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S. Korea Shipbuilding: 1Q20 Preview: Some Momentum Still Intact

Orders weak overall despite freight hike, but likely to continue for product/LNG carriers

Freight rates, based on data from Clarksons Research, climbed 75% YoY in 1Q20. However, global shipbuilding order placements dropped 82.1% YoY, remaining at just 4.2% of the initial full-year forecast of 75.31mn DWT. Despite favorable freight rate trends, order placements have remained sluggish with economic uncertainties raised by the COVID-19 pandemic. Order placements were particularly weak for bulk carriers and containerships, which represent 50.7% of the total, due to their high sensitivity to economic conditions. Meanwhile, with low-sulfur fuel oil (LSFO) accounting for 71.3% of total fuel oil sales in Singapore, market conditions remain upbeat for product carriers. Mozambique, Qatar and Yamal LNG projects are also proceeding as scheduled. As such, we believe momentum still exists for product/LNG carriers.

1Q20 results to exceed consensus estimates on 5.3% QoQ increase in USD/KRW rate

The four shipbuilders under our coverage are expected to have secured combined operating profit of KRW215.5bn (-2.3% YoY) on sales of KRW8.6tr (+14.8% YoY) for 1Q20, exceeding the consensus estimate by 84.8%. We now believe 1Q20 operating profit exceeded market expectations at Korea Shipbuilding & Offshore Engineering, Hyundai Mipo Dockyard and Daewoo Shipbuilding & Marine Engineering, backed by the 5.3% QoQ increase in USD/KRW exchange rate. Combined order intake is estimated at USD3.4bn (-24.1% YoY) for 1Q20.

PBR below 0.47x seen excessively low; Retain Hyundai Mipo Dockyard as top pick

The average PBR valuation of shipbuilders dropped to lows of 0.43x this year, weighed down by the COVID-19 pandemic and oil price declines. With order placements continuing for product/LNG carriers, stocks seem excessively undervalued at present considering that PBR lows stood at 0.47x in 2015-2016 amid the drop in shipbuilding prices below profit levels, decline in order backlog, and weaker-than-expected earnings from offshore businesses. We now expect order placements to resume for LNG carriers in May-June and freight rates to remain high for product carriers on strong demand for LSFO shipments. Hyundai Mipo Dockyard remains our top pick in the shipbuilding sector with product carriers accounting for 65.7% of the company’s total order intake. Korea Shipbuilding & Offshore Engineering will likely see its shares rally in May-June, driven by momentum from LNG carrier order placements.
Source: Business Korea

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