Mirae Asset Securities logo

Ample upside to shares following pullback

Pullback driven more by concerns over order weakness than by macro worries

On Sep. 27, shares of Samsung E&A slumped 8.2%. In addition to concerns over lower non-hydrocarbon project orders from Samsung Electronics (SEC) and weak hydrocarbon order momentum, the stock was likely pressured by a drop in oil prices (amid the prospect of increased supply from Saudi Arabia and Libya) and escalating Middle East tensions (Iran and Israel). That said, given that global EPC peers closed the day 1.7% higher on average, we believe the decline was driven more by order concerns than by broader macro issues.

Indeed, investor sentiment soured following press reports on SEC potentially canceling/delaying construction and orders for its P4 and P5 foundries in Pyeongtaek. Additionally, in the hydrocarbon business, Alujain National Industrial (Saudi Arabia) switched to public bidding for its US$2bn PDH-PP project (for which Samsung E&A was previously awarded a front-end engineering design contract), further hurting sentiment.

Outlook for hydrocarbon business remains positive; disappointment premature

While the potential for reduced orders from SEC and other group affiliates is negative, we continue to forecast improvements in hydrocarbon orders and earnings (the key investment point for Samsung E&A). Although the company has experienced a lull in hydrocarbon orders since winning the Fadhili gas plant project from Saudi Arabia, it still has the potential to secure several more orders this year, including Qatar''s RLP project (US$300mn), the SAF project in Malaysia (US$1bn), the TPPI project in Indonesia (US$3.5bn), and the SAN-6 blue ammonia project in Saudi Arabia (US$2bn). We also note that the company is planning to hire around 600 design specialists (particularly for hydrocarbon projects) this year and focusing on securing liquids-to-chemicals (LTC) orders from Saudi Arabia. In light of these factors, we believe the current absence of new orders should be viewed as the result of a selective bidding strategy aimed at securing favorable margins.

Samsung E&A has been striving to improve its cost ratio via innovations in design, modularization, and automation. We believe these efforts are paying off in the form of strong hydrocarbon margins (which have surpassed non-hydrocarbon margins) and recurring one-off gains. For 3Q24, we estimate operating profit at W205.7bn (+34.0% YoY), 11% higher than the consensus (W184.9bn). We believe one-off settlement gains from hydrocarbon projects could boost earnings further.







**** Please see the attached files for details.