Korean shipbuilding stocks gain momentum on bright earnings prospect

2023.05.23 10:00:02 | 2023.05.23 12:26:48

Daewoo Shipbuilding & Marine Engineering Co. headquarters in Seoul [Photo by Lee Seung-hwan]이미지 확대

Daewoo Shipbuilding & Marine Engineering Co. headquarters in Seoul [Photo by Lee Seung-hwan]

South Korea’s shipbuilding stocks are rising on the back of expectations that their profitability will improve over the next three years as their portfolio of high-value ships expands.

Shares of Daewoo Shipbuilding & Marine Engineering Co. (DSME), which is set to be renamed Hanwha OCEAN on Tuesday following the acquisition by Hanwha Group, rose 11.75 percent on Monday from the previous session.

Other shipbuilding stocks gained ground.

HD Hyundai Heavy Industries Holdings Co. climbed 5.49 percent, Samsung Heavy Industries Co. 4.58 percent, and Hyundai Mipo Dockyard Co. 9.7 percent.

The gain is being led by rising shipbuilding prices despite falling new orders won by shipbuilders.

The prices of building new ships have hit a record this year to reach a level in 2009 when the country’s shipbuilding industry was in its heyday.

According to Clarkson Research, the New Building Price Index, which measures the average price of building new ships, reached 168.1 as of May 12, up 3.4 percent from 162.51 in January.

The index has gone up above the 160 range since May, a level reported in 2009 when Korean shipbuilders enjoyed the highest-ever revenue by raking in orders at low prices.

In particular, the price of liquefied natural gas (LNG) carriers, the mainstay of local shipbuilders, has been on the rise at a rapid pace.

According to NH Investment & Securities Co., the average price of an LNG carrier is estimated at 340.1 billion won ($258 million) per vessel, up 32 percent from 2021, when ship prices began to rise.

Daewoo Shipbuilding & Marine Engineering Co.’s liquefied natural gas (LNG) carrier [Photo provided by DSME]이미지 확대

Daewoo Shipbuilding & Marine Engineering Co.’s liquefied natural gas (LNG) carrier [Photo provided by DSME]

“Global deliveries of large-scale LNG carriers increased from 27 vessels in 2022 to 45 this year and will rise to 80 per year by 2026,” said Han Young-soo, an analyst at Samsung Securities Co. “Revenue of shipbuilders for LNG carriers will start to grow in the second half of this year.”

Market watchers use order backlogs to predict the paths for shipbuilding stocks amid rising shipbuilding prices, as order backlogs are an accurate indicator of profitability for the Korean shipbuilders that have lifted ship prices by reducing construction slots.

An increase in order backlogs means higher profitability, allowing shipbuilders for stronger bargaining power.

“By sales, Korean shipbuilders have an order backlog of up to 3 years,” said Jung Yeon-seung, an analyst from NH Investment & Securities Co.

Jung added that they have changed their strategy of winning orders by focusing on improving the quality of orders.

Improvements in profitability are expected to filter into future earnings in the second half of this year. Shipbuilders will also likely see growth in earnings over the next three years as high-value ships will be on the rise.

“Shipbuilders’ earnings are expected to swing to the black in the second half,” said Yoo Jae-sun, an analyst at Hana Financial Investment Co. “The pace of growth in margins will quicken every year as high-value ships will increase over the next three years.”

The upward trend in DSME shares, in the meantime, was driven by positive expectations of the acquisition by Hanwha Group and the subsequent rebranding. The expectations lifted shares of Hanwha Corp. by 6.94 percent on Monday.

DSME is poised to hold a shareholders’ meeting on Tuesday to finalize the items on the agenda, including changing the shipyard’s name to Hanwha Ocean and appointing new executives.

By Kang Min-woo and Han Yubin

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