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