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DSME’s Financial Future Uncertain

DSME’s financial structure remains uncertain following the cancellation of its acquisition by HHI Group.

As the planned merger between Hyundai Heavy Industries Group (HHI Group) and Daewoo Shipbuilding & Marine Engineering (DSME) has been canceled, DSME’s financial structure remains uncertain.

DSME is presumed to have suffered a net loss of 1.3 trillion won in 2021. Sales fell nearly 40 percent in 2021 from a year earlier due to a severe shortage of work three to four years ago. Its deficit snowballed due to the large-scale provisions prompted by a surge in steel plate prices.

Industry insiders say that the sharp increase in steel plate prices dealt a particularly heavy blow to DSME.

As of the third quarter of last year, DSME’s debt ratio stood at 298 percent. It jumped by 130 percentage points from the end of 2020 (167 percent). Stock analysts estimate DSME’s net loss to reach 150 billion won in 2022. Therefore, its debt ratio is expected to easily exceed 310 percent.

DSME’s biggest problem is that its ability to raise cash to pay off debts is weakening. As of the third quarter of 2022, DSME’s current ratio stood at 93 percent, with its quick asset ratio hitting 78 percent.

The current ratio is calculated by subdividing current assets with current liabilities. It is a popular metric used to assess a company’s short-term liquidity with respect to its available assets and pending liabilities. In other words, it reflects a company’s ability to generate enough cash to pay off all its debts once they become due. The quick asset ratio is calculated by excluding inventory assets that are difficult to cash in immediately. It is a more conservative indicator than the current ratio.

Usually, if a company’s current ratio is more than 150 percent and its quick asset ratio is more than 100 percent, it means that the company is highly stable. But DSME’s figures were well below the baseline.

Hyundai Heavy Industries posted a net loss of 350 billion won in the first half of 2021, but during the same period, its debt ratio stood at 144 percent, its liquidity ratio 133 percent, and its quick asset ratio 117 percent.

DSME posted US$10.8 billion in order intake in 2021, exceeding its order target of US$7.7 billion. For this reason, some observers say that its deficit is expected to shrink this year and finally, it will turn to a surplus (net profit of 50 billion won) from 2023.

However, it takes two to three years for orders to be reflected in actual sales, and considering short-term loans and shipbuilding costs, DSME is highly likely to face a liquidity crisis in 2022, analysts forecast.

In consideration of these concerns, state-run banks such as Korea Development Bank have provided DSME with a credit line of 2.9 trillion won.

Initially, HHI Group planned to improve DSME’s financial structure after acquisition. But with the plan shattered, DSME has been put into a situation where it has no choice but to ask the government to come to its rescue.
Source: Business Korea

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