Korean shipbuilding stocks rebound on expectations for improved earnings

HD Hyundai Heavy Industry Co.’s shipyard in Ulsan. [Courtesy of HHI]

South Korean shipbuilding stocks managed to rebound Monday after weeks of decline as investors perceive prices are too low considering expectations for improved third-quarter earnings.

Shares of HD Hyundai Heavy Industries Co. (HHI) finished 9.16 percent higher at 131,100 won ($98.9) on Monday while those of HD Korea Shipbuilding & Offshore Engineering Co. 7.69 percent higher and Hanwha Ocean Co. 7.57 percent. Samsung Heavy Industries Co. and other shipbuilders also gained ground.

The upswing has been driven by large-scale buying rally on expectations for improved earnings.

Shipbuilding stocks reached their peak in early August but concerns about overblown prospects for the stocks led to a plunge in their prices.

Shares of Hanwha Ocean plunged 25.13 percent this month as of August 25, those of HD HHI 14.03 percent, and Samsung Heavy Industries 9.08 percent.

Prospects for shipbuilders’ earnings, however, remain bright as they enjoyed a strong streak of orders recently. Demand for high-value vessels has also risen, contributing to their sales.

According to the data released by Samsung Securities Co., major shipbuilders’ order backlog stood at 115 trillion won this year, up 16 percent from a year ago.

The New Shipbuilding Index, an indicator of shipbuilding profitability, is also headed north, reaching 173.56 on August 25, up 7.2 percent from the beginning of the year.

Shipbuilders are projected to perform well in the third quarter.

According to financial data tracker FnGuide Inc., HD HHI is projected to see a nearly eightfold surge in its operating profit for the third quarter, from 14.3 billion won last year to 102.5 billion won.

Following a massive operating loss of 627.8 billion won in the third quarter last year, Hanwha Ocean is projected to post an operating profit of 7.4 billion won.

Challenges, however, remain, such as those related to labor shortage.

Samsung Securities found that major shipbuilders increased their labor capacity during the first two quarters of this year, with a rise of 2.5 percent from the end of last year.

“However, the shipbuilders have still found their labor shortage severe,” said Shin Young-soo, an analyst at Samsung Securities.

Another worrying factor involves falling shipping freight rates, which have been hindering shipping companies’ order capacity. Cumulative global newbuilding orders this year totaled 858 vessels as of July, down 26.7 percent from 1,170 vessels a year earlier.