Asia Essentials

Resilient earnings from petrochemical and housing. Daelim Industrialreported revenue of Won2,457bn, +2.4% YoY, OP of Won131bn, and NP ofWon103bn. Its 3Q16 earnings were ~20% ahead of our expectations thanksto resilient earnings from petrochemical and domestic housing businesses.

While losses from Saudi Arabia (DSA) have continuously decreased, parentbasis construction business OP dropped by 40.1% YoY despite a +7.7% YoYrevenue growth due to poor plant business margin.

Overseas business continues to add uncertainty around earnings andcashflow. Daelim Industrial has two major projects which are scheduled to becompleted by year-end (SADARA, Petro-Rabigh II). In the currentenvironment, we expect growing uncertainty around earnings and cashflow asthe Saudi government tightens budget spending. The Saudi austerity driveshould hurt the cash cycle of Daelim Industrial until end-2016.

Furthermore, poor overseas order intake should weigh on top-linegrowth in 2017-2018. While market seems to have large expectations onIranian orders for Daelim Industrial, we remain cautious on lack of fundingsupport from quasi-government entities, such as KDB and KEXIM, as theyhave a large amount of capital locked in the shipbuilding sector at themoment. YTD overseas order intake remains at US$250mn vs. 2013-2015average of US$3.5bn.