After Earnings Announcement, Shipbuilding Stocks Slump... Expectations for Order Rebound

Clear Rebound After Decline Until Mid-Month
"Reflecting Strong New Orders and Expectations for Price Increases"

[Asia Economy Reporter Gong Byung-sun] Shipbuilding stocks, which had been struggling with poor performance in the second quarter of this year, have recently been rebounding. This is interpreted as reflecting steady order contracts and expectations that the industry conditions will improve in the long term.

As of 9:44 a.m. on the 26th, Daewoo Shipbuilding & Marine Engineering recorded 27,250 KRW, up 1.11% (300 KRW) from the previous day. Although this aligns with the recent rebound in the KOSPI, the recovery trend of shipbuilding stocks has been more pronounced since the 23rd. From the 23rd to the 25th, the stock prices of Samsung Heavy Industries, Daewoo Shipbuilding & Marine Engineering, Korea Shipbuilding & Offshore Engineering, and Hyundai Mipo Dockyard rose by 11.29%, 6.94%, 8.22%, and 8.46%, respectively.

Shipbuilding stocks were sluggish until mid-month. While the KOSPI fell by 4.43% between the 2nd and 20th of this month, Korea Shipbuilding & Offshore Engineering, Samsung Heavy Industries, and Hyundai Mipo Dockyard dropped by 16.09%, 15.33%, and 14.06%, respectively. Only Daewoo Shipbuilding & Marine Engineering, which fell 9.22%, had a decline below the 10% mark.

This downward trend was due to poor second-quarter earnings. As the price of steel plates was expected to rise by more than 60% in the second half of the year, large-scale provisions were reflected in operating profits and losses. Daewoo Shipbuilding & Marine Engineering posted an operating loss of a staggering 1.0074 trillion KRW in the second quarter, and Korea Shipbuilding & Offshore Engineering, which had orders worth 17.4 billion USD (approximately 20.2831 trillion KRW) in the first half, also recorded an operating loss of 897.3 billion KRW. Samsung Heavy Industries and Hyundai Mipo Dockyard recorded operating losses of 437.9 billion KRW and 192.2 billion KRW, respectively.

Unstable financial structures added to concerns. Samsung Heavy Industries carried out a free capital reduction to avoid capital erosion and approved a paid-in capital increase plan on the 17th to repay debt. In the case of Daewoo Shipbuilding & Marine Engineering, the debt ratio, which was 166.8% last year, is estimated to reach 239.5% by the end of this year.

However, the industry conditions entering an upward cycle are ultimately driving the rebound. Considering economic recovery and rising oil prices, KB Securities revised its annual new ship order forecast upward from the previous 32.1 million compensated gross tons (CGT) to 39.8 million CGT. In this environment, shipbuilders are steadily securing orders. This month, Korea Shipbuilding & Offshore Engineering signed orders worth 2.5031 trillion KRW, Samsung Heavy Industries 460.9 billion KRW, Daewoo Shipbuilding & Marine Engineering 227.8 billion KRW, and Hyundai Mipo Dockyard 110.3 billion KRW.

Expectations for price increases are also reflected. The securities industry forecasts that the strong new orders and the increased steel plate prices will be reflected in ship prices. In fact, the Clarkson Newbuilding Price Index, which averages the prices of newly built ships worldwide, fell to 125 points in November last year but surpassed 130 points in March and 140 points in July this year. Recently, it even rose to 145 points.

Han Young-soo, a researcher at Samsung Securities, explained, "The long-term cycle of the shipbuilding industry has entered an improving trend, and since the shipbuilding industry has a long business cycle, it will consistently maintain this trend over a long period."