Shipbuilding Stepping Into Growth Phase Despite Backlogs

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NH Investment & Securities maintains a Positive rating on the shipbuilding sector in light of expanding order backlogs and solid top-line growth. Combined 4Q21 new orders at the top-four Korean shipbuilders are estimated at US$10.3bn, with their annual total likely reaching US$49.1bn (+103% y-y), says an article published in BusinessKorea.

Optimistic outlook for 2022-2023

With a sharp new order expansion last year, sales should continue rising throughout 2022 and 2023. In addition, order backlog growth is set to sustain. We note that HHI Group presented US$17.6bn as a 2022F new order target for its shipbuilding/offshore business. Though the figure is down 23% y-y, we believe this should be sufficient to drive the business’s top-line expansion.

Increasing interest in the shipbuilding sector

Amid growing expectations for margin improvement and new hires in line with sales growth, attention on the shipbuilding industry is rising. According to some media reports, shipbuilders need to hire around 8,000 new employees in order to both keep up with increased to-be-delivered ship volume and finish testing and handovers in time. Margins should also improve on rising ship prices. In 4Q21, prices grew 1.8% for tankers, 2.9% for containerships, and 1.9% for LNG carriers, which represent on average a 22.8% rise from a year ago.

Last settling up before exiting from the recession

Ordinary wage-related costs and to-be-delivered rig ship costs to be reflected as one-off expenses in 4Q21. In December, HHI Group lost in an ordinary wage litigation case, and as a result, companies under HHI Group, including HHI, likely reflected potential costs in their 4Q21 results. Also, costs related to SHI’s undelivered drillships are reflected in our forecasts. In addition to provisioning for the sale price reduction, SHI should book extra maintenance and repair costs until it finds new buyers. 

4Q21 earnings estimates

Sales and recurring profits at shipbuilders likely remained similar q-q in 4Q21. That said, we believe that Hyundai Heavy Industries (HHI) booked one-off costs from the loss of its ordinary wage-related lawsuit, resulting in large-scale operating losses. At marine equipment makers, limited profits are likely in light of the settlement process with shipbuilders.

2022 forecasts

From 2022, however, shipbuilders are predicted to experience both top-and bottom-line growth thanks to higher ship prices and greater delivery volume. Marine equipment makers are also forecast to see greater output. However, with LNG carrier insulation players already running at near full capacity, top-line growth should be limited despite ample order backlog.

Rapid demand growth

In 4Q21, the four major domestic shipbuilders likely won US$10.3bn (-14.7% q-q) in orders. The q-q decrease is attributable to shippers’ worsening investment sentiment amid the spread of Omicron. Nevertheless, orders at the four firms likely doubled y-y to US$49.1bn in 2021.

Demand to remain stable

The effects of the Omicron crisis are expected to ease in the near future. Tanker and container freight rates are on the up, and demand for LNG carriers tends to move independently of the spread of diseases. Sizable orders for containerships and LNG carriers have already been placed since the beginning of the year. Orders came to US$2.74bn in the first two weeks of 2022, already reaching 6% of the 2020 level.

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Source: Bussiness Korea

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