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Shipbuilding Industry: Energy Infrastructure Provider

Thanks to a rapid expansion of global newbuilding orders for containerships and LNG carriers over 2021~2022, the order backlog drought at domestic shipbuilders seen since 2018 has come to an end. We note that the two-year-long newbuilding boom has been driven by greater demand for vessels to cope with rising trade volume of consumer goods and expanding natural gas development. Recently, however, concerns towards weakening new order momentum have begun to grow.

Domestic shipbuilders’ order backlog to continue rising in 2023
We believe that newbuilding orders in 2023 will exceed those seen in 2018 and 2019, with overall order backlog continuing to climb y-y, driven by: 1) replacement demand for old oil tankers; 2) steady LNGC order flow; 3) a resumption of offshore plant orders for natural gas development; and 4) orders for alternative fuel-powered vessels. Combined newbuilding orders at Korea’s top-four shipbuilders (HHI, HMD, DSME, and SHI) will likely slip 15% y-y to US$28.9bn, but their order backlogs should still climb 9% y-y to W99.2tn.

To achieve profit over mid/long term
In 2023, we expect domestic shipbuilders to see a reduction in fixed cost burden backed by full-fledged shipbuilding volume and sales increase. Despite having to allocate large-scale provisioning in response to rising plate prices since 2H21, margins are to improve at domestic shipbuilders in 2023, on the downward stabilization of steel prices. While labor and outsourcing costs are likely to continue rising in 2023, the cost increase should be fully offset once higher shipbuilding prices are reflected. To address the widely expected labor shortage issue, the government is working to provide policy support. In line with improved dock operation efficiency, based on: 1) a rising portion of consecutive orders (for which shipbuilders can apply the same design); and 2) increasing orders for oil tankers and offshore plants, the profit improvement trend should sustain over the long term.

Present Positive rating on shipbuilding industry
We initiate coverage on the industry with a Positive rating. From 2023, we expect to see a cycle of solid order and order backlog growth, sales growth, margin improvement, and capital increase. Shipbuilders are expected to turn to profit, as well. In line with greater belief in margin improvement, P/B valuations should enter an expansionary phase again.

Top pick: DSME, Second-preferred pick: SHI
We present DSME as our sector top pick and SHI as our second-preferred pick. Shipbuilders are forecast to enjoy valuation re-rating only when lackluster orders for commercial vessels are offset by orders for special-purpose vessels, offshore wind-turbine installation vessels, and offshore plants in 2023. DSME is predicted to see a reduction in discount rate thanks to capital injection from the Hanwha Group, and SHI should bask in sound FLNG order momentum.
Source: Business Korea

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