[Into the Stocks] Hyundai Heavy Industries (Son) and Korea Shipbuilding & Offshore Engineering (Mother)... The Future Is Bright

[Asia Economy Reporter Lee Seon-ae] On the 17th, Hyundai Heavy Industries, the world's No. 1 shipbuilder, made a spectacular debut on the KOSPI market. Hyundai Heavy Industries is the largest shipbuilding company in Korea, established in 1972 by the late Hyundai Group Chairman Chung Ju-yung. It rose to the top of the world rankings in 1985, just 13 years after its founding, and has maintained the No. 1 global market share ever since. The stock price outlook viewed by the securities industry is also bright.

With Hyundai Heavy Industries' initial public offering (IPO), a shadow was cast over Korea Shipbuilding & Offshore Engineering (KSOE), the intermediate holding company of Hyundai Heavy Industries Group and the parent company of Hyundai Heavy Industries. This is due to concerns over shareholder value dilution caused by the holding company discount.

◆ The Shadow over Korea Shipbuilding & Offshore Engineering = Typically, when a major subsidiary goes public, the holding company's stock price plunges. This is due to the phenomenon called 'double counting,' where the market capitalization formed when both the parent company and subsidiary are listed results in overlapping valuation of the two companies. Since the subsidiary's performance is already reflected in the parent company's consolidated financials, a subsidiary's new IPO is considered a negative factor for the holding company's stock price.

On this day, Korea Shipbuilding & Offshore Engineering's stock price, which started at 118,500 KRW, fell to 108,500 KRW by 10 a.m., a sharp drop of 8.44% compared to the previous day.

Concerns about Korea Shipbuilding & Offshore Engineering are further intensified due to its ambiguous position. It is not the ultimate parent company. Hyundai Heavy Industries Holdings is the ultimate parent company of Hyundai Heavy Industries Group, and Korea Shipbuilding & Offshore Engineering is the intermediate holding company for the shipbuilding sector.

Looking at Hyundai Heavy Industries Group's ownership structure as of the end of June, Hyundai Heavy Industries Holdings holds a 30.95% stake in the intermediate holding company Korea Shipbuilding & Offshore Engineering. Korea Shipbuilding & Offshore Engineering holds 80.54% of the unlisted Hyundai Samho Heavy Industries and 42.40% of the listed Hyundai Mipo Dockyard. Hyundai Heavy Industries' stake will decrease from 100% to 79.7% following today's listing.

◆ Excessive Concerns... 'Renewable Growth Stock' = However, the market evaluates that the excessive concerns are overblown. Considering the speed of improvement in the shipbuilding industry, the current stock price weakness is deemed excessive. The reason for the positive long-term growth outlook is the judgment that it is a renewable growth stock.

According to Hyundai Heavy Industries Holdings' future growth plan, Korea Shipbuilding & Offshore Engineering will be responsible for the group's overall research and development (R&D), Hyundai Heavy Industries will focus on R&D and productization of shipbuilding technologies, and Hyundai Samho Heavy Industries and Hyundai Mipo Dockyard will specialize in production.

What stands out in R&D is 'renewable energy.' As ammonia ships become popular in long-distance transportation, Korea Shipbuilding & Offshore Engineering plans to expand liquefied hydrogen tanks and carriers and develop hydrogen fuel cell power generation and fuel cell-based electric propulsion ships. In the wind power sector, from 2023, it will start demonstration projects for floating offshore wind farms in Ulsan and the southeastern region, and is expected to become a key player in green hydrogen demonstration projects through CCS (carbon capture and storage) and water electrolysis.

Lee Dong-heon, a researcher at Daishin Securities, said, "Although there is a discount issue for the intermediate holding company due to the subsidiary's listing surrounding Korea Shipbuilding & Offshore Engineering, the industry is recovering, and it is leading the market's eco-friendly innovation," adding, "The stock price will be re-evaluated when new businesses become visible."

However, the investment opinion was maintained as 'Buy,' and the target price was lowered from 180,000 KRW to 150,000 KRW. The researcher explained, "The target price was set by applying a price-to-book ratio (PBR) of 1.0 times to the average book value per share (BPS) for 2021 and 2022, reflecting the intermediate holding company discount due to the subsidiary's listing," emphasizing, "Industry recovery benefits are expected, and as the world's No. 1 shipbuilding group, it will lead the market's eco-friendly innovation."

◆ Hyundai Heavy Industries' Differentiated Competitiveness = Hyundai Heavy Industries' IPO price is cheaper than Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries, which together form Korea's 'Big 3' shipbuilders, so the stock price trend after listing is expected to be positive for the world's No. 1 shipyard.

The securities industry analyzes that Hyundai Heavy Industries has strong competitiveness in the eco-friendly ship sector, and considering the recent emphasis on eco-friendly themes in the stock market, there is sufficient upside potential.

In the public offering subscription for general investors held on the 7th and 8th, Hyundai Heavy Industries attracted subscription deposits of 56.0562 trillion KRW, showing a competition rate of 405.5 to 1. Earlier, in the demand forecast for institutional investors held on the 2nd and 3rd, it recorded a competition rate of 1836 to 1, confirming the IPO price at the top of the desired band at 60,000 KRW. Based on the IPO price, the market capitalization is 5.3264 trillion KRW. The securities industry has mentioned a corporate value of about 6 trillion KRW for Hyundai Heavy Industries.

The opening price on this day was 111,000 KRW, 51,000 KRW (85%) higher than the IPO price of 60,000 KRW. After showing a sharp decline, it immediately turned upward, reaching a high of 135,000 KRW by 10 a.m. This is attributed to the fact that only 9.6% of the total shares, or 8,538,483 shares, were available for trading on the first day of listing.

Kim Hyun, a researcher at Meritz Securities, set Hyundai Heavy Industries' target price at 110,000 KRW, stating, "If the expansion of ship orders and optimistic recovery until 2023 are pre-reflected, a PBR of 1.5 times is also predictable."

Choi Jin-young, a researcher at NH Investment & Securities, said, "Considering the order outlook after listing and the low valuation, a favorable stock price trend is expected even after listing," adding, "Shipbuilding stocks tend to be linked to order performance and valuation, and additional order performance improvements are expected by the end of the year, including the main LNG contract with Qatar." He further analyzed, "It secures an overwhelming market share in high value-added ships such as LNG carriers and differentiates itself from competitors by producing and selling core equipment such as ship engines in-house," concluding, "A return to profitability is expected starting in the second half."