February 24, 2010

 INDUSTRY SPOTLIGHT

Overseas orders key

Construction Success abroad to determine share performances
(OVERWEIGHT)

 Sector expected to outperform despite declines in leading indicators

 In two of the four periods the Kospi has corrected while leading economic
indicators have declined since 2000, the construction sector has outperformed
the market. Construction orders grew more than 20% y-y in 2Q02, while
housing prices rose 5% y-y in 2Q06—both times shares outpaced the market.
After jumping in 2009 ahead of a recovery in orders, construction shares have
been performing sluggishly of late, which we blame on expectations that
orders will taper off. We believe, however, that overseas work will sustain
order growth this year, and construction shares will outperform as a result.

 Overseas orders key

 With a capital gains tax exemption expiring this month, domestic construction
Analyst orders are likely to taper off, and thus we believe overseas orders—a number of
KS Kang major projects are to start in 1H—will determine construction share
ksook.kang@samsung.com
822 2020 7776 performances in 2010. The market estimates overseas orders going to Korean
construction firms to total USD74b this year, a rise of 51%. Even excluding
orders for a large nuclear power plant project in the United Arab Emirates
Jinsoo Yook
jinsoo.yook@samsung.com booked early this year, overseas orders are expected to grow 12.2%. We believe
822 2020 7791 the targets will be met, backed by twice the amount of orders from large
facility-complex projects taken last year.

 Stocks with overseas strength and attractive valuations recommended

 We expect construction shares to fluctuate in the near term, but see limited
downside for firms positioned to win overseas orders. We advise accumulating
such stocks on any correction, and investing in firms that: 1) should win large
overseas projects; 2) are trading at discounts to the market; 3) have ample
overseas order backlogs to sustain growth even if they miss their 1H new order
targets; or 4) have corrected excessively because of foreign selling.

 Top picks: GS E&C and Samsung Engineering

 We expect GS Engineering & Construction to win USD5.8b in overseas orders

in 2010—equal to 88% of its sales—on its strength in oil refining and gas
plants, markets that are expanding as orders from the Middle East increase.
Shares are trading at a 9.1x 12-month forward P/E, below the market average.
 We believe Samsung Engineering will orders this year with a value twice our
2010 sales estimate. Even if the Middle Eastern plant construction market
worsens, the company’s ample order backlog (made up mostly of overseas
work) should propel its sales up 30% in 2010. Shares are trading at a premium
to the market, but we believe this is justified by our expectation that the
company will grow its EPS by 31% in 2010 and by its sound financial status.

Samsung Securities (Korea) www.samsungfn.com

February 24, 2010

Construction

Sector expected to outperform despite declines in leading indicators

In two of the four periods the Kospi has corrected while leading economic indicators have
declined since 2000, the construction sector has outperformed the market. Given the
sector’s inherent cyclicality, at first it seems difficult to understand this. The answer seems
fairly simple, however. Construction orders grew more than 20% y-y in 2Q02, while
housing prices rose 5% y-y in 2Q06, creating a housing market bubble—both times shares
outpaced the market. In contrast, construction shares suffered as orders plunged over
Jun-Jul 2006, and again after the onset of the financial crisis in 2008. Generally since
2000, periods of strong order momentum and liquidity have boosted shares.
For much of last year, the average construction stock moved in line with the market, while
shares of major players outperformed as leading economic indicators rebounded. This
happened even as overseas and domestic orders continued to decline before beginning to
head up again in August and September. Investors appear to have priced in a recovery in
orders far in advance, lifting the sector’s peak-forward P/E to a 31% premium to the
market last year.
Of late, shares have been performing sluggishly, which we blame on expectations that
orders will taper off, particularly with a capital gains tax exemption expiring this month.
We believe, however, that increasing overseas plant orders (while less profitable than in
the past) will offset a decline in domestic order growth this year, allowing total orders to
continue growing y-y. As a result, construction shares should outperform.

Figure 1. Leading economic indicators vs construction orders*

(KRWb) (Index: Jan 2005=100)

18,000 140

16,000
130
14,000
120
12,000

10,000 Monthly construction 110

orders (LHS)
8,000 100
6,000
90
4,000 Leading economic
indicator (RHS) 80
2,000

0 70
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Note: * Sum of domestic and overseas orders; 8-month moving average

Source: CEIC, Quantiwise

Figure 2. Leading economic indicators and relative performance of construction shares

(%) (% m-m)
20 Sector's performance 0.25
Chg in leading economic relative to Kospi (RHS)
15 indicator (LHS)
0.20

10
0.15
5
0.10
0

0.05
(5)

(10) 0.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: CEIC, WiseFn

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February 24, 2010

Construction

Figure 3. National housing price index

(%)
105 National housing price index
100

95

90

85

80

75

70

65

60
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Kookmin Bank

Overseas orders key

We believe overseas orders—a number of major projects are to start in 1H—will determine
construction share performances in 2010.
Overseas orders have exploded since 2006—last year their value came to USD49.1b, 56%
of that of domestic orders taken. The market expects a Korean consortium a deal to build
a nuclear power plant in the United Arab Emirates to help overseas orders soar more than
50% this year to USD74b—which would be equivalent to 67% of domestic orders, and the
highest figure since Korean firms entered the Middle East in the 1970s. (Even excluding
USD18.9b in orders for the UAE plant that have already been received, overseas orders
are expected to rise 12.2%).
Even if Korean firms succeed less in their bids because of competition with foreign rivals,
we expect the market’s expectations be met, backed by twice the amount of orders from
large facility-complex projects taken last year.

Figure 4. Overseas orders and portion of total orders

(KRWt) (%)
80 45.0

70 40.0

35.0
60
30.0
50
25.0
40 Overseas-portion of total orders (RHS)
20.0
30
15.0
20
10.0
10 5.0
Overseas orders (LHS)
0 0.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Source: NSO, ICAK

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February 24, 2010

Construction

Figure 5. Key overseas projects to be awarded in 2010

(USDb) Project Client Value Bidders Status
Kuwait LPG #4 gas train KNPC 1.3 Hyundai E&C, GS E&C, Daelim Ind, SK E&C, Proposal
Saipem, Petropac, etc
KNPC refinery KNPC 15.0 GS E&C-led consortium, SK E&C, Daelim Ind, Hyundai E&C, Tender in 2H
etc
Oman Power & desalination plants PWP 1.0 GS E&C, Hanwha E&C, etc Bidding
Qatar Al Shaheen refinery QP 7.0 GS E&C / Hyundai E&C-led consortium, etc Bidding
Saudi Yanbu refinery Conoco Phillips 9.0
Arabia /Saudi Aramco
PKG #1 1.2 Samsung Eng-led consortium Low bid
PKG #2 1.0 Hyundai E&C Low bid
PKG #3 2.3 TR Low bid
PKG #4 1.2 GS E&C, Daelim Ind, JGC, Chiyoda, Technip, etc Bidding
PKG #5 0.9 Hyundai Heavy, Daewoo E&C, Hanwha E&C, SK E&C, etc Bidding
PKG #6 0.5 Daelim Ind, Saipem, Petropec, etc Proposal
Raz Az Zour refinery and desalination plant SWCC 4.5 Bidding
PKG #1 n/a Daelim Ind, Daewoo E&C, Hyundai E&C, etc
PKG #2 n/a Hyundai Heavy, Samsung Eng, Samsung C&T, etc
PKG #3 n/a Doosan Heavy, etc
UAE Olefin complex Borouge 3.0 Proposal
PKG #1 n/a GS E&C, Daelim Ind-led consortium
Samsung Eng-led consortium, etc
PKG #2 n/a Daelim Ind-led consortium, GS E&C, SK E&C, Samsung Eng,
etc
PKG #3 n/a GS E&C, Technimont, Saipem, etc
Shah gas treatment Adnoc 12.0 Proposal
PKG #1 n/a Samsung Eng, L&T, etc
PKG #2 n/a Samsung Eng, Hyundai Heavy, Petropec, Saipem, etc
PKG #3 n/a Samsung Eng, GS E&C, Petropec, Saipem, etc
PKG #4 n/a SK E&C, Hyundai Heavy, etc
Source: Industry data

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February 24, 2010

Construction

Stocks with overseas strength and attractive valuations recommended

We expect construction shares to fluctuate in the near term, but see limited downside for
firms positioned to win overseas orders. We advise accumulating such stocks on any
correction, and investing in firms that: 1) should win large overseas projects; 2) are
trading at discounts to the market; 3) have ample overseas order backlogs to sustain
growth even if they miss their 1H new order targets; or 4) have corrected excessively
because of foreign selling.

Figure 6. P/E comparison: Construction sector vs Kospi

(x)
23.0
Construction sector
21.0

19.0

17.0
15.0

13.0

11.0
Kospi
9.0

7.0

5.0
2005 2006 2007 2008 2009 2010

Source: I/B/E/S

Figure 7. Relative P/E trends, by construction firm

(x)
3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0
2005 2006 2007 2008 2009 2010
Hyundai E&C Samsung Eng Samsung C&T
GS E&C Daelim Ind

Source: WiseFn

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February 24, 2010

Construction

Top picks: GS E&C and Samsung Engineering

Our top picks are GS Engineering & Construction and Samsung Engineering.
We expect GS E&C to win USD5.8b in overseas orders in 2010—equal to 88% of its
sales—on its strength in oil refining and gas plants, markets that are expanding as orders
from Middle Eastern firms KNPC, Shar, Yanbu, and Al Shaheen increase. Shares are
trading at a 9.1x 12-month forward P/E, below the market average. We believe the
company’s earnings will improve on short-term orders from affiliates. We advise taking
advantage of a recent correction coming on seasonal foreign selling—foreign ownership
grew faster than at any other company in 2009—to accumulate.
We believe Samsung Engineering will KRW10b in orders this year, or twice our 2010 sales
estimate, backed by its diversification into other regions and processes. Even if the Middle
Eastern plant construction market worsens, the company’s ample order backlog (3x sales,
made up mostly of overseas work) should propel its sales up 30% in 2010. Shares are
trading at a premium to the market, but we believe this is justified by our expectation that
the company will grow its EPS by 31% in 2010 and by its sound financial status.

Figure 8. Estimates of overseas orders as percentage of sales in 2010

(%)
Overseas orders / sales (2010 estimates)
200
180
160
140
120
100
80
60
40
20
0
Daewoo E&C Hyundai E&C Samsung Eng GS E&C Daelim Ind

Source: Samsung Securities estimates

Figure 9. Recent price corrections vs change in foreign ownership

(%, %pts)
28.0 25.9
24.0 Chg in foreign
20.0 ownership* (%pts) 17.6
16.2
16.0 12.9
12.0
6.0 6.3
8.0
4.0 0.4
0.0
(4.0)
(8.0)
(12.0)
(16.0) Chg in share price** (%)
(20.0)
Daewoo Hyundai Samsung Daelim Ind GS E&C HDC Samsung
E&C E&C C&T Eng

Note: * Compared to lowest point in 2009

** Compared to Jan 21 close
Source: WiseFn

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February 24, 2010

Construction

Fig 10. Peer valuation

(KRWb, USDm) Samsung Eng GS E&C Fluor Corp Technip Saipem S&W KBR Linde JGC Chiyoda Toyo
Sales 2009E 3,471 7,381 21,939 8,932 13,988 43,890 11,948 15,560 4,954 3,510 2,132
2010E 4,301 7,736 21,351 8,213 14,186 43,962 10,311 16,272 6,162 3,038 2,085
2011E 5,858 8,585 22,621 9,028 15,052 45,823 9,747 17,152 7,280 4,296 2,567
Operating profit 2009E 316 569 1,167 900 1,540 4,193 558 1,830 433 9 100
2010E 375 628 1,035 774 1,565 4,210 537 2,107 518 68 49
2011E 522 652 1,022 871 1,711 4,508 592 2,361 604 197 90
EPS 2009E 6,337 7,521 3.8 5.3 2.2 4.0 1.7 6.3 1.0 0.1 0.3
2010E 9,024 9,408 3.4 4.4 2.2 3.9 1.7 7.3 1.3 0.2 0.2
2011E 12,832 11,691 3.7 4.9 2.2 3.9 1.8 2.2 1.5 0.5 0.3
2009-2011 CAGR (%)
Sales 19.1 6.9 1.0 0.4 2.5 1.4 (6.6) 3.3 13.7 7.0 6.4
Operating profit 18.2 6.8 (4.3) (1.1) 3.6 2.4 2.0 8.9 11.7 180.2 (3.6)
EPS 26.5 8.3 (0.8) (2.9) (0.2) (1.0) 1.8 (29.2) 13.9 85.8 (3.0)
Valuation
P/E (x) 2009E 18.6 13.6 12.1 13.8 15.4 13.1 11.9 18.1 18.0 108.4 9.9
2010E 13.1 13.8 13.6 16.6 15.7 13.7 12.4 15.6 14.6 43.5 19.2
2011E 9.2 9.2 12.4 14.4 14.2 12.4 11.5 13.6 12.2 16.9 10.9
EV/EBITDA (x) 2009E 9.1 7.9 5.0 4.8 - 7.7 4.0 9.0 7.5 32.1 1.5
2010E 8.0 7.5 5.6 5.7 - 7.6 4.2 8.3 5.8 11.9 2.5
2011E 5.5 7.0 5.2 5.1 - 7.2 3.9 7.7 5.2 5.2 1.7
P/B (x) 2009E 6.2 1.7 2.5 2.1 3.4 2.1 1.4 1.7 1.8 1.5 0.9
2010E 4.6 1.5 2.1 2.0 2.9 2.0 1.3 1.6 1.7 1.4 0.9
2011E 3.2 1.3 1.8 1.8 2.5 1.8 1.1 1.5 1.5 1.4 0.8
ROE (%) 2009E 39.1 12.4 20.2 15.9 23.3 16.7 13.0 9.2 10.3 1.1 9.1
2010E 39.0 14.2 14.1 12.7 19.5 15.2 11.9 10.5 12.1 2.3 4.7
2011E 40.8 15.5 13.4 13.1 19.3 15.5 11.4 11.6 13.4 6.0 8.1
Source: Bloomberg, Samsung Securities estimates

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February 24, 2010

Construction

 Disclosures
- As of Feb 23, 2010, Samsung Securities shared group affiliation with Samsung Engineering.
- During the three months prior to Feb 23, 2010, Samsung Securities had not participated in any securities issuance (including DRs, CBs, and IPOs) by companies
covered in this report.
- As of Feb 23, 2010, Samsung Securities' holdings of shares and debt instruments convertible into shares of each company covered in this report would not, if such
debt instruments were converted, exceed 1% of each company's outstanding shares.
- As of Feb 23, 2010, the covering analyst(s) did not own any shares, or debt instruments convertible into shares, of any company covered in this report.
- This report has been prepared without any undue external influence or interference, and accurately reflects the views of the analyst(s) covering the company or
companies herein.
- All material presented in this report, unless specifically indicated otherwise, is under copyright to Samsung Securities.
- Neither the material nor its content (including copies) may be altered in any form, or by any means transmitted, copied, or distributed to another party, without prior
express written permission from Samsung Securities.
- This memorandum is based upon information available to the public. While we have taken all reasonable care to ensure its reliability, we do not guarantee its
accuracy or completeness. This memorandum is not intended to be an offer, or a solicitation of any offer, to buy or sell the securities mentioned herein. Samsung
Securities shall not be liable whatsoever for any loss, direct or consequential, arising from the use of this memorandum or its contents. Statements made regarding
affiliates of Samsung Securities are also based upon publicly available information and do not necessarily represent the views of management at such affiliates.

 Target price changes in past two years

GS E&C Samsung Engineering

(KRW) (KRW)
250,000 160,000

140,000
200,000
120,000

150,000 100,000

80,000
100,000 60,000

40,000
50,000
20,000

0 0

Feb 08 Aug 08 Feb 09 Aug 09 Feb 10 Feb 08 Aug 08 Feb 09 Aug 09 Feb 10

 Rating changes in past two years

GS E&C
Date 2008/3/6 7/9 9/4 10/12 11/4 11/21 11/21 2009/3/5 4/12 6/1 7/21 10/15
Recommendation BUY(M) BUY(M) BUY(M) BUY(M) HOLD(M) HOLD(H) HOLD(M) HOLD(H) HOLD(H) HOLD(H) HOLD(H) BUY(M)
Target price (KRW) 236,000 175,300 123,900 115,100 95,000 86,800 86,800 72,500 76,300 81,800 85,600 134,000
Date 10/22 12/14 2010/1/25
Recommendation BUY(M) BUY BUY
Target price (KRW) 145,000 145,000 138,000
Samsung Engineering
Date 2008/3/11 4/25 7/27 9/4 11/4 11/21 2009/2/17 4/24 6/1 7/23 2010/2/11
Recommendation BUY(M) BUY(M) BUY(M) BUY(M) BUY(M) BUY(M) BUY(M) BUY(M) BUY(M) BUY(M) BUY
Target price (KRW) 145,000 140,000 119,800 107,600 95,000 79,400 71,700 87,800 93,900 97,900 144,000
 Stock ratings:
<Company>
BUY: Expected to provide an absolute return of more than +15% over the next 6 months
HOLD: Expected to provide an absolute return of between -15% and +15% over the next 6 months
SELL: Expected to provide an absolute total return of less than -15% over the next 6 months.
<Industry>
OVERWEIGHT: Expected to outperform the market by more than 5% over the next 6 months
NEUTRAL: Expected to outperform/underperform the market by less than 5% over the next 6 months
UNDERWEIGHT: Expected to underperform the market by more than -5% over the next 6 months
※ On Dec 7, 2009, Samsung Securities has changed to a single-tier investment rating system (BUY, HOLD, and SELL) from a two-tier system comprising
investment ratings (BUY, HOLD, and SELL) and risk ratings (High, Medium, and Low).