services from the issuer in the next three
months.
A10 The Nomura Group is a registered market maker in the securities / related derivatives of the issuer.

Doosan Heavy Industries & Construction (034020
KS)
KRW 33,250 (24-Mar-
2014)
Rating and target price chart (three year history)
Buy (Sector rating: N/A)
Date Rating Target price Closing price
17-Aug-13 Not Rated 46,800.00
22-Mar-12 Neutral 63,200.00
22-Mar-12 75,000.00 63,200.00
For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We derive our TP of KRW49,000 by using SOTP valuation methodology. We apply peer group
EV/EBITDA of 10x to DH's derived core operation value and then add the value of its subsidiaries at a 30% holding company
discount. The benchmark index for this stock is MSCI Korea.

Risks that may impede the achievement of the target price Downside risks are: (1) weaker-than-expected orders, (2)
lingering concerns on project-finance guarantees, and (3) poorer-than-expected equity-method results, which could have a
negative impact on net profit.


28
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Distribution of ratings (Global)
The distribution of all ratings published by Nomura Global Equity Research is as follows:
42% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 43% of companies with this
rating are investment banking clients of the Nomura Group*.
47% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 55% of companies with
this rating are investment banking clients of the Nomura Group*.
11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 26% of companies with
this rating are investment banking clients of the Nomura Group*.
As at 31 December 2013. *The Nomura Group as defined in the Disclaimer section at the end of this report.

Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and
Japan and Asia ex-Japan from 21 October 2013
The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock,
subject to limited management discretion. An analysts target price is an assessment of the current intrinsic fair value of the stock based on an
appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow
analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated
target price, defined as (target price - current price)/current price.

STOCKS
A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral',
indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that
the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target
price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies
that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or
additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-
Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed
at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI
Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap.

SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance,
indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that
the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as
'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging
Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.

Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,
subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock,
based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that
potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A
'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price
have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is
acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled
as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should
not expect continuing or additional information from Nomura relating to such securities and/or companies.

SECTORS
A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks

29
under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average
recommendation of the stocks under coverage is) a negative absolute recommendation.

Target Price
A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be
impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the
company's earnings differ from estimates.

Disclaimers
This document contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or,
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11 Electricity demand can only grow and so will

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