SEOUL, KOREA - ▶ Wider divergence among global EPC firms in slow times: The main edge in the global EPC market is whether the firms can offer specialized services and products.While Korea’s core strength in the area over the past decade was pricing, the key determinant for the coming should be skills. We focus on skills as 1) profitability is becoming more critical as the industry has reached maturity, 2) Japanese firms will likely re-enter the Middle East (ME) hydrocarbon plant market and 3) China is penetrating the infrastructure market at an alarming pace. In boom times, all EPC firms enjoy the upswing. But when the tide turns, their performances diverge sharply. For an investment opportunity in 2013, Japanese firms look promising in the hydrocarbon plant business, Chinese in infrastructure and Korean in power and LNG downstream.
▶ Promising EPC firms by segment: Japan in hydrocarbon plant and LNG upstream; China in infrastructure: In the 2012 hydrocarbon plant business, it would have been rewarding to invest in European second-tiers who aggressively took orders. But for 2013, we believe Japan’s JGC and Chiyoda merit more attention. JGC’s PE is 19% discounted to its local stock market average and profitability tops global peers. Historically, the success of Japanese EPC firms has owed more to new products than to favorable FX rates. But this time, profits earned from LNG projects (past three years) and the lengthy JPY weakness will likely prompt their re-entry to the ME hydrocarbon plant market. In the infrastructure field, Chinese firms such as CCCC and CSCEC look promising. They have a vast domestic market and have also built a presence in the US backed by a robust capital base and competitive prices. It is hard to expect Korean players to outperform unless a hydrocarbon and infrastructure boom re-emerges.
▶ Korea strong in power plants and LNG downstream: Korean builders are the most prospective in the power plant and LNG downstream markets. Globally, the power plant market is worth USD600bn, oil and gas USD480bn and transportation infrastructure USD300bn. In the power plant market, the weak JPY should benefit Korean builders that can source Japanese equipment preferred by clients and Japanese capital. The notable example is Daelim Ind. In LNG downstream, Korea’s solid track record building terminals as the world’s second-largest LNG importer is a strong point. Moreover, Samsung C&T expanded its markets by acquiring UK-based Whessoe. In slow times, a selective approach to EPC firms is critical based on the firms’ relative strengths by business and valuation merits. We maintain Samsung C&T and Daelim Ind. as top picks.