Youshin Engineering Corporation 054930.KS
December 12, 2011 - 2:33am EST by
khs824
2011 2012
Price: 10,800.00 EPS $0.00 $0.00
Shares Out. (in M): 3 P/E 0.0x 0.0x
Market Cap (in $M): 32 P/FCF 0.0x 0.0x
Net Debt (in $M): -59 EBIT 0 0
TEV ($): -27 TEV/EBIT 0.0x 0.0x

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Description

We recommend a long position in Youshin Engineering Corporation (054930.KS), a Korean domestoic construction management company listed in the South Korean stock exchange.
 
The investment is a deep net-net idea, downside protected with abundant cash and assets.  As any living professional knows, construction and real estate worldwide are shot to the ground.  Such is also the case in Korea.  Homebuilders suffer from oversupply of nationwide development projects which are all held in their balance sheets as invetory, while financing these projects in the first place with heavily levered off-balance-sheet SPVs whose debts the homebuilders are collaterally liable for.  Likewise, real estate investors, usually highly levered, bought into the real estate bubble just at the wrong time, just to struggle deleveraging through asset sales -- an unsuccessful endeavor as everyone else is doing the same.  In this regard, the historical recession in real estate is not unsubstantiated.
 
In the case of Youshin, however, it is analogous to baby being thrown out with the bathwater.  Youshin is a construction management company, like an auditing firm for construction projects.  The company does not suffer from any of the risks that homebuilders, developers, or other real estate investors suffer: namely, 1) undersubscribed housing inventory in the books, 2) high financing costs, and 3) recourse debt held in off-balance-sheet SPVs.  It is a mere service/consulting provider to real estate contractors.  Thus, the Company is much insulated from the actual problems related to the construction and real estate sector.  
 
Moreover, the Company holds KRW 59 billion in net cash and non-operating assets while the market cap is only KRW 32 billion (see below valuation).
 
Majority of the shares is owned by the founder and CEO, Mr. Cheon, who is the oldest member of the Korean construction industry.
 
The stock market truly threw out the baby with the bathwater in the case of Youshin, as all construction and real estate stocks were systematically oversold since mid-2007.  We anticipate a minimum upside of 150~200% at the current price level.
 
Valuation Summary
Basic O/S (shares) 3,000,000
Treasury (shares) 0
Net O/S (shares) 3,000,000
Stock Price (KRW) 10,800
Market Cap (KRW bil) 32
Net Debt (KRW bil) (59)
TEV (KRW bil)

(27)

 
In USD terms (assuming 1 USD = 1,100 KRW)
Stock Price (USD) 9.82
Market Cap (USD mil) 29.45
Net Debt (USD mil) (53.60)
TEV (USD mil) (24.14)
 
 
A. Asset-based valuation
Item Ratio Profit Potential 
PBR 0.33 203%
P/NRV(Net Realizable Value) 0.41 143%
P/Net-Cash 0.55 82%
 
 
B. Normalized Earnings Valuation
Est. Normalized FCF 5
Fair EV (r = 13.3%) 36
Current EV (27)
Profit Potential 193%
 
 
<Net Realizable Value, i.e. Proxy for liquidation value>
(Units: KRW billions, note for round-off error)
BV NRV Footnotes
Assets
Current Assets 102 99
Cash & Cash Equivalents 51 51 (1)
Account Receivables 49 48 (2)
Miscellaneous Current Assets 2 0 (3)
Non-Current Assets 48 31
Long-term Bank Deposits 7 4 (4)
Long-term Bonds 14 3 (5)
Investment Real Estate 0 0
PP&E 24 24 (6)
Intangible Assets 2 0
Total Assets 149 130
Total Liabilities 51 51
Total Equity (NRV) 98 79
 
(1): Bank deposits
(2): Company traditionally have a very low write-off rate.  But in favor of conservatism, wrote off all of overdue receivables.
(3): Prepaid expenses.  Wrote off 100%.
(4): Bank deposits
(5): Most of it is Company's deposit loan to the majority shareholder, in the form of a security deposit for real estate lease.  Wrote off 100% of it, just in case the majority shareholder does not pay back.
(6): Only calculated the market price of all land.  Wrote off 100% of buildings, plants, etc.

Catalyst

No known catalyst
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