Gears to be exported to the U.S. for resource development / Courtesy of Daewoo Securities

By Lee Gyu-sun

Set up in 2000, Woorim Machinery mainly manufactures industrial gear units and gear reducers for excavators.

Most of Doosan Corporation Mottrol’ travel motors used in 10-ton or above excavators are built with Woorim’s gear reducers.

Woorim is heavily dependent on Doosan, Korea’s hydraulic industry leader, and its earnings have fluctuated depending on the performance of China’s excavator market.

It is usually difficult for a firm in the gear sector of the construction machinery part industry to diversify the client base. Consequently, a value of a gear maker depends more on the earnings of a client ― a hydraulic component maker ― rather than diversification of clients.

Industrial gear units called industrial reducers have many potential consumers ― the steel, shipbuilding, construction and heavy industries sectors. The domestic market for industrial reducers is estimated to be as large as 200 billion won with the market leader being Hyosung. Woorim has some 10 percent of the market.

About 60 percent of the industrial reducer sales come from exports. Exports to North America recently jumped due to the demand for gear units for oil drilling. Because of its brand exposure abroad, the firm’s brand value and exports are expected to improve.



Four favorable factors

Daewoo Securities sees four factors that could improve Woorim’s corporate value.

Firstly, the market for gear reducers in excavators is expected to improve in the second quarter after hitting a low in the first.

The Chinese excavator market would enter its peak between March and May. After the Chinese New Year holidays, orders for key hydraulic components by Chinese firms are increasing. Chinese companies’ share in the excavator market is increasing, but they are yet to manufacture key hydraulic components on their own.

Targeting the market, Doosan completed its Chinese plant in February and will begin operation in March. Doosan says in its 2012 business plan that the revenue will increase 21 percent year-on-year and the portion of the sales in China against the total will go up from 37 percent to 43 percent. Woorim is likely to grow along with Doosan.

Heavy dependence on one company has been a discount factor for Woorim’s stocks, but the issue will gradually be resolved beginning this year.

Japanese hydraulic part maker Nabtesco has outsourced production to Woorim after the massive earthquake last spring while Woorim will also begin supplying parts to Hyundai Heavy Industries for massive 80-ton excavators. The portion of the sales to Doosan against the total is expected to decrease from 95 percent to 80 percent in 2012.

Woorim is also a likely beneficiary of resource development in North America including excavating shale gas in the U.S. and oil sand in Canada.

Industrial gear units are key consumable parts of drilling equipments, so the demand for them would increase.

Since late 2010, Woori has been supplying reducers to an unnamed North American industrial gear manufacturer, and the sales to the firm would increase from 1 billion won in 2010 to 11 billion won in 2011 and 13 billion in 2012. At the same time, the total industrial reducer sales would increase from 18.5 billion won in 2010 to 28 billion won in 2012 and 43 billion won in 2012. In 2011, the North American sales accounted for 40 percent of the industrial reducer unit’s total sales.

Furthermore, the firm has laid a foundation for growth through a massive facilities expansion, the first of such since 2007.

The 14,215-squater-meter new plant’s production capacity is estimated to be 100 billion won. With the existing facilities’ 80-billion-won capacity, the total would be 180 billion won. The new facilities will produce industrial reducers.

Woorim’s financial structure is solid. The firm financed the facilities expansion with its own cash without borrowing. Even after paying for the expansion, it still has cash left in its account. The investment is expected to be completely recouped by 2014.

Earnings

Woorim Machinery’s 2011 sales is estimated at 70 billion won ― up 39 percent from a year ago ― while the operating profit would grow 71 percent to 11.6 billion won. The operating profit to sales ratio would be 16.5 percent ― a satisfactory outcome, considering that the fourth quarter sales of gear reducers for excavators was sluggish and the profitable industrial reducer unit’s sales counted just 40 percent of the total.

In 2012, Daewoo Securities expect the record earnings momentum with the revenue at 95 billion won, the operating profit at 15.7 billion won and the net profit at 12.4 billion won.

Woorim’s stock is currently traded at its price being seven times as much as its 2012 forecasted earnings per share. Considering the potential record high earnings momentum and fundamental changes to the firm this year, the current stock price seems to be very much undervalued.

Lee Gyu-sun is the leader of KDB Daewoo Securities’ small cap team. Kim Da-ye, a Business Focus staff reporter, translated and edited this report.