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Shipbuilding: Uncertainties Already Factored in, Focus on Order Intake

In December 2021, the Supreme Court ruled in favor of workers at Hyundai Heavy Industries Group in a lawsuit over ordinary wage. Shipbuilders are expected to have set aside provisions in 4Q21 — an estimated KRW400bn at Korea Shipbuilding & Offshore Engineering, KRW300bn at Hyundai Heavy Industries, and KRW100bn at Hyundai Mipo Dockyard. We believe 70% of the provisions would have been booked as operating expense and the remaining 30% as non-operating expense.

The EU is set to release the results of its probe into Korea Shipbuilding & Offshore Engineering’s acquisition of Daewoo Shipbuilding & Marine Engineering on January 21 in Korea Standard Time. The EU is unlikely to approve the deal on concerns that the merger could reduce competition in the marketplace and create monopoly especially for LNG carriers. These negatives are already reflected in the share price correction that started in December.

Orders to grow in earnest from the beginning of the year

We previously expected shipbuilding orders to be placed in earnest from 2Q22. A recovery in order placements for LNG carriers was confirmed in 4Q21. Orders for at least 51 units are planned this year. We also projected tanker order placements to resume gradually from 2Q22 due to an increase in decommissioned vessels and an upturn in demand.

In contrast to previous expectations, Hyundai Heavy Industries Group is off to a good start this year. It secured an USD1.4bn order in the first week of January, attaining 9.4% of its merchant vessel order target for 2022. With the Shanghai Containerized Freight Index (SCFI) still high and contracts deferred from 4Q21 likely to be signed, strong order intake should continue from 1Q22 onwards driven by LNG carriers and containerships.

Share prices to recover in 1Q22 faster than previously anticipated

We revise our projection of the strength of quarterly order placements for 2022 from 1Q<2Q>3Q<4Q to1Q>2Q>3Q<4Q. Shares are projected to rebound from 1Q22 instead of 2Q22 despite uncertainties regarding ordinary wage and the EU’s antitrust decision on the KSOE-DSME merger. We favor Hyundai Heavy Industries Group in the shipbuilding sector. Last year the group delivered on its annual order intake guidance early in 3Q21 and focused on newbuilding prices from 4Q21. Having more orders deferred from 4Q21 vs. competitors, a steady inflow of orders is expected in 1Q22. Our preference among the group’s three shipbuilders is Hyundai Mipo Dockyard in view of higher profitability than peers and share undervaluation despite order competitiveness.
Source: Business Korea

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