Shifting Direction from Housing to NPPs
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
Hyundai E&C boasts the capability to execute multiple large NPP projects in Eastern Europe. A valuation discount (due to tepid domestic real estate market conditions) for its construction arm is to be offset by solid earnings at the nuclear power division. We include the firm among our sector top picks.
Shifting direction from housing to NPPs
Although adhering to a Buy rating, we lower our TP on Hyundai E&C from W60,000 to W50,000. We adhere to Buy, reflecting the fact that the firm boasts strong track records and networks through being a key constructor for large NPP projects. But, we lower our TP in light of a downward adjustment in our EV/EBITDA multiple (5.0x →3.5x) for the firm’s construction business in consideration of sluggish domestic real estate market conditions.
But, we maintain the firm among our top picks on: 1) the likely securing of 13 large-scale NPP projects by 2030 (worth W100tn); 2) its experience in building APR1400 NPPs in Korea and the opportunity to build AP1000 reactors via a strategic partnership with US Westinghouse; and 3) the firm’s likely entry into the decommissioning and SMR markets by partnering with US-based Holtec.
Hyundai E&C has performed a number of large-scale NPP construction (APR 1400) projects in both Korea and the UAE. Interest in large-scale NPPs has grown recently after the breaking out of the Russia-Ukraine war, and the EU Taxonomy includes nuclear power. But, as Russia and China are expected to be excluded from the European market under the new Cold War geopolitical landscape, the competitive landscape is to be reshaped, centering upon domestic constructors. The total order worth for a NPP (APR 1400) construction project is sized at around W6tn, with construction alone accounting for W2tn and requiring 6~7 years to complete. Looking at Hyundai E&C’s past projects in the UAE and elsewhere, the firm’s COGS-to sales ratios for such proved solid.
Strategic partnership with Westinghouse
In May, Hyundai E&C signed a strategic partnership agreement with US-based Westinghouse in order to enter the large-scale NPP (AP 1000) construction market. The agreement is significant as it means that Hyundai E&C is highly likely to construct large NPPs, even if they are constructed in the US way. Bechtel (a constructor in partnership with Westinghouse) lacks sufficient capability to perform all NPP construction in Poland, as its last construction experience dates back more than a decade.
We forecast consolidated 3Q22 sales of W5,321.3bn (+22% y-y) and OP of W177bn (-20% y-y), slightly below consensus due to raw materials price hikes. Although the firm has managed to pass along cost increases for residential buildings, it has not been able to do so for non-residential buildings. Order momentum should be highlighted upon Saudi Crown Prince Mohammed bin Salman’s visit to Korea in November.