Korean shipyard shares rise on second-quarter earnings expectations

[Courtesy of HD Korea Shipbuilding & Offshore Engineering]

Shares of South Korean shipbuilders are rising on expectations of strong second-quarter earnings as ship prices climbed to a level seen at start of the latest peak period of the shipbuilding industry last week.

According to the Korea Exchange on Wednesday, shares of Hanwha Ocean Co. has more than doubled this year to 39,300 won ($30.46)from 18,950 won at the end of last year. HD Korea Shipbuilding & Offshore Engineering Co. has risen by about 70 percent to 126,000 won on Wednesday from 77,000 won in December. Over the same period, shares of Samsung Heavy Industries Co. and HD Hyundai Heavy Industries Co. also gained 33.4 percent and 11.3 percent, respectively.

The biggest factor behind the stock price increase is expectations for improved earnings in the second quarter. According to market data tracker FnGuide Inc., HD Hyundai Heavy‘s second-quarter revenue is expected to reach 2.90 trillion won, an increase of 34.1 percent year-on-year, and report an operating profit of 81.7 billion won from a loss.

The outlook for HD Korea Shipbuilding, the holding company of HD Hyundai Heavy, is even brighter. The company is expected to post a revenue of 5.47 trillion won and an operating profit of 124.2 billion won in the second quarter. Revenue is expected to increase 30.6 percent year-on-year and operating profit is expected to turn positive.

HD Korea Shipbuilding’s orderbook looks much better than its competitors. To date, the company has secured orders for a total of 93 ships valued at $11.42 billion. This is 72.6 percent of its annual order target of $15.74 billion. Order backlog stands at 153 ships valued at $21.63 billion.

Hanwha Ocean, formerly known as Daewoo Shipbuilding & Marine Engineering Co., is expected to achieve a revenue of 1.94 trillion won and an operating loss of 12.5 billion won in the second quarter, narrowing from a loss close to 100 billion won. This outlook seems to have a positive impact on the company’s stock.

[Courtesy of Hanwha Ocean]

This year, Hanwha Ocean has secured five orders worth $1.06 billion, including four liquefied natural gas (LNG) carriers and one depot maintenance vessel. This represents 15.2 percent of the target amount of $6.98 billion. The total order backlog stands at 131 ships valued at $29 billion.

Since being incorporated into Hanwha Group, Hanwha Ocean has been actively seeking to secure orders. In particular, the company has signaled its intention to become a leading naval shipbuilder by winning the remaining orders of the Defense Acquisition Program Administration’s Ulsan-class BATCH-III project to build six state-of-the-art 3,500-ton frigates to replace aging ones in its fleet. The first ship, which was awarded to HD Hyundai Heavy in March 2020 and the second through fourth ship to SK Oceanplant Co., formerly Samkang M&T Co., last year. The DAPA is expected to accept bids for the remaining two ships later this month

Samsung Heavy, meanwhile, is expected to post 2.19 trillion won in revenue and 356 billion won in operating profit in the second quarter. Revenue is expected to rise by 41.6 percent compared to the same period last year, and swing from an operating loss. The company has secured nine orders worth $3.2 billion, including six LNG carriers, two crude oil tankers, and one floating liquefied natural gas (FLNG) facility.

Some industry insiders say that the shipbuilding cycle is back. The Newbuilding Price Index, a leading indicator of the shipbuilding industry, has entered a level seen in the peak period. In fact, the index recorded 170.76 on June 16, a 0.29-point increase compared to the previous week.

“Despite repeated freight rate declines, the Newbuilding Price Index has already surpassed the level seen at the end of 2006, the first year of the peak period,” said Han Young-soo, an analyst at Samsung Securities Co. “Orders for LNG carriers and container ships are continuing, contrary to expectations, and shipbuilders’ profitability is gradually improving as their low-priced orders are being depleted.”