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2022 Outlook: Shipbuilding: Shift towards Green Ship Technologies

Taking a mid/long-term view, we maintain a Positive stance towards the shipbuilding sector. The sector is expected to see healthy new orders next year. In 1H22, LNGC orders from Qatar are expected, and in 2H22, the tanker segment should recover. While containership order placement is to shrink y-y in 2022, the figure should still remain above the past average. Margins should improve in line with higher ASPs.

We believe that ship prices will remain strong next year. A number of Korean shipbuilders have landed orders to last through 2024, and are expected to raise ship prices. Adoption of green technologies to meet stricter environment regulations should also bolster ship prices. Shippers are likely to introduce in earnest new ships with green technologies from 2H22. A rise in raw material costs should push up ship prices as well.

We present Hyundai Mipo Dockyard (HMD) as our top pick for the sector, and HSD Engine as our preferred play. The two companies rely the lest on LNGCs among domestic firms, indicating that they will likely keep growing even after the LNGC order boom induced by Qatar LNGC project ends. Also, they boast simple governance structures and financial soundness, and their business portfolios do not overlap with that of other listed firms.

I. Recent logistics bottlenecks bode well for shipbuilders

The recent logistics bottlenecks bode well for shipbuilders. With container freight rates soaring, new orders for containerships have jumped roughly 7x from the recent 5-year average. Korea boasts 39% of new orders placed in 2021. Also, new orders for LNGCs have increased 19%, and tanker orders have climbed 14%. As a result, Korean shipbuilders are estimated to achieve US$46.4bn worth of new orders in 2021, which represents a 3.2x increase y-y. They are also likely to secure over 3 years worth of order backlog this year.

II. Amid ample order backlog, shipbuilders raising ship prices

Affected by more than 3 years worth of order backlog, shipbuilders are boosting ship prices. We predict that their new orders will be 24% down y-y next year, but will still be 2.3x higher than the 2016~2020 average. As their order backlog is ample and steel place prices have jumped 60%, shipbuilders no longer need to win low-margin orders. Given such, shipbuilders have raised prices for some types of ships this year, and are likely to increase prices across all types of ships next year.

III. To enjoy competitive edge via eco-friendly technologies

We believe that Korean shipbuilding companies will enjoy market share expansion based upon their superiority in terms of eco-friendly technologies. With the IMO’s new regulations (EEDI and EEXI) set to take effect from 2023, shipping companies need to convert their old vessels or issue newbuilding orders. Korean shipbuilders boast superior technological edge in environmental technologies such as gas-powered engines, with more than 60% of their combined order backlog consisting of eco-friendly vessels. In addition, Korean shipbuilders are developing future technologies, including ammonia-fueled vessels.

IV. Top pick

We suggest HMD as our sector top pick for 2022, and introduce HSD Engine as our second-preferred play. Given their low exposure to LNGC, both HMD and HSD Engine should maintain sound earnings growth even after the Qatar LNGC boom ends. In addition, their straightforward governance structures and distinctive businesses offer appeal. We forecast that global tanker orders (the mainstay for HMD) will expand 60% in 2022. Meanwhile, HSD Engine should continue to enjoy robust top-line growth through entry into the Chinese market.
Source: Business Korea

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