ready to fly high - mirae asset

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

Aviation Ready to fly high

Korea’s aviation industry offers an attractive long-term investment opportunity

We believe Korea’s aircraft and parts industry is well-poised for exceptional long-term growth, supported by the stable expansion of the global civil aircraft market and the Korean government’s policy support. Domestic parts suppliers should step out of the shadows of Korea Aerospace Industries (KAI) and experience strong growth on their own thanks to technological advances. Within a short time span, Korea has evolved into a manufacturer of parts, civil aircraft, and military aircraft. We believe the domestic development of civil aircraft will become possible within the next decade, aided by the accumulation of technology from manufacturing advanced fighter jets.

We identify four potential areas of growth for the Korean aviation industry: 1) the manufacturing of civil aircraft parts, in which domestic suppliers should gain market share; 2) light-armed helicopters (LAH), light civil helicopters (LCH), and fighter jet (KF-X) development projects, which are expected to commence this year, 3) maintenance, repair, and operations (MRO) for civil and military aircraft, and 4) the US next-generation trainer program, known as T-X.

KAI (047810 KS/Buy/TP: W143,000): Leader of Korea’s aviation industry

KAI is Korea’s leading aviation company, manufacturing civil aircraft parts (for Boeing and Airbus), as well as military aircraft, such as the T-50 and Surion. The company is also at the center of Korea’s aircraft development projects, planning to develop and produce next-generation fighter jets and helicopters. In our view, the company is best positioned to benefit from the government’s commitment to fostering the aviation industry. We believe KAI is primed to become a comprehensive aviation company encompassing not only development and manufacturing but also modification and MRO. Technological advancements should help the company eventually tap into the development of civil aircraft.

ASTK (067390 KQ/Buy/TP: W49,000): A success story in aircraft parts

ASTK is Korea’s second-largest aircraft parts supplier and is capable of producing civil aircraft fuselages. The company, which currently has an order backlog of W1.1tr, should gain increasing orders from Boeing, Airbus, and Lockheed Martin on the back of rising civil aircraft demand and growing outsourcing of parts production. The acquisition of Orbitech should help the company expand its order book, boost capacity, and reduce costs.

Orbitech (046120 KQ/Buy/TP: W16,000): A combination of growth and stability

Orbitech supplies aircraft parts, but also operates a nuclear energy business, which serves as its cash cow. We believe synergies with parent company ASTK will lead to increased orders and cost savings, allowing the aircraft business to swing to a profit in 2015.

Overweight (Maintain)

Industry Report

August 27, 2015

Daewoo Securities Co., Ltd.

[Shipbuilding & Machinery]

Ki-jong Sung +822-768-3263 [email protected]

Michael Yun +822-768-4169 [email protected]

Ho-seung Lee +822-768-4176 [email protected]

[Small Cap]

Seung-hyeon Park +822-768-4194 [email protected]

Road map of Korean aviation industry

Source: KDB Daewoo Securities

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KDB Daewoo Securities Research

C O N T E N T S

Civil aircraft market outlook 3 1. Market to expand at a CAGR of 5% over the next 20 years 3 2. Market trends: Expansion of global outsourcing 4

Military aircraft market outlook 6 1. Overview of KF-X project 6 2. Status of KF-X project 6 3. Impact of KF-X project 7

LCH/LAH development 8 1. Replacement of aging attack helicopters 8 2. KAI searching for LCH and LAH development partners 8

MRO market 9 1. Civil aircraft MRO market to expand 9 2. MRO business competition to intensify 10

T-X project 11 1. US to replace its jet trainers via the T-X program 11 3. Risks and expectations 11

Korean aviation industry 12 1. Overview 12 2. Domestic aviation industry’s supply chain and recent trend 13 3. Domestic aircraft industry’s history and technological trends 14 4. Overseas technology trends 16

Global peer valuation 19

Korea Aerospace Industries (047810 KS) 22 ASTK (067390 KQ) 29 Orbitech (046120 KQ) 36

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Civil aircraft market outlook

1. Market to expand at a CAGR of 5% over the next 20 years

According to Boeing, the global civil aircraft market will see demand for 38,050 new aircraft over the next 20 years, with the total value of those new deliveries estimated at US$5.7tr. Notably, airline passenger traffic and cargo traffic are expected to grow at respective CAGRs of 4.9% and 4.7%—higher than the annual average global GDP growth estimate of 3.1%—creating a favorable environment for the civil aircraft market. In addition, we believe that the oil price downtrend will positively affect the market in the medium to long term, as the attendant fall in jet fuel prices should improve the earnings and purchasing power of airlines. (Jet fuel accounts for the highest proportion of airlines’ expenses.)

Of note, small- and medium-sized aircraft (single-aisle and small wide-body) are seeing the fastest demand growth in the global market due to 1) rising emerging market demand, 2) the growing adoption of highly efficient aircraft, and 3) the growth of low-cost carriers (LCCs). Over the next 20 years, the proportion of small- and medium-sized aircraft will likely reach around 70% of the overall civil aircraft market (50% for single-aisle and 22% for small wide-body).

Figure 1. New aircraft and global airline networks Figure 2. Overview of key aircraft market indicators

Source: Boeing, KDB Daewoo Securities Research Source: Boeing, KDB Daewoo Securities Research

Figure 3. Global aircraft market breakdown Figure 4. Civil aircraft market outlook by size

Source: Korea Aerospace Industries Association, KDB Daewoo Securities Research Note: 2013 and 2033 figures refer to total number of aircraft in operation

Source: Boeing, KDB Daewoo Securities Research

MRO30%

Components/equipment

24%

Combat aircraft12%

Civil aircraft34%

(2010)W396bn

3.1

4.9 4.7

0

1

2

3

4

5

6

Global economic growth Passenger traffic Cargo traffic

(%)Average annual growth rate: 2015-2034

1 2 3

14

3 1

4 6

31

3

0

10

20

30

40

Large wide-body

Medium wide-body

Small wide-body Single aisle Regional jets

2014

2034

('000 units)

[Civil aircraft market]20,910 units (2013) -> 42,180 units (2033)

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2. Market trends: Expansion of global outsourcing

The aircraft industry environment is oligopolistic and closed. Traditionally, the industry has been dominated by the US and Europe, with Boeing and Airbus, in particular, controlling the global civil aircraft market. And the combined market share of the top 10 makers stands at more than 80%.

However, major aircraft makers are gradually increasing their global outsourcing of sections/parts/materials production, as: 1) Boeing and Airbus currently enjoy order backlogs of more than five years thanks to surging aircraft demand; 2) outsourcing can cut production costs; 3) parts makers are reducing the burden of new aircraft development for aircraft makers via risk-sharing programs; and 4) parts makers have bolstered their competitiveness on the back of defense offset agreements (in which the seller of a product or service agrees to buy products or services from its client as an inducement).

In the past, Boeing outsourced 35-50% of 737 parts production. For the recently developed 787 model, the percentage has increased to 70%. In addition, the company has modified its supply chain by forging partnerships with vendors capable of providing entire integrated sections (similar to modules). Airbus also plans to increase the proportion of non-EU-sourced parts from 31.5% in 2009 to 40% in 2020.

Table 1. Changes in Boeing’s parts outsourcing strategy

737 (past) 787 (current)

% of parts outsourcing 35-50% 70%

Relationship with parts suppliers Based on conventional supply contracts Strategic partnerships with tier-one vendors

Roles of parts suppliers Parts development and production Section development and production

No. of parts suppliers Several thousand Around 50 strategic partners

Supply contract type Fixed-price contract with delay penalties Risk-sharing partnership

Assembly operations 30 days for final assembly Three days (assembly of complete sections)

Source: Airway News, KDB Daewoo Securities Research

Figure 5. Boeing 737 supply chain (past) Figure 6. Boeing 787 supply chain (current)

Source: Boeing, KDB Daewoo Securities Research Source: Boeing, KDB Daewoo Securities Research

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Figure 7. Boeing 787 Dreamliner supply chain overview Figure 8. Airbus attempting to raise percentage of non-EU

parts to 40% by 2020

Source: Boeing, KDB Daewoo Securities Research Source: Airbus, KDB Daewoo Securities Research

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Military aircraft market outlook

1. Overview of KF-X project

The KF-X project is a program that aims to develop an advanced multirole fighter for the Republic of Korea Air Force (ROKAF) based on domestic aerospace technology. The program is targeting production of a 4.5-5G fighter to replace Korea's aging F-4D/E Phantom II and F-5E/F Tiger II aircraft (243 units in total). The government is targeting the introduction of 120 fighter aircraft in 2025. KF-X is Korea’s largest weapons project, bearing total costs of around W30tr (including R&D expenses of W8.7tr).

2. Status of KF-X project

In July 2014, Korea’s Joint Chiefs of Staff decided to equip the KF-X with two engines, pushing back the year of deployment to 2025 and bumping up the total R&D budget from W6.4tr to W8.7tr. The Defense Acquisition Program Administration will assume 60% (W5.2tr) of total development costs, while the Indonesian government will shoulder 20% of the costs under a cooperative agreement with the Korean government. Private firms, including KAI, will bear the remaining 20%.

A 10-year-long feasibility study was completed, and KAI was selected as the preferred bidder in March 2015. As such, the project is currently gaining momentum. Further delays are unlikely, given that authorities will be reluctant to contribute to a potential fighter vacuum, and we expect the KF-X contract to be finalized by the end of this year.

Table 2. Timeline for the KF-X project

Date Details

Progress

11/02 197th Joint Chiefs of Staff meeting

4/10 Formulated a framework for the project

6/11-12/12. Joint exploratory development study by Korea and Indonesia

3/13-11/13 Outsourced an audit of feasibility study

11/13 8th Aerospace Industry Development Policy Committee meeting

11/13 281st Joint Chiefs of Staff meeting

9/14 Approved basic development plan at a defense project committee meeting

9/14 Signed MOA regarding KF-X technology transfer

10/14

12/14

12/14

Korean and Indonesian governments signed joint development agreement

Finalized total project budget

Announced bidding details

3/15 Selection of preferred bidder

Plans 9/15 Contract negotiation and execution

Source: Defense Acquisition Program Administration, KDB Daewoo Securities Research

Table 3. KF-X Development costs and expected benefits (Wtr, %)

Project Details Value Notes

KF-X

Development costs

Korean government W5.2tr (60%)

Indonesian government W1.7tr (20%)

Companies W1.7tr (20%) KAI likely to invest W0.9tr (10%)

Economic benefits

KF-X aircraft W9.9tr-13.2tr

Added value from KF-X production W2.8tr-5tr

Job creation from KF-X production 45,000-61,000

Technological benefits

Aerospace industry W9.5tr

Defense industry W17.7tr

Other W13.5tr

Source: Defense Acquisition Program Administration, KDB Daewoo Securities Research

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3. Impact of KF-X project

The KF-X fighter project will likely give rise to the following positives: 1) a significant economic contribution, 2) aerospace technology development, and 3) the strengthening of national security.

1) Economic contribution: Excluding R&D costs, roughly W10tr will be invested in mass production and W9tr in fighter operation and management. In light of the government’s export plan, the project is expected to add around W60tr to the economy.

2) Aerospace technology development: We believe that technology transfers from countries with advanced aerospace technologies will give the Korean aerospace industry a chance to take a major leap forward. All in all, the KF-X project is forecast to have positive ripple effects on the aerospace and defense sectors (as well as certain other industries).

3) Strengthening of national security: The domestic development of fighter jets is anticipated to reinforce Korea’s aerial defense and capabilities in joint military operations. And easier operation and maintenance (relative to imported jets) should help increase fighter utilization.

Figure 9. KF-X C103 mock-up Figure 10. KF-X (based on projections)

Source: New Daily, KDB Daewoo Securities Research Source: Kukmin Ilbo, KDB Daewoo Securities Research

Figure 11. Domestic fighter demand trend Figure 12. National defense upgrade costs

Source: MND, KDB Daewoo Securities Research Source: MND, KDB Daewoo Securities Research

0

100

200

300

400

500

600

2008 2013 2018F 2021F 2025F

Low-endMedium-endHigh-end

(units)

Number of fighter jets considered appropriate

-5

0

5

10

15

20

0

2

4

6

8

10

12

2007 2008 2009 2010 2011 2012 2013 2014 2015

Defense upgrade costs (L)

YoY growth (R)

(Wtr) (%)

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LCH/LAH development

1. Replacement of aging attack helicopters

In a 2008 report on armed helicopter deployment plans, the Korea Institute for Defense Analyses (KIDA) advised that the defense ministry should only focus on the development of high-end and low-end models because domestically produced mid-end attack helicopter models based on the Korean Utility Helicopter (KUH) platform could not compete with the equally-sized Apache.

The Joint Chiefs of Staff decided in 2009 to heed KIDA’s advice, with the Korea Institute for Industrial Economics and Trade (KIET) and the Ministry of National Defense (MND) giving assent in 2010. For about one year thereafter, the Agency for Defense Development (ADD) and the Korea Aerospace Research Institute (KARI) led R&D efforts for LAH and LCH, respectively. KAI participated in such efforts as a prototype maker.

2. KAI searching for LCH and LAH development partners

In July 2014, KAI was designated the lead developer for LCH and LAH, and discussions are underway to select foreign partners for development. The company plans to develop an LCH platform by 2020 and an LAH platform by 2022 (based on the LCH platform).

Figure 13. KUH model

Source: KDB Daewoo Securities Research

Figure 14. LAH Figure 15. LCH

Source: KAI, KDB Daewoo Securities Research Source: KAI, KDB Daewoo Securities Research

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MRO market

1. Civil aircraft MRO market to expand

The aircraft MRO business is largely divided into depot maintenance and performance-based logistics (PBL). Recently, amid LCC-driven expansion of the domestic civil aviation industry, the Korean government has been supporting the growth of aircraft MRO providers. We project the domestic aircraft MRO market to grow to W2.5tr by 2020.

Figure 16. Depot maintenance

Source: KAI, KDB Daewoo Securities Research

Figure 17. KAI’s MRO businesses

Source: KAI, KDB Daewoo Securities Research

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2. MRO business competition to intensify

On January 19th, the Ministry of Land, Infrastructure and Transport announced a plan to support the growth of the domestic aircraft maintenance industry. This project will provide customized support to establish specialized MRO providers and facilitate the creation of an MRO cluster.

The ministry plans to support a specialized MRO provider that formulates a concrete business plan and settles on a site location after discussions with the local government. Specifically, the ministry will help the MRO provider secure facilities and orders and acquire advanced maintenance technology via defense offset agreements. Over the long term, this project aims to expand the aircraft MRO business by nurturing MRO exporters and jointly sourcing parts.

Regarding bidding for the MRO project, KAI (Sacheon), Asiana Airlines and Boeing (Cheongju), Incheon International Airport (Incheon), and Korean Air (Gimhae) are expected to compete. In addition, Airbus is also likely to create a consortium to participate in the bidding.

We believe the government is unlikely to make a final decision on the project until 2016, as it could generate disputes and controversies (e.g., claims of preferential treatment, etc.)

Figure 18. Status of domestic infrastructure


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T-X project

1. US to replace its jet trainers via the T-X program

The T-X program was established to allow the United States Air Force to buy a new two-seat jet trainer for fast-jet training to replace the Northrop T-38 Talon. The bidding is expected to start in 2H16 and finish in 2017. About 350 aircraft (worth US$11bn) are expected to be ordered to replace the T-38. Given that a total of 546 T-38 units are currently in operation, an additional 300 aircraft could be ordered thereafter. As such, the total project value could reach more than W20tr.

2. Competitors

KAI plans to bid for the T-X project with the T-50, which the company has jointly developed with Lockheed Martin. The company’s biggest competitor is a consortium of Boeing and Saab, which plans to develop a new jet trainer for the project. We believe competitors will have no choice but to develop new aircraft, as the T-50 is superior to competitors’ existing jet trainers.

The M-346, which was jointly developed by General Dynamics and Alenia Aermacchi, is considered inappropriate for 5G fighter jet training due to its low (transonic) speed. A prototype developed by Northrop Grumman and Scaled Composites, which is scheduled to begin test flights this year, is emerging as the strongest competitor to the T-50. In addition, BAE Systems’ Hawk Mk.128 and Textron AirLand’s Scorpion are also considered competitors to the T-50.

3. Risks and expectations

Competition to win the T-X project (worth at least W12tr) is expected to be fierce. There is also a possibility that Lockheed Martin might participate in the bid on its own. Lockheed Martin is known to have been developing a new advanced jet trainer since 2010. Although the company has not produced an advanced trainer jet yet, it is likely to have built up knowledge and experience through the joint development and improvement of the T-50 with KAI.

It is worth noting that the US Air Force seems highly likely to award the contract to a US participant. If KAI maintains its partnership with Lockheed Martin and the consortium manages to land the project, it would pave the way for KAI’s accelerated growth, driven by US-bound exports. In an effort to support the KAI-Lockheed Martin consortium, the Korean government selected Lockheed Martin’s F-35 for its next-generation fighter jet acquisition project.

Figure 19. T-38 Figure 20. T-50

Source: Google, KDB Daewoo Securities Research Source: Google, KDB Daewoo Securities Research

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Korean aviation industry

1. Overview

The aviation industry is engaged in the production, upgrade/modification, and maintenance of aircraft, parts/components, and terrestrial systems. The industry requires comprehensive technologies ranging from machinery to electronic, electric, and materials.

Broadly, the aviation industry can be divided into aircraft production and operation. The aircraft production segment is again divided into parts/materials and finished aircraft, while the operation segment includes MRO and terrestrial support systems.

Classified by use, military aircraft include fighters, surveillance aircraft, and trainers, while civil aircraft include passenger planes and light planes. Classified by propulsion technique, aircraft can be categorized into propeller-driven aircraft and jet planes. They are also classified by type of wings as either fixed-wing (fighters and trainers) or rotary-wing (helicopters) aircraft.

Figure 21. Aviation industry


Figure 22. Combat aircraft


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2. Domestic aviation industry’s supply chain and recent trend

The aviation industries of North America and Europe have flourished, driven by Boeing and Airbus. As such, these two regions have well-established supply chains, composed of finished aircraft manufacturers, tier-one suppliers, tier-two suppliers, and other partners.

The domestic aviation industry, meanwhile, is only in a nascent stage. Its supply chain, which is still not firmly established, consists of parts suppliers/OEMs, R&D partners, and intermediate/finished goods producers. The industry’s ecosystem has been developing at a slow pace due to 1) the lack of finished aircraft producers, 2) the closed network of major global players, 3) technological challenges and lack of experience, 4) concerns about the potential formation of an oligopoly, and 5) the large capex burden.

Recently, however, the industry’s ecosystem has been improving markedly for several reasons. First, leading players, namely KAI and Korean Air, are seeing increased orders and an expansion in outsourcing. Second, domestic companies have built up technologies and experience. Third, SMEs with strong technological competitiveness, namely ASTK, are rising sharply on the back of strong exports. Lastly, financing conditions have become more favorable thanks to the increase in IPOs.

Figure 23. Domestic aircraft industry supply chain

Source: Korea Aerospace Industries Association, KDB Daewoo Securities Research

Figure 24. Change in domestic aviation industry

Source: Korea Aerospace Industries Association, KDB Daewoo Securities Research

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3. Domestic aircraft industry’s history and technological trends

The domestic aircraft industry began with the assembly of military aircraft; in the 1980s, for example, Korean Air assembled MD 500 helicopters for Hughes Aircraft Company. Since the mid-1980s, Korean companies have also been involved in the civil aircraft industry, exporting parts to advanced aircraft makers (through partnerships such as defense offsets and countertrades). In the 2000s, Korean firms began to engage in R&D efforts to develop next-generation aircraft, including medium-altitude UAVs and smart UAVs. Korean firms are also currently preparing to develop attack helicopters.

Korea has acquired a strong competitive edge in production technologies (e.g., airframe design and assembly), and is attempting to sharpen its competitiveness in the aircraft design and development segments, as well. According to industry data, Korea’s civil aircraft production technologies have reached 90% of advanced country levels, while testing and designing technologies have each reached 70%.

Broadly, fixed-wing aircraft include fighter jets, ground-attack aircraft, electronic-warfare aircraft, surveillance aircraft, maritime patrol aircraft, transport aircraft, aerial refueling aircraft, and trainer aircraft. According to industry data, giving a value of 100 to US technology, the level of Korea’s fixed-wing aircraft technology is 73—the 13th highest in the world.

As for rotary-wing aircraft, the completion of Surion (a utility helicopter) made Korea the 11th nation in the world to develop a homegrown helicopter. Korea started developing Surion in June 2006 and shipped the first unit in August 2009, and the aircraft succeeded in its maiden flight in March 2010. With Surion, Korea’s rotary-wing aircraft technology level advanced to 77, the 11th highest in the world. Currently, Korea is engaged in efforts to develop other types of helicopters.

Remote-controlled UAVs are capable of performing dangerous missions. Korea is competitive in both small and large UAV technology, and the level of domestic UAV technology stands at 84, the seventh highest in the world.

Currently, more than 50% of the key requirements for unmanned systems are based on IT technologies. Given Korea’s strong IT capabilities, we expect the domestic development of UAVs to accelerate faster than other areas.

Figure 25. Level of domestic aircraft technology: Strong edge in airframe design and assembly


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Figure 26. Level of Korean fixed-wing aircraft technology: 13th in global ranking

Source: Defense Agency of Technology and Quality, KDB Daewoo Securities Research

Figure 27. Level of Korean rotary-wing aircraft technology: 11th in global ranking


Figure 28. Level of Korean UAV technology: 7th in global ranking


10095 93 92 91 87 84 84 84 84 80

75 75 75 72 7164

56

Leading industrial Advanced Developed Underdeveloped

10096 94 91 91 91

84 83 80 78 77 77 75 7369 69 66

62


10096 93 91

87 86 86 83 81 7975 75 73 73 72

65 6457


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4. Overseas technology trends

Recently, the global aircraft industry has been focused on UAVs, environmentally friendly/highly efficient aircraft, high-performance aircraft, and IT convergence systems.

The ultimate goal of developing UAVs is to enable fully autonomous flight. The trend of unmanned systems is spreading beyond military aircraft into the civil aircraft arena. More than 187 companies in 37 countries are participating in UAV projects. Currently, around 400 projects are underway.

The US is striving for the convergence of UAV technology with existing, manned system technology. Israel, meanwhile, is focusing on the diversification, scale, and survivability of UAVs, while France aims to have UAVs replace its Rafale fighters by 2020.

Table 4. Development timeline of UAV technology

Period Details Models

1960s-70s

Initial UAV - Recorded video during Vietnam War AQM-34

1970s-80s

Improved UAV

- Used as decoy and fighter vehicles during Gulf War

- Improved models (return rate of 90%) used to record

during Gulf War

Ryan 147

Mastiff

1980s-90s

UAV systems

- Low-altitude and short-distance unmanned systems used

during Lebanon conflicts and Gulf War

- Real-time spy reconnaissance,

Searcher

Pioneer

CL-89

Hunter

1990s-2000s

High-performance

UAV

- Medium-altitude endurance system emerged during

Afghanistan War

- Attack function

Predator

2000s-

Strategic UAV

systems

- High altitude endurance system

- Ability to fly for more than 72 hours in the stratosphere

- Private-invested development

- System integration technology

- Real-time communications

Global Hawk

Smart UAV

Helios

Source: Ministry of Trade, Industry and Energy, KDB Daewoo Securities Research

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The trend toward environmentally friendly and highly efficient aircraft is most evident in the commercial airplane segment (which accounts for over 70% of the global civil aircraft market). Since the 2000s, aircraft manufacturers have been evaluating new aircraft based on their level of operational cost savings. The Boeing B787, for example, with a fuselage and wings made up mostly of carbon-fiber reinforced composites, reduces fuel costs by 20% relative to existing models.

Table 5. Development timeline of green/high-efficiency technology in civil aircraft


1950s-60s

1G civil aircraft

- Turbojet engines

･ High-speed flying

B707

DC-8

1960s-70s

2G civil aircraft

- Turbofan engine

･ Improved economic feasibility

- Short- to medium-distance flying

B737

DC-9

1970s-80s

3G civil aircraft

- The emergence of large-size aircraft enabled low-cost and

large-scale transportation

B747

A300

DC-10

1980s-90s

4G civil aircraft

- Economic recovery following oil shocks

･ Replacement of old aircraft

- Low-fuel and low-noise engines; Digital technology

A320

B757/767

1990s-

5G civil aircraft

- Growing global demand for transportation; High demand for

direct flights

･ High-efficiency mega-sized aircraft; Longer-range

aircraft

- Concurrent engineering; Preference for light-weight aircraft

･ Simultaneous progress in designing and manufacturing

･ Embracing composite materials

A330/380

B777/747A

B787/A350

B737 Max


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The US has been the most aggressive in developing high-performance aircraft. Since 1993, the country has developed attack aircraft, including the F-35. The UK, Germany, Italy, and Spain jointly developed the Eurofighter, an attack aircraft that features functions such as mobility, supercruise, and thrust vector control.

Table 6. Development timeline of combat aircraft technology


1945-55

1G combat aircraft

- Commercialization of hypersonic jets

- Based on avionics

-

MiG-17

F-86

Yak-23

F-104

1955-60s

2G combat aircraft

- Hypersonic jet

- 1G radar system

- Equipped with missiles

F-100

F-104,

MiG-21

F-8

1960s-70s

3G combat aircraft

- Improved equipment functions

- Air-to-air and air-to-ground missiles

- Multi-purpose

F-4,

MirageF.1

MiG-23

Harrier

1970s-90s

4G combat aircraft

- Developed during Cold War

- Improved mobility

- Precision-guided weapons

- Improved survival rates

Mig-29

F-14

F-15

F-16

1990s-2000s

4.5G combat aircraft

- Super precision-guided weapons

- Integrated sensor systems

- Limited stealth

Rafale

EFA

Su-35

F/A-18E/F

2000s-

5G combat aircraft

- Stealth

- Mobility, high survival rate

- Advanced integrated sensor systems

F-35

F/A-22

PAK FA

Su-47


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Global peer valuation

Table 7. Valuation table (Wbn, %, W)

Aircraft makers Aircraft parts manufacturers

KAI BoeingLockheed

Martin Airbus Bombardier Avg. ASTK Precision AVIC Zodiac Spirit

China

AvionicsAvg.

Market cap 8,812 102,188 72,502 61,131 2,258 - 350 37,427 13,016 10,300 8,251 7,813 -

Revenue

2014 2,280 97,004 48,378 75,018 21,691 - 67 10,851 3,457 5,748 7,497 1,241 -

2015F 2,952 112,810 53,190 85,586 22,768 - 84 11,769 4,594 6,417 7,897 1,476 -

2016F 3,787 115,448 54,478 87,818 22,833 - 100 12,437 5,543 7,002 8,138 1,717 -

OP

2014 160 7,886 6,078 4,821 931 - -3 2,990 111 700 833 155 -

2015F 274 9,625 6,573 5,644 941 - 4 3,106 133 666 1,019 193 -

2016F 350 10,721 7,051 5,716 813 - 15 3,408 181 1,002 1,046 230 -

OP

margin

2014 7.0 8.1 12.6 6.4 4.3 7.7 -4.5 27.6 3.2 12.2 11.1 12.5 10.3

2015F 9.3 8.5 12.4 6.6 4.1 8.2 4.8 26.4 2.9 10.4 12.9 13.1 11.7

2016F 9.2 9.3 12.9 6.5 3.6 8.3 15.0 27.4 3.3 14.3 12.8 13.4 14.4

NP

2014 108 6,166 3,898 3,068 444 - -8 1,908 77 462 584 123 -

2015F 205 6,627 4,209 3,567 442 - 2 2,003 92 435 667 144 -

2016F 263 7,322 4,551 3,609 325 - 10 2,205 131 658 671 173 -

Revenue

growth

2014 14.8 6.3 0.2 -13.9 13.1 4.1 9.3 14.0 22.6 7.3 14.1 10.1 12.9

2015F 29.5 16.3 9.9 14.1 5.0 15.0 26.1 5.0 19.4 -5.8 14.2 17.2 12.7

2016F 28.3 2.3 2.4 2.6 0.3 7.2 19.8 10.0 42.2 51.1 0.6 19.7 23.9

EPS

2014 1,111 9,014 12,090 3,918 364 - -1,296 13,770 29 1,705 4,006 65 -

2015F 2,122 9,559 13,556 4,632 223 - 179 15,047 37 1,528 4,750 79 -

2016F 2,728 11,158 15,052 4,800 136 - 745 16,885 48 2,329 4,957 97 -

BPS

2014 10,568 21,358 16,474 20,256 960 - 3,720 94,966 784 12,752 15,992 569 -

2015F 12,318 12,989 11,840 15,693 532 - 3,600 99,359 918 12,742 20,057 623 -

2016F 14,787 19,669 13,088 18,207 630 - 4,345 106,442 966 14,573 22,666 709 -

P/E (x)

2014 81.3 15.2 17.6 18.2 2.6 27.0 - 18.2 155.3 21.0 13.2 65.0 54.5

2015F 42.6 15.9 17.4 16.7 4.6 19.4 186.5 18.1 127.9 21.7 12.3 57.0 70.6

2016F 33.1 13.6 15.7 16.1 7.4 17.2 44.9 16.2 97.0 14.3 11.8 46.3 38.4

P/B (x)

2014 8.6 6.5 13.0 3.5 1.0 6.5 2.3 2.6 5.6 2.8 3.3 7.6 4.1

2015F 7.3 11.3 19.2 4.8 1.9 8.9 9.3 2.7 5.2 2.6 2.8 7.2 5.0

2016F 6.1 7.5 17.3 4.1 1.6 7.3 7.7 2.5 4.9 2.3 2.5 6.3 4.4

ROE (%)

2014 10.7 39.4 73.9 19.3 33.1 35.3 -21.4 27.6 3.2 12.2 11.1 12.5 9.0

2015F 18.5 64.8 103.0 30.9 72.5 57.9 5.1 26.4 2.9 10.4 12.9 13.1 13.5

2016F 19.9 85.0 124.5 26.5 17.2 54.6 18.7 27.4 3.3 14.3 12.8 13.4 15.9

EV/

EBITDA

2014 38.4 9.3 10.0 7.9 6.2 14.4 80.8 11.6 69.7 13.9 7.1 39.3 37.1

2015F 24.8 8.6 10.1 6.9 6.9 11.5 55.9 11.8 58.4 14.2 6.7 33.3 30.1

2016F 19.7 7.7 9.4 6.9 7.0 10.1 25.1 10.9 47.2 10.1 6.6 28.6 21.4

P/S (x)

2014 3.9 1.0 1.4 0.7 0.1 1.4 0.8 3.2 3.6 1.8 1.0 6.0 2.7

2015F 3.0 0.9 1.4 0.7 0.1 1.2 0.7 3.1 2.9 1.5 1.0 5.4 2.4

2016F 2.3 0.9 1.3 0.7 0.1 1.1 0.6 2.9 2.4 1.4 1.0 4.6 2.1

Source: Bloomberg, KDB Daewoo Securities

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August 27, 2015


Figure 29. Share performance of Boeing Figure 30. Share performance of Airbus

Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

Figure 31. Share performance of Lockheed Martin Figure 32. Share performance of Spirit AeroSystems Holdings


Figure 33. Share performance of Triumph Group Figure 34. Share performance of Precision Castparts


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Figure 35. Share performance of AVIC aircraft Figure 36. Share performance of China Avionics Systems


Figure 37. Share performance of KAI Figure 38. Share performance of ASTK


Figure 39. Share performance of Orbitech Figure 40. Share performance of Hize Aero


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Home-grown fighter jets: From concept to reality

Korea Aerospace Industries (KAI) is Korea’s only manufacturer and developer of aircraft (T-50, Surion, etc.). The company also produces civil aircraft parts for Boeing and Airbus and engages in aircraft upgrades/modification, MRO, training system development, and satellites.

In addition to the LAH and LCH projects, KAI has also been tapped as the preferred bidder for the KF-X development project. The company is essentially tasked with all of Korea’s major civil/military aircraft development and production projects.

Order backlog to hit record in 2015; Robust growth for the next three years

For 2015, we expect KAI to win orders of W1.1tr for aircraft, W1.9tr for parts, and W7tr for the KF-X project, bringing total order backlog to W18-19tr. Such strong new orders and backlog should keep the company growing at 20% CAGR over the next three years.

Other sources of growth

1) MRO business: The MRO market is expected to grow on the back of the increasing entry of low-cost carriers (LCCs). KAI intends to expand its MRO operations to take advantage of the growth of LCCs and government support. That said, competition is likely to be fierce, with Korean Air and a foreign consortium led by Airbus also battling for a greater share of the market.

2) T-X program and other: For the US Air Force’s next-generation trainer (T-X) program, KAI plans to propose a version of its T-50 trainers together with Lockheed Martin. The T-X program will involve supplying around 350 trainers worth up to W11tr, with mass production beginning in 2020.

Initiate with Buy and TP of W143,000

We initiate our coverage on KAI with a Buy rating and target price of W143,000. Our target price is based on a P/E of 30x our 2016F EPS of W3,179, to which we applied a 50% premium in light of the company’s high growth potential compared to global peers, as well as the Korean government’s long-term industry support. We see potential for a highly profitable business, with ROE forecast to reach 22.3% in 2016.

We believe KAI is well-positioned for long-term growth, as the company is likely to dominate the development and production of most civil/military aircraft as the unparalleled leader of the domestic aviation industry. In our view, this makes the company a great retirement stock from a medium- and long-term perspective.

Korea Aerospace Industries (047810 KS) Leader of Korea’s aviation industry

FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F

Revenue (Wbn) 1,535 2,016 2,315 2,848 3,583 4,423

OP (Wbn) 126 125 161 304 398 491

OP margin (%) 8.2 6.2 7.0 10.7 11.1 11.1

NP (Wbn) 74 90 111 232 310 391

EPS (W) 760 924 1,140 2,383 3,179 4,008

ROE (%) 8.6 9.7 11.1 20.4 22.3 22.8

P/E (x) 34.0 31.4 34.9 38.1 28.6 22.7

P/B (x) 2.8 2.9 3.7 7.1 5.8 4.7

Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests

Source: Company data, KDB Daewoo Securities Research estimates

Aviation Industry

(Initiate) Buy

Target Price (12M, W) 143,000

Share Price (08/26/15, W) 90,800

Expected Return 57%

OP (15F, Wbn) 304

Consensus OP (15F, Wbn) 285

EPS Growth (15F, %) 109.1

Market EPS Growth (15F, %) 25.0

P/E (15F, x) 38.1

Market P/E (15F, x) 10.9

KOSPI 1,894.09

Market Cap (Wbn) 8,851

Shares Outstanding (mn) 97

Free Float (%) 46.0

Foreign Ownership (%) 13.6

Beta (12M) 1.54

52-Week Low 35,450

52-Week High 103,500

(%) 1M 6M 12M

Absolute 0.9 83.1 156.1

Relative 9.0 92.6 179.7

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Company overview

Homegrown fighter jets: From concept to reality

KAI is Korea’s only manufacturer and developer of aircraft (T-50, Surion, etc.). The company also produces civil aircraft parts for Boeing and Airbus and engages in aircraft upgrades/modification, MRO, training system development, and satellites.

In addition to the LAH and LCH projects, KAI has also been tapped as the preferred bidder for the KF-X development project (with an annual development cost of W600-700bn). The company is essentially tasked with all of Korea’s major civil/military aircraft development and production projects.

Revenue breakdown: 40% for defense, 35% for parts, and 25% for aircraft exports

In 1H15, the defense unit accounted for 37.8% of KAI’s total revenue, followed by parts (36.2%) and aircraft exports (26.0%). Revenue contribution from the defense unit increased sharply on higher T-50 exports. The company’s order backlog stood at around W11.4tr, of which 51% is for parts, 35% for the defense unit, and 14% for aircraft exports. If the KF-X contract is finalized within this year, the company’s total order backlog will likely increase to W18-19tr at the end of the year.

KAI’s largest shareholder is KDB, with a 26.75% stake

KAI’s largest shareholder is the Korea Development Bank (KDB) with a 26.75% stake, followed by Hanwha Techwin and Hyundai Motor Company (10% each), the National Pension Service (7.61%), and DIP Holdings (5.0%). Foreign ownership stood at 14.5% as of August 12th.

Figure 41. Order backlog (based 2Q15) Figure 42. Major shareholders


National defense

19%

Overseas business (aircraft)

15%Parts/MRO

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Order backlogW11.4 tr

Korea Development Bank, 27%

Hyundai Motor, 10%

Hanhwa Techwin, 10%

DIP Holdings, 5%

NPS, 8%

Other, 40%

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Orders and order backlog

Order backlog to reach W18-19tr at end-2015

In 1H15, KAI won orders of W1.8tr for parts, W200bn for the defense unit, and W400bn for aircraft exports, bringing its order backlog to W11.4tr.

For 2015, we project the company to receive aircraft export orders (W1.1tr; to Botswana, Turkey, Iraq, etc.) as well as parts orders from Boeing and Airbus (W1.9tr). If the KF-X contract is finalized, its year-end order backlog will likely reach W18-19tr, 80% higher than the level at end-2014 (W11tr).

Lead developer of LCH and LAH

KAI was selected to lead the LCH and LAH development projects in 2014. The company plans to develop an LCH platform by 2020 and then use the LCH platform to develop LAHs by 2022. Once an overseas partner is designated, this project will pick up speed. We estimate overall development costs to reach W600bn, and mass production is planned for 2022.

Figure 43. New orders trend Figure 44. Order backlog trend


Figure 45. New orders forecast for 2015 Figure 46. Order backlog by business


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August 27, 2015


To enter hyper growth in 2015

We anticipate that 2015 will mark the beginning of a hyper growth phase for KAI, with revenue of W2.85tr (+23% YoY) and operating profit of W303.6bn (+88% YoY). We expect the company’s revenue to grow at a CAGR of 25% through 2017, driven by 1) stable sales at the defense and aircraft units and 2) expansion of aircraft exports. This year, the company will begin exporting T-50 aircraft to Iraq and the Philippines, and KT-1 aircraft to Peru.

Once the company takes KF-X orders in 2015, it should generate around W600-700bn in related annual revenue through 2023. This value is equivalent to more than 20% of the company’s 2015F revenue. Furthermore, the company is likely to generate around W150bn in annual revenue from the KUH project for which it has been selected as a preferred bidder. As such, we expect the company to deliver revenue growth of more than 25%.

Profitability to improve on lower fixed cost burden and the won’s weakness

Backed by robust revenue growth, operating profit will also likely expand sharply thanks to lower fixed cost burden. In particular, T-50 revenue growth is likely to lower the revenue contribution of lower-margin civil aircraft parts. In addition, profitability is expected to improve on the won’s weakness. Of note, given that the won has depreciated by 10% YoY since the beginning of 3Q, operating profit is anticipated to increase sharply during the quarter.

On the non-operating side, interest expenses are likely to increase through 3Q due to borrowings for working capital. However, we believe that borrowings will decrease at the end of the year, as considerable receivables should be collected.

Table 8. Quarterly earnings (Wbn, %)

2014 2015F 3Q15F growth 2014 2015F 2016F

1Q 2Q 3Q 4Q 1Q 2Q 3QF 4QF YoY QoQ

Revenue 503 599 517 696 621 679 648 900 25.2 -4.6 2,315 2,848 3,583

Defense 255 324 257 381 241 257 268 453 4.4 4.4 9.4 0.1 50.1

Aircraft 46 106 87 87 167 177 158 190 83.1 -10.4 36.0 112.9 34.8

Parts/MRO 203 169 174 228 214 246 221 257 27.1 -9.8 16.3 21.2 -12.2

Operating profit 29 46 40 47 56 77 71 99 79.4 -8.0 161 304 398

Pretax profit 18 33 42 48 57 74 72 99 69.8 -2.8 140 302 404

Net profit 18 27 34 33 44 57 55 63.6 -3.0 111 232 310

OP margin 5.7 7.7 7.7 6.7 9.1 11.4 11.0 11.0 - - 7.0 10.7 11.1

Net margin 3.5 4.5 6.5 4.7 7.0 8.4 8.5 8.5 - - 4.8 8.2 8.6

Note: All figures are based on consolidated K-IFRS

Source: Company data, KDB Daewoo Securities Research

Figure 47. Revenue and OP margin (annual) Figure 48. Revenue and OP margin (quarterly)

Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

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August 27, 2015


Investment recommendation and valuation

Initiate coverage with a Buy rating

We initiate our coverage on KAI with a Buy rating, as:

1) The civil aircraft industry will likely deliver steady growth in the medium to long term.

2) The Korean government is anticipated to invest in and support the military aircraft business over the medium to long term.

3) The company is expected to display steady growth and operating profit on the back of a massive order backlog.

4) Sound cash flow and accumulated technological prowess should maximize the company’s corporate value.

TP of W143,000

We present a target price of W143,000 for KAI. Our target price is based on a P/E of 30x our 2016F EPS of W3,179, to which we applied a 50% premium in light of the company’s high growth potential compared to global peers, as well as the Korean government’s long-term industry support. We see potential for a highly profitable business, with ROE forecast to reach 22.3% in 2016. We think that KAI is a promising investment, as the company can generate solid cash flow in the long term. (See Global Peer Valuation on page 19.)

We believe KAI is well-positioned for long-term growth, as the company is likely to dominate the development and production of most civil/military aircraft as the unparalleled leader of the domestic aviation industry. In our view, this makes the company a great retirement stock from a medium- and long-term perspective. In addition, the outlook is bright for the company’s T-50 exports and civil aircraft parts.

Figure 49. P/E-ROE comparison (2015F) Figure 50. P/B-ROE comparison (2015F)

Source: Bloomberg, KDB Daewoo Securities Research Source: Bloomberg, KDB Daewoo Securities Research

KAIAVIC

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August 27, 2015


Figure 51. Share performances of global aircraft makers


Figure 52. Share performances of global aircraft parts manufacturers


Figure 53. KAI, KOSPI, and manufacturing index


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August 27, 2015


Korea Aerospace Industries (047810 KS/Buy/TP: W143,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F

Revenue 2,315 2,848 3,583 4,423 Current Assets 1,244 1,619 1,882 2,155

Cost of Sales 2,027 2,417 3,028 3,738 Cash and Cash Equivalents 13 212 370 545

Gross Profit 288 431 555 685 AR & Other Receivables 216 199 267 285

SG&A Expenses 127 128 158 195 Inventories 433 480 453 464

Operating Profit (Adj) 161 304 398 491 Other Current Assets 582 728 792 861

Operating Profit 161 304 398 491 Non-Current Assets 858 850 819 817

Non-Operating Profit -20 -2 6 18 Investments in Associates 3 4 5 7

Net Financial Income -7 -8 8 18 Property, Plant and Equipment 494 483 474 489

Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 225 222 189 161

Pretax Profit 141 302 404 509 Total Assets 2,101 2,469 2,701 2,972

Income Tax 30 70 94 118 Current Liabilities 543 633 563 496

Profit from Continuing Operations 111 232 310 391 AP & Other Payables 152 161 188 160

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 103 170 70 0

Net Profit 111 232 310 391 Other Current Liabilities 288 302 305 336

Controlling Interests 111 232 310 391 Non-Current Liabilities 522 591 607 580

Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 261 251 231 181

Total Comprehensive Profit 95 233 310 391 Other Non-Current Liabilities 261 340 376 399

Controlling Interests 95 233 310 391 Total Liabilities 1,065 1,224 1,170 1,075

Non-Controlling Interests 0 0 0 0 Controlling Interests 1,037 1,245 1,531 1,897

EBITDA 250 394 479 565 Capital Stock 487 487 487 487

FCF (Free Cash Flow) -165 217 320 340 Capital Surplus 128 128 128 128

EBITDA Margin (%) 10.8 13.8 13.4 12.8 Retained Earnings 415 623 909 1,275

Operating Profit Margin (%) 7.0 10.7 11.1 11.1 Non-Controlling Interests 0 0 0 0

Net Profit Margin (%) 4.8 8.1 8.7 8.8 Stockholders' Equity 1,037 1,245 1,531 1,897

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F

Cash Flows from Op Activities -113 255 360 400 P/E (x) 34.9 38.1 28.6 22.7

Net Profit 111 232 310 391 P/CF (x) 12.6 20.9 18.6 15.7

Non-Cash Income and Expense 196 191 167 174 P/B (x) 3.7 7.1 5.8 4.7

Depreciation 51 52 48 45 EV/EBITDA (x) 16.8 22.9 18.2 15.0

Amortization 38 38 33 28 EPS (W) 1,140 2,383 3,179 4,008

Others 107 101 86 101 CFPS (W) 3,149 4,347 4,892 5,791

Chg in Working Capital -389 -83 -31 -64 BPS (W) 10,636 12,773 15,703 19,461

Chg in AR & Other Receivables -198 -11 -56 -17 DPS (W) 250 250 250 250

Chg in Inventories -68 -47 27 -11 Payout ratio (%) 21.9 10.5 7.9 6.2

Chg in AP & Other Payables -159 -5 24 -31 Dividend Yield (%) 0.6 0.3 0.3 0.3

Income Tax Paid -25 -77 -94 -118 Revenue Growth (%) 14.8 23.0 25.8 23.4

Cash Flows from Inv Activities -80 -86 -57 -80 EBITDA Growth (%) 23.2 57.6 21.6 18.0

Chg in PP&E -51 -38 -40 -60 Operating Profit Growth (%) 28.8 88.8 30.9 23.4

Chg in Intangible Assets -54 -35 0 0 EPS Growth (%) 23.4 109.0 33.4 26.1

Chg in Financial Assets 25 -15 -17 -20 Accounts Receivable Turnover (x) 18.4 18.6 20.1 20.6

Others 0 2 0 0 Inventory Turnover (x) 5.8 6.2 7.7 9.7

Cash Flows from Fin Activities 68 32 -144 -144 Accounts Payable Turnover (x) 15.2 16.4 18.7 23.6

Chg in Financial Liabilities 87 56 -120 -120 ROA (%) 5.4 10.2 12.0 13.8

Chg in Equity 0 0 0 0 ROE (%) 11.1 20.4 22.3 22.8

Dividends Paid -19 -24 -24 -24 ROIC (%) 9.7 15.0 18.7 22.4

Others 0 0 0 0 Liability to Equity Ratio (%) 102.7 98.3 76.5 56.7

Increase (Decrease) in Cash -125 200 158 175 Current Ratio (%) 229.1 255.8 334.1 434.7

Beginning Balance 138 13 212 370 Net Debt to Equity Ratio (%) 31.8 14.4 -6.9 -21.6

Ending Balance 13 212 370 545 Interest Coverage Ratio (x) 12.1 20.6 33.6 72.3


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Korea’s second-largest aircraft parts supplier

Established in 2002, ASTK is Korea’s second-largest aircraft parts supplier, with Boeing as its biggest client. The company produces stringers, bulkheads, and sections 48 (rear fuselage), and is the only domestic company aside from KAI capable of manufacturing fuselages.

To meet increasing demand for single-aisle aircraft in emerging countries, Boeing is ramping up its 737 assembly line and plans to raise its monthly capacity to 52 units per month by 2018. At present, ASTK supplies around five sections 48 for the Boeing 737-900 every month, but intends to eventually increase its monthly capacity to up to nine.

Investment points: Ample order backlog, new orders, acquisition synergies

We estimate ASTK’s order backlog stood at W1.11tr at end-1H15, the majority of which is for Boeing’s most popular jet, the 737. Given the recent surge in civil aircraft demand and increased outsourcing of parts production, ASTK should see increasing orders through customer and product diversification.

For 2015, we see order backlog rising to W1.5-2tr, driven by additional orders from Boeing and offset orders from Airbus and Lockheed Martin. Backed by massive order inflows and backlog, we forecast the company to maintain rapid growth of over 20% CAGR for the next three years.

ASTK’s acquisition of Orbitech should help the company expand its order book, boost capacity, and save costs. ASTK plans to concentrate on large assemblies and fuselages, while Orbitech will narrow its focus on machinery assembly. ASTK should also see more outsourcing operations following the acquisition, which should prove favorable to margins. The deal is also anticipated to boost ASTK’s production capacity (currently W120bn) by roughly W50bn.


We initiate our coverage on ASTK with a Buy call and target price of W49,000. Our target price is based on a market cap equal to 45% of the lower end of our 2015 order backlog forecast (W1.5tr). KAI, the company’s only comparable domestic peer, is currently valued at 45% of our year-end backlog estimate (W20tr).

On average, global aircraft parts suppliers are trading at a P/E of 71x, P/B of 5x, and EV/EBITDA of 30x, suggesting traditional valuation methods are unsuitable. During good times, the stock prices of aircraft parts suppliers react more sensitively to industry conditions, orders, and margins than to revenue and profit. Looking forward, we highlight three investment points: order backlog growth, entry into the offset market, and margin expansion.

ASTK (067390 KQ) A success story in aircraft parts

FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F

Revenue (Wbn) 44 61 67 82 102 127

OP (Wbn) 4 -4 -3 3 6 10

OP margin (%) 9.1 -6.6 -4.5 3.7 5.9 7.9

NP (Wbn) 9 -7 -8 2 5 9

EPS (W) 1,639 -888 -630 116 359 656

ROE (%) 72.5 -35.5 -21.4 3.4 9.8 15.7

P/E (x) - - - 253.6 82.1 44.9

P/B (x) - - 2.3 8.5 7.7 6.5



Aviation Industry

(Initiate) Buy


Share Price (08/26/15, W) 29,500

Expected Return 66%

OP (15F, Wbn) 3


EPS Growth (15F, %) -


P/E (15F, x) 253.6


KOSDAQ 667.44

Market Cap (Wbn) 407


Free Float (%) 75.7


Beta (12M) 1.10

52-Week Low 7,280

52-Week High 36,150

(%) 1M 6M 12M

Absolute -17.8 106.3 0.0

Relative -4.4 90.7 0.0

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AeroSpace Technology of Korea

KOSDAQ

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August 27, 2015


Korea’s second-largest aircraft parts supplier

Established in 2002, ASTK is Korea’s second-largest aircraft parts supplier, with Boeing as its biggest client. The company produces stringers, bulkheads, and sections 48 (rear fuselage), and is the only domestic company aside from KAI capable of manufacturing fuselages.

A section 48 (the part of the fuselage on which tail wings are mounted) consists of about 6,400 parts. Spirit AeroSystems had been the exclusive supplier of the Boeing 737’s sections 48, but ASTK won orders in 2013 thanks to surging demand and Boeing’s strategy of increasing outsourcing.

Currently, Boeing’s monthly capacity for the 737 stands at 42 units. To meet increasing demand for single-aisle aircraft in emerging countries, Boeing is ramping up its Boeing 737 assembly line and plans to raise its monthly capacity to 52 units by 2018. At present, ASTK supplies around five sections 48 for the Boeing 737-900 every month, but intends to eventually increase its monthly capacity to up to nine. Currently, sections 48 are the major growth driver for ASTK, contributing to the company’s earnings turnaround in 1H. ASTK’s cumulative section 48 production volume reached the 100 mark in 1H15.

Figure 54. ASTK’s product portfolio Figure 55. Section 48 for the Boeing 737


Figure 56. Boeing’s monthly production plan for the B737 Figure 57. Civil aircraft market outlook


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(units)

1 2 3

14

3 1

4 6

31

3

0

10

20

30

40

Large wide-body

Medium wide-body


2014

2034

('000 units)


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August 27, 2015


Ample order backlog and new orders

We estimate ASTK’s order backlog stood at W1.11tr at end-1H15, the majority of which is for Boeing’s most popular jet, the 737. In the aviation industry, after a company is selected as a supplier of parts, it usually continues supplying the parts until the relevant aircraft model is discontinued. Given the recent surge in civil aircraft demand and increased outsourcing of parts production, ASTK should see increasing orders through customer and product diversification.

In our view, ASTK is likely to see a further increase in orders. The company recently won orders for the Boeing 737 MAX, and is expected to receive orders from Triumph Vought, another tier-one supplier for Boeing.

In addition, ASTK will likely make a foray into the military jet offset market in 2H, which has so far been dominated by only a few players in Korea. Recently, Airbus’s A330 MRTT won the Defense Acquisition Program Administration’s (DAPA) future air-to-air refueling and transport aircraft project. As Airbus is believed to have offered an offset deal, ASTK is expected to receive orders from the aircraft company in 2H. In addition, ASTK will also likely be selected as a partner for Lockheed Martin’s offset arrangement in relation to the DAPA’s purchase of the F-35 fighter jets.

Figure 58. ASTK’s order trend Figure 59. ASTK’s order backlog as of 1H15


Figure 60. ASTK’s main clients Figure 61. New orders expected from Airbus, Lockheed Martin


0

100

200

300

400

500

06 07 11 13 14

(US$mn)

- B757 MDCD

- Bulkhead

- Section 48- B747 after-bodyassembly

- Rear spar/ jack screw

- Sec. 48 increment- B737 Max

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August 27, 2015


Synergies from Orbitech acquisition

In August, ASTK acquired a 16.6% stake in Orbitech, which specializes in machinery assembly for aircraft parts. Last year, the company formed a technological partnership with ASTK and successfully landed an order from Spirit AeroSystems. The company is now exclusively supplying bulkheads for the Boeing 737-900 via ASTK.

ASTK’s acquisition of Orbitech should help the company expand its order book, boost capacity, and save costs. ASTK plans to concentrate on large assemblies and fuselages, while Orbitech will narrow its focus on machinery assembly. ASTK should also see more outsourcing operations following the acquisition, which should prove favorable to margins. The deal is also anticipated to boost ASTK’s production capacity (currently W120bn) by roughly W50bn.

We forecast Orbitech’s aircraft parts revenue to jump from W2.3bn in 2014 to W11bn in 2015, W22bn in 2016, and W34bn in 2017. As revenue gains momentum, the aircraft parts division should swing from a loss in 2014 to a profit in 2H15, pushing up ASTK’s equity-method gains.

Figure 62. Orbitech’s machine facilities Figure 63. Business strategy of ASTK & Orbitech

Source: KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities

Figure 64. Orbitech’s aircraft business Figure 65. Change in domestic aviation industry


1 2

11

22

34

0

10

20

30

40

13 14 15F 16F 17F

(Wbn)

Civil aircraft market boom

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August 27, 2015


Earnings outlook

ASTK recorded 1H revenue of W36.9bn (+16% YoY), operating profit of W0.7bn (turning to black YoY), and net profit of W0.4bn (turning to black YoY). Earnings growth was driven by: 1) an increase in rear fuselage (section 48) production volume and yield, 2) the won’s depreciation against the dollar, and 3) a decrease in financing expenses.

We believe the company turned an important corner with operating profit returning to black, especially after posting operating losses over the past two years. This was attributable to the company’s investments of over W30bn after taking large-scale orders in 2011. Although profit levels are still modest, the company’s earnings turnaround along with its order backlog of over W1tr and new order momentum should accelerate an improvement in its fundamentals. We expect to see continued growth in both top and bottom lines in 2H.

For the full year, we project ASTK’s revenue at W82.2bn (+23% YoY), operating profit at W2.5bn (turning to black YoY), and net profit at W1.6bn (turning to black YoY). In light of the robust global aviation industry and strong order growth, we believe the company’s margins will rise steadily going forward on the back of a revenue CAGR of 20%

Table 9. ASTK’s quarterly earnings (Wbn,%)

2014 2015F 2014 2015F 2016F

1Q 2Q 3Q 4Q 1Q 2Q 3QF 4QF

Revenue 17.4 16.6 16.5 16.0 19.7 19.9 21.5 21.0 66.6 82.2 101.9

QoQ - -5 -0 -3 23 1 8 -2 - - -

YoY - - - - 13 20 30 32 9 23 24

Operating profit 0.4 -1.5 -0.9 -1.0 0.2 0.5 1.0 0.8 -3.0 2.5 6.1

QoQ - -509 -38 6 TTB 216 80 -13 - - -

YoY - - - - -53 TTB TTB TTB RR TTB 143

Pretax profit -0.7 -3.5 -1.8 -2.3 0.6 0.1 0.7 0.5 -8.4 1.8 5.2

Net profit -0.7 -3.2 -1.8 -2.2 0.4 -0.0 0.7 0.5 -7.9 1.6 5.0

QoQ - 329 -43 21 TTB RR TTB -19 - - -

YoY - - - - TTB RR TTB TTB RR TTB 205

OP margin 2.1 -9.0 -5.6 -6.2 0.9 2.7 4.5 4.0 -4.6 3.1 6.0

Net margin -4.2 -19.0 -10.9 -13.6 2.2 -0.1 3.1 2.5 -11.8 2.0 4.9

Note: All figures are based on consolidated K-IFRS


Table 10. ASTK’s annual earnings (Wbn,%)

2012 2013 2014 2015F 2016F 2017F

Revenue 44.8 60.9 66.6 82.2 101.9 127.0

YoY 34 36 9 23 24 25

Bulkhead 17.1 18.7 15.4 17.0 21.2 27.5

Section 48 0.4 10.4 18.5 25.6 32.0 39.3

U/L Deck 2.9 5.0 4.9 5.5 6.2 7.0

Stringer 4.4 4.0 3.2 4.0 6.4 9.0

Other 20.0 22.7 24.5 30.2 36.2 44.2

Operating profits 4.1 -4.1 -3.0 2.5 6.1 10.2

YoY 128 TTR RR TTB 143 66

Pretax profit 0.6 -7.2 -8.4 1.8 5.2 10.1

Net profit 0.6 -6.5 -7.9 1.6 5.0 9.1

YoY 124 TTR RR TTB 205 83

OP margin 9.2 -6.8 -4.6 3.1 6.0 8.0

Net margin 1.3 -10.7 -11.8 2.0 4.9 7.1

Revenue portion Bulkhead 38 31 23 21 21 22

Section 48 1 17 28 31 31 31

U/L Deck 7 8 7 7 6 6

Stringer 10 7 5 5 6 7

Other 45 37 37 37 36 35


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August 27, 2015


Figure 66. Section 48 monthly production Figure 67. Section 48 sales forecast


Figure 68. Revenue breakdown Figure 69. Annual earnings


0.1

2.2

3.9

5.3

6.7

8.2

0

2

4

6

8

10

12 13 14 15F 16F 17F

(units)

0

10

19

26

32

39

0

10

20

30

40

50

12 13 14 15F 16F 17F

)Wbn(

Bulkhead23%

Section 4828%

U/L Deck7%

Stringer5%

Other37%

4 4 4 5 5 9

15 25 26

34

45

61 67

82

102

127

-10

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10

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30

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90

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150

02 04 06 08 10 12 14 16F

Revenue (L)

OP margin (R)

(%)(Wbn)

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35

August 27, 2015


ASTK (067390 KQ/Buy/TP: W49,000)


Revenue 67 82 102 127 Current Assets 62 64 76 88

Cost of Sales 65 74 90 110 Cash and Cash Equivalents 14 11 13 15



Operating Profit (Adj) -3 3 6 10 Other Current Assets 1 1 2 3

Operating Profit -3 3 6 10 Non-Current Assets 55 55 57 58

Non-Operating Profit -5 -1 -1 0 Investments in Associates 0 0 0 0

Net Financial Income -4 -2 -2 -1 Property, Plant and Equipment 48 50 51 53

Net Gain from Inv in Associates 0 0 1 1 Intangible Assets 4 3 2 1

Pretax Profit -8 2 5 10 Total Assets 117 120 133 146


Profit from Continuing Operations -8 2 5 9 AP & Other Payables 13 17 22 27


Net Profit -8 2 5 9 Other Current Liabilities 2 4 4 6

Controlling Interests -8 2 5 9 Non-Current Liabilities 12 11 10 9


Total Comprehensive Profit -8 2 5 9 Other Non-Current Liabilities 4 3 2 1

Controlling Interests -8 2 5 9 Total Liabilities 70 72 80 84

Non-Controlling Interests 0 0 0 0 Controlling Interests 47 48 53 62


FCF (Free Cash Flow) -7 -4 3 1 Capital Surplus 47 47 47 47

EBITDA Margin (%) 3.0 8.5 10.8 11.8 Retained Earnings -8 -6 -2 8

Operating Profit Margin (%) -4.5 3.7 5.9 7.9 Non-Controlling Interests 0 0 0 0

Net Profit Margin (%) -11.9 2.4 4.9 7.1 Stockholders' Equity 47 48 53 62


Cash Flows from Op Activities -2 1 8 6 P/E (x) - 253.6 82.1 44.9

Net Profit -8 2 5 9 P/CF (x) 43.8 50.3 37.4 27.3



Amortization 1 1 1 1 EPS (W) -630 116 359 656

Others 5 1 1 1 CFPS (W) 191 587 789 1,083

Chg in Working Capital -1 -5 -1 -6 BPS (W) 3,720 3,491 3,850 4,506

Chg in AR & Other Receivables -2 -2 -4 -4 DPS (W) 0 0 0 0

Chg in Inventories -1 -2 -4 -4 Payout ratio (%) 0.0 0.0 0.0 0.0

Chg in AP & Other Payables 2 4 4 5 Dividend Yield (%) 0.0 0.0 0.0 0.0

Income Tax Paid 0 0 0 -1 Revenue Growth (%) 9.8 22.4 24.4 24.5

Cash Flows from Inv Activities -6 -6 -7 -6 EBITDA Growth (%) - 250.0 57.1 36.4

Chg in PP&E -5 -5 -5 -5 Operating Profit Growth (%) - - 100.0 66.7

Chg in Intangible Assets 0 0 0 0 EPS Growth (%) - - 209.5 82.7


Others -1 0 0 0 Inventory Turnover (x) 2.5 2.9 3.3 3.6

Cash Flows from Fin Activities 21 -4 5 -2 Accounts Payable Turnover (x) 6.5 5.7 5.3 5.3

Chg in Financial Liabilities - - - - ROA (%) -7.3 1.4 3.9 6.5

Chg in Equity 27 0 0 0 ROE (%) -21.4 3.4 9.8 15.7

Dividends Paid 0 0 0 0 ROIC (%) -3.4 2.6 6.6 10.0

Others - - - - Liability to Equity Ratio (%) 151.1 148.7 151.1 135.3

Increase (Decrease) in Cash 13 -3 3 2 Current Ratio (%) 106.3 107.0 109.4 118.3

Beginning Balance 1 14 11 13 Net Debt to Equity Ratio (%) 78.2 74.7 70.9 54.0

Ending Balance 14 11 13 15 Interest Coverage Ratio (x) -0.8 1.5 4.1 7.8


Aviation

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August 27, 2015


An aircraft parts supplier with a stable cash cow

Founded in 1991, Orbitech mainly provided nuclear energy safety services, such as radiation management and in-service inspections (IS), before entering the aircraft parts business in 2013. Last year, the company formed a technological partnership with ASTK and successfully landed an order from Spirit AeroSystems to supply parts for Boeing. In August 2015, Orbitech was acquired by its business partner ASTK.

Investment points: ASTK acquisition, aircraft unit turnaround, and cash cow

We believe the acquisition by ASTK will generate meaningful synergies. Regarding the aviation business, ASTK plans to concentrate on large assemblies and fuselage orders, while Orbitech intends to specialize on machinery assembly as a supplier to its parent company. Orbitech should see steady order growth, backed by ASTK’s export competitiveness. The company should also benefit from profit enhancements via reductions in indirect costs (development, sales, etc.) and investment efficiency.

ASTK has a current order backlog of W1.1tr and is expected to attract strong new orders over the next couple of years. This should lift Orbitech’s order backlog to W400-500bn from W150bn currently.

In the coming years, we forecast Orbitech’s aircraft parts revenue to jump from W2.3bn in 2014 to W11bn in 2015, W22bn in 2016, and W34bn in 2017. Revenue growth should be supported by the increased production of Boeing’s 737, as Orbitech is the exclusive supplier of bulkheads for ASTK’s section 48. As revenue gains momentum, the aircraft parts division should swing from a loss in 2014 to a profit in 2H15. The company’s other divisions (nuclear energy and ISI), which are licensed businesses with high entry barriers, should continue to serve as profitable cash cows.

Looking ahead to 2016, we expect the company to deliver more meaningful earnings growth, with revenue of W42bn (+41% YoY), operating profit of W5bn (+259% YoY), and net profit of W4.6bn (+874% YoY).


We initiate our coverage on Orbitech with a Buy recommendation and target price of W16,000. We applied a P/E of 38x, the average multiple of global aircraft suppliers, to our 2016F EPS, and assigned a 20% premium to account for 1) the company’s strong order momentum via ASTK, 2) profitable cash cow business, and 3) above-industry ROE. Looking forward, we highlight two investment points: 1) robust new orders from parent company ASTK, and 2) rapid margin recovery.

Orbitech (046120 KQ) A combination of growth and stability

FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F

Revenue (Wbn) 37 15 21 30 42 55

OP (Wbn) 0 -5 -2 1 5 9

OP margin (%) 0.0 -33.3 -9.5 3.3 11.9 16.4

NP (Wbn) 0 -9 -4 0 5 9

EPS (W) 54 -1,142 -472 37 357 660

ROE (%) 1.7 -42.8 -25.0 3.0 21.8 30.7

P/E (x) 62.0 - - 259.0 26.5 14.4

P/B (x) 0.9 1.3 1.1 5.4 4.5 3.4



Aviation Industry

(Initiate) Buy


Share Price (08/26/15, W) 9,480

Expected Return 69%

OP (15F, Wbn) 1


EPS Growth (15F, %) -


P/E (15F, x) 259.0


KOSDAQ 667.44

Market Cap (Wbn) 103


Free Float (%) 80.4


Beta (12M) 1.17

52-Week Low 1,600

52-Week High 11,800

(%) 1M 6M 12M

Absolute 9.2 273.2 274.0

Relative 27.0 245.1 218.4

50

150

250

350

450

550

8.14 12.14 4.15 8.15

Orbitech KOSDAQ

Aviation

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August 27, 2015


A combination of growth and stability

Founded in 1991, Orbitech mainly provided nuclear energy safety services, such as radiation management and in-service inspections (IS), before entering the aircraft parts business in 2013. The company built an aircraft parts factory in Haman, South Gyeongsang Province, in end-2013. And last year, the company formed a technological partnership with ASTK and successfully landed an order from Spirit AeroSystems to supply parts for Boeing.

Orbitech’s aircraft parts capex has thus far totaled W25bn, which seems a huge investment in light of its 2013 revenue of W14.7bn. The massive capex and initial losses have hurt the company’s financial health, with debt-to-equity ratio and net debt worsening to 228% and W15.2bn, respectively, in end-2014 (vs. 31% and net cash status in end-2012).

However, ASTK acquired a 16.6% stake in Orbitech in August 2015, improving the company’s financial position quickly. On the back of restructuring, improving aircraft business margins, and improving financial position, Orbitech is showing strong growth potential and stability.

Orbitech aims to reach a break-even point in the aircraft business this year by improving process efficiency, saving costs, and directly purchasing raw materials. The nuclear energy safety service unit is acting as a cash cow. We project the company’s debt-to-equity ratio to improve to 50-70%.

Table 11. Company history

Year Details

1991 Orbitech established; Started NDT business

2005 Expanded into nuclear power-related businesses (radiation safety management, measurement of personal radiation exposure, etc.)

2010 Listed on KOSDAQ

2013 Advanced into the aircraft precision components market; Built a factory in Haman

2014 Forged a technological partnership with ASTK; Signed a contract to supply aircraft precision components with US-based Spirit

2015 CEO Kim Hee-won of ASTK acquired management control of Orbitech

Source: Company data, KDB Daewoo Securities

Figure 70. Aircraft parts factory Figure 71. Aircraft parts pipeline

Source: Company data, KDB Daewoo Securities Source: Company data, KDB Daewoo Securities

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August 27, 2015


Expecting synergies with ASTK

We believe the acquisition by ASTK will generate meaningful synergies. Regarding the aviation business, ASTK plans to concentrate on large assemblies and fuselage orders, while Orbitech intends to specialize on machinery assembly as a supplier to its parent company.

Orbitech should see steady order growth, backed by ASTK’s export competitiveness. The company should also benefit from profit enhancements via reductions in indirect costs (development, sales, etc.) and investment efficiency. As for ASTK, acquisition of Orbitech should ensure stable business cooperation (ahead of order growth) and greater price competitiveness. We believe this deal will yield a win-win situation for both companies.

In the coming years, we forecast Orbitech’s aircraft parts revenue to jump from W2.3bn in 2014 to W11bn in 2015, W22bn in 2016, and W34bn in 2017. Revenue growth should be supported by the increased production of Boeing’s 737, as Orbitech is the exclusive supplier of bulkheads for ASTK’s section 48.

As revenue gains momentum, the aircraft parts division should swing from a loss in 2014 to a profit in 2H15. The company’s other divisions (nuclear energy and ISI), which are licensed businesses with high entry barriers, should continue to serve as profitable cash cows.

Figure 72. Business strategy of ASTK & Orbitech Figure 73. Sales breakdown (2014)


Figure 74. Aircraft parts business revenue Figure 75. Net debt ratio


Nuclear energy66%

Environment12%

ISI11%

Aerospace11%

1 2

11

22

34

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20

30

40

13 14 15F 16F 17F

(Wbn)

Civil aircraft market boom

-100

-50

0

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100

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200

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-5

0

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10

15

20

00 02 04 06 08 10 12 14

Net debt (L)

Net debt ratio (R)

(Wbn) (%)

Aviation

39

August 27, 2015


Earnings outlook

In 2Q, Orbitech posted revenue of W7.8bn (+88% YoY), operating profit of W800mn (turning to black YoY), and a net profit of W500mn (turning to black YoY). OP margin reached 10.8%, hitting the highest level since 2010. Improved earnings were driven by: 1) revenue growth at the aircraft unit, 2) a decline in costs associated with restructuring and interest expenses, and 3) recovery of earnings at the nuclear safety service and IS units.

For 2H, we expect to see a temporary decline in nuclear revenue, as a contract with one of two nuclear sites is slated to expire. However, we expect top-line growth to continue, boosted by strong aircraft parts revenue. 2H margins will likely continue to turn around YoY, as the aircraft unit is likely to swing to a profit. Still, the pace of growth is likely to be slow, dragged down by a decline in nuclear safety service revenue.

Looking ahead to 2016, we expect the company to deliver more meaningful earnings growth, with revenue of W42bn (+41% YoY), operating profit of W5bn (+259% YoY), and net profit of W4.6bn (+874% YoY). In particular, the aircraft parts unit is forecast to generate revenue of W22bn (+100% YoY; 52% of overall revenue). In light of robust industry and order-taking, we expect the company to deliver revenue growth (CAGR of 36% over the next three years) and margin improvement.

Table 12. Orbitech’s quarterly earnings (Wbn, %)

2014 2015F 2014 2015F 2016F

1Q 2Q 3Q 4Q 1Q 2Q 3QF 4QF

Revenue 4.1 4.2 6.0 6.5 6.2 7.8 8.2 7.5 20.8 29.8 42.0

QoQ 7 0 44 9 -4 26 5 -9 - - -

YoY 19 28 43 69 50 88 37 15 41 43 41

Operating profit -0.7 -1.1 -0.3 0.1 -0.3 0.8 0.4 0.4 -2.0 1.4 5.0

QoQ RR RR RR TTB RR TTB -51 9 - - -

YoY RR RR RR TTB RR TTB TTB 246 RR TTB 259

Pretax profit -1.2 -2.2 -0.7 -0.9 -0.6 0.6 0.3 0.3 -4.9 0.6 4.8

Net profit -1.2 -2.2 -0.7 0.2 -0.6 0.5 0.3 0.3 -3.8 0.5 4.6

QoQ RR RR RR RR RR TTB -46 14 - - -

YoY RR RR RR TTB RR TTB TTB 87 RR TTB 874

OP margin -16.2 -27.0 -5.3 2.0 -4.8 10.8 5.0 6.0 -9.5 4.7 12.0

Net margin -27.8 -52.3 -10.9 2.5 -9.1 6.2 3.2 4.0 -18.3 1.6 10.9

Note: All figures are based on non-consolidated K-IFRS


Table 13. Orbitech’s annual earnings (Wbn, %)

2013 2014 2015F 2016F 2017F

Revenue 14.7 20.8 29.8 42.0 55.3

YoY -60 41 43 41 32

Power 9.0 13.7 14.2 15.5 16.3

Environment 2.6 2.5 - - -

ISI 3.2 2.2 3.1 4.5 5.0

Aircraft parts 1.0 2.3 11.1 22.0 34.0

Operating profits -4.1 -5.2 -2.0 1.4 5.0

YoY RR RR TTB 259 76

Pretax profit -7.2 -7.9 -4.9 0.6 4.8

Net profit -6.5 -9.2 -3.8 0.5 4.6

YoY RR RR TTB 874 85

OP margin -34.9 -9.5 4.7 12.0 16.0

Net margin -62.6 -18.3 1.6 10.9 15.4

Revenue portion Power 57 66 48 37 29

Environment 17 12 0 0 0

ISI 20 11 10 11 9

Aircraft parts 6 11 37 52 61


Aviation

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August 27, 2015


Figure 76. Civil aircraft market outlook by size Figure 77. Boeing’s monthly production plan for the B737


Figure 78. ASTK’s annual earnings Figure 79. ASKT’s section 48 monthly production


0.1

2.2

3.9

5.3

6.7

8.2

0

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4

6

8

10

12 13 14 15F 16F 17F

)units(

42

47

52

0

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2014 2017F 2018F

)units(

4 4 4 5 5 9

15 25 26

34

45

61 67

82

102

127

-10

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02 04 06 08 10 12 14 16F

Revenue (L)

OP margin (R)

(%)(Wbn)

1 2 3

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3 1

4 6

31

3

0

10

20

30

40

Large wide-body Medium wide-body


2014

2034

('000 units)


Aviation

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August 27, 2015


Orbitech (046120 KQ/Buy/TP: W16,000)


Revenue 21 30 42 55 Current Assets 14 19 23 29

Cost of Sales 21 26 34 43 Cash and Cash Equivalents 2 2 2 2



Operating Profit (Adj) -2 1 5 9 Other Current Assets 6 9 10 12

Operating Profit -2 1 5 9 Non-Current Assets 28 29 31 31

Non-Operating Profit -3 0 0 0 Investments in Associates 0 0 0 0

Net Financial Income -1 -1 0 0 Property, Plant and Equipment 23 24 25 25

Net Gain from Inv in Associates -1 0 0 0 Intangible Assets 2 2 1 1

Pretax Profit -5 1 5 9 Total Assets 42 48 54 60


Profit from Continuing Operations -5 0 5 9 AP & Other Payables 2 2 3 4


Net Profit -4 0 5 9 Other Current Liabilities 2 2 2 2

Controlling Interests -4 0 5 9 Non-Current Liabilities 20 9 4 5


Total Comprehensive Profit -4 0 5 9 Other Non-Current Liabilities 2 3 3 4

Controlling Interests -4 0 5 9 Total Liabilities 29 29 30 28

Non-Controlling Interests 0 0 0 0 Controlling Interests 13 19 23 32


FCF (Free Cash Flow) 0 9 7 2 Capital Surplus 17 21 21 21

EBITDA Margin (%) 0.0 13.3 16.7 20.0 Retained Earnings -5 -4 0 9

Operating Profit Margin (%) -9.5 3.3 11.9 16.4 Non-Controlling Interests 0 0 0 0

Net Profit Margin (%) -19.0 0.0 11.9 16.4 Stockholders' Equity 13 19 23 32


Cash Flows from Op Activities 2 12 10 4 P/E (x) - 259.0 26.5 14.4

Net Profit -4 0 5 9 P/CF (x) 8.7 36.0 16.7 11.0



Amortization 0 0 0 0 EPS (W) -472 37 357 660

Others 4 1 1 1 CFPS (W) 259 263 569 865

Chg in Working Capital 0 9 3 -7 BPS (W) 2,052 1,746 2,103 2,764

Chg in AR & Other Receivables 1 -1 -2 -2 DPS (W) 0 0 0 0

Chg in Inventories 0 -1 -1 -1 Payout ratio (%) 0.0 0.0 0.0 0.0

Chg in AP & Other Payables -1 0 1 1 Dividend Yield (%) 0.0 0.0 0.0 0.0

Income Tax Paid 0 0 0 0 Revenue Growth (%) 40.0 42.9 40.0 31.0

Cash Flows from Inv Activities -3 -5 -5 -4 EBITDA Growth (%) - - 75.0 57.1

Chg in PP&E -2 -3 -3 -2 Operating Profit Growth (%) - - 400.0 80.0

Chg in Intangible Assets 0 0 0 0 EPS Growth (%) - - 864.9 84.9


Others -1 0 0 0 Inventory Turnover (x) 26.0 22.1 17.4 16.9

Cash Flows from Fin Activities -1 4 1 -4 Accounts Payable Turnover (x) 15.8 23.1 21.2 19.7

Chg in Financial Liabilities - - - - ROA (%) -8.3 1.0 9.0 15.0

Chg in Equity 0 5 0 0 ROE (%) -25.0 3.0 21.8 30.7

Dividends Paid 0 0 0 0 ROIC (%) -6.3 3.5 13.8 22.2

Others - - - - Liability to Equity Ratio (%) 228.3 156.2 130.2 87.3

Increase (Decrease) in Cash -2 0 0 0 Current Ratio (%) 159.6 94.7 88.6 126.4

Beginning Balance 3 2 2 2 Net Debt to Equity Ratio (%) 118.1 69.4 53.2 21.0

Ending Balance 2 2 2 2 Interest Coverage Ratio (x) -1.5 2.8 25.2 0.0


Aviation

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August 27, 2015


APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price

KOREA AEROSPACE(047810) 08/26/2015 Buy 143,000 Orbitech(046120) 08/26/2015 Buy 16,000

AeroSpace Technology of

Korea(067390) 08/26/2015 Buy 49,000

Equity Ratings Distribution

Buy Trading Buy Hold Sell

72.36% 13.57% 14.07% 0.00%

* Based on recommendations in the last 12-months (as of June 30, 2015)

Disclosures

As of the publication date, Daewoo Securities Co., Ltd. has participated in issuance of the securities (including DR and IPO) of AeroSpace Technology of Korea

Inc., and other than this, Daewoo Securities has no other special interests in the companies covered in this report.

Analyst Certification

The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean

securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions

expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this

report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s

area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified

herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been

promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific

recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by

overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and

private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of

the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.

Disclaimers

This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange.

Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been

independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or

correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English

translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this

report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This

report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any

securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of

the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any

laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof.

Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or

Stock Ratings Industry Ratings

Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving

Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes

Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening

Sell : Relative performance of -10%

Ratings and Target Price History (Share price (─), Target price (▬), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆))

* Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months.

* Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material

development.

* The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of

future earnings.

* The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic

conditions.

0

50,000

100,000

150,000

200,000

Aug 13 Aug 14 Aug 15

(W) KOREA AEROSPACE

0

10,000

20,000

30,000

40,000

50,000

60,000


(W) AeroSpace Technology of Korea

0

5,000

10,000

15,000

20,000


(W) Orbitech

Aviation

43

August 27, 2015


form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers,

employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a

purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or

agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment

banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to

in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to

future performance. Future returns are not guaranteed, and a loss of original capital may occur.

Distribution

United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within

Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other

persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant

Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its

contents.

United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional

investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance

thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that

they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed

herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The

securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or

sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements.

Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong

Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for

distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws

of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person.

All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or

its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its

affiliates to any registration or licensing requirement within such jurisdiction.

KDB Daewoo Securities International Network

Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc.

Head Office

34-3 Yeouido-dong, Yeongdeungpo-gu

Seoul 150-716

Korea

Two International Finance Centre

Suites 2005-2012

8 Finance Street, Central

Hong Kong, China

320 Park Avenue

31st Floor

New York, NY 10022

United States

Tel: 82-2-768-3026 Tel: 85-2-2845-6332 Tel: 1-212-407-1000

Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch

41st Floor, Tower 42

25 Old Broad St.

London EC2N 1HQ

United Kingdom

Six Battery Road #11-01

Singapore, 049909

7th Floor, Yusen Building

2-3-2 Marunouchi, Chiyoda-ku

Tokyo 100-0005

Japan

Tel: 44-20-7982-8000 Tel: 65-6671-9845 Tel: 81-3- 3211-5511

Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office

2401A, 24th Floor, East Tower, Twin Towers

B-12 Jianguomenwai Avenue

Chaoyang District, Beijing 100022

China

Room 38T31, 38F SWFC

100 Century Avenue

Pudong New Area, Shanghai 200120

China

Suite 2103, Saigon Trade Center

37 Ton Duc Thang St,

Dist. 1, Ho Chi Minh City,

Vietnam

Tel: 86-10-6567-9299 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000

Daewoo Investment Advisory (Beijing) Co., Ltd. Daewoo Securities (Mongolia) LLC PT. Daewoo Securities Indonesia

2401B, 24th Floor, East Tower, Twin Towers

B-12 Jianguomenwai Avenue,

Chaoyang District, Beijing 100022

China

#406, Blue Sky Tower, Peace Avenue 17

1 Khoroo, Sukhbaatar District

Ulaanbaatar 14240

Mongolia

Equity Tower Building Lt.50

Sudirman Central Business District Jl.

Jendral Sudirman Kav. 52-53, Jakarta Selatan

Indonesia 12190

Tel: 86-10-6567-9699 Tel: 976-7011-0807 Tel: 62-21-515-1140

ready to fly high - mirae asset

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