[HMM Standing Alone①] The Ugly Duckling Trapped in Chronic Deficits Becomes a Swan

[Image source=Yonhap News]

HMM, the largest container shipping company in South Korea, was a headache for the government just three years ago. Despite receiving over 7 trillion won in public funds, its performance rarely recovered, often drawing criticism as "pouring water into a bottomless jar." However, the situation dramatically reversed starting in 2020. HMM consecutively broke records for its highest-ever performance, with cash assets reaching 13 trillion won. It soared brilliantly from an ugly duckling to a swan. With HMM's value increasing, the government stepped in to find a new owner. This was officially announced by Minister Cho Seung-hwan of the Ministry of Oceans and Fisheries during a recent presidential briefing. It is the first time the government has publicly expressed its intention to privatize HMM.

However, as the government envisions, this is not a simple issue. The significant rise in corporate value has ironically become an obstacle to standing alone. There are many high hurdles to overcome. We examine the challenges and solutions anticipated for the difficult privatization of HMM.

[Asia Economy Reporter Yoo Hyun-seok] "To facilitate smooth mergers and acquisitions (M&A) in the future, it is necessary to maintain management control shares centered on the Korea Ocean Business Corporation, which manages HMM, and to gradually sell off KDB Industrial Bank's shares in HMM." (September 13, 2021, Lee Dong-geol, Chairman of KDB Industrial Bank, online press conference) 'HMM Standing Alone'

"Given that HMM continues to generate profits, the government and public institutions cannot keep holding HMM indefinitely," said Minister Cho Seung-hwan on August 10. "We will create conditions for privatization by gradually reducing public institution shares."

Privatization of HMM, which had been stalled for six years, appears to be actively pursued under the Yoon Seok-yeol administration. This is influenced by President Yoon's campaign pledge for a "New Maritime Power Leap," the government's strong commitment to fostering the shipbuilding and maritime industry as a top national infrastructure sector, and HMM's rising value after escaping the red.

Although the primary goal of performance and management normalization has been achieved, the path to the government's declared privatization remains challenging. The enlarged scale due to soaring performance means there is no suitable new owner, and accelerating the process has become difficult. As the shipping freight rates that drove HMM's performance peak this year and then reversed into a decline, concerns have been raised that the longer it takes to find a new owner, the more future growth engines may be lost.

According to the shipping industry on the 19th, HMM recorded sales of 9.9527 trillion won and operating profit of 6.0858 trillion won in the first half of this year (January to June). These figures represent increases of 87% and 153%, respectively, compared to the same period last year. This is the highest performance ever recorded for the first half of a year.

Looking at the second quarter alone, sales rose 83.7% year-on-year to 5.034 trillion won, and operating profit surged 111.4% to 2.9371 trillion won. This was the result of unprecedented strong maritime freight rates. Following last year's operating profit of about 7.4 trillion won, which wiped away a "decade-long slump," HMM's performance streak continued this year.

Behind the brilliant record of seven consecutive quarters of strong performance since 2020, HMM endured painful sacrifices. HMM was launched in 1976 under the name Asea Shipping. It was the first domestic shipping company and ranks among the top 10 global shipping companies. The global financial crisis in 2008 caused shipping freight rates to plummet, leading to financial difficulties. At that time, Hyundai Group undertook intensive restructuring from 2013 to address HMM's liquidity crisis.

However, in 2016, HMM entered into a voluntary agreement and a "Management Normalization Plan Implementation Agreement" with creditor financial institutions, including KDB Industrial Bank, and proceeded with debt restructuring such as equity conversion. During this process, Hyundai Group's shareholding, which was the major shareholder, was reduced to less than 1%, and KDB Industrial Bank became the new major shareholder. HMM separated from Hyundai Group after 40 years.

Even after being incorporated into KDB Industrial Bank in 2016, HMM's situation did not improve easily. HMM was already struggling with deficits due to the global shipping freight rate collapse. Starting with an operating loss of 338.4 billion won in 2011 on a consolidated basis, it recorded losses exceeding 300 billion won annually. In 2016, the year it parted ways with Hyundai Group, operating losses reached 833.4 billion won. The situation did not improve much afterward, with operating losses of 558.7 billion won in 2018 and 299.7 billion won in 2019. Over the 10 years from 2009 to 2019, HMM suffered an average annual loss of 440 billion won, falling into a severe liquidity crisis. Since public funds injected by KDB Industrial Bank and others into HMM amounted to 7.4 trillion won, criticism of "pouring water into a bottomless jar" was repeatedly voiced.

HMM's management conditions changed starting in 2020. In the second quarter of that year, it posted an operating profit of 138.7 billion won, marking its first profit in 21 quarters since the first quarter of 2015. The deployment of 24,000 TEU-class container ships and joining the shipping alliance "THE Alliance" contributed to this turnaround. As part of the government's "Five-Year Plan for Shipping Reconstruction" in 2018, HMM signed contracts with Korea's three shipbuilders to build 20 ultra-large vessels worth about 3.15 trillion won, initiating the introduction of ultra-large ships. This enabled HMM to realize economies of scale. Additionally, the shipping alliance helped reduce transportation costs.

An HMM official said, "Before last year's performance, the highest profit was about 600 billion won in 2020," adding, "After turning profitable in 2020, we immediately recorded 900 billion won, breaking records." He further noted, "Recently, the market upswing caused by COVID-19 has been driving performance."

Last year was especially the best year for HMM. Due to the COVID-19 pandemic, the Shanghai Containerized Freight Index (SCFI), a global shipping freight rate indicator, surged, improving performance. The SCFI rose sharply from 2,129 points at the end of December 2020 to 5,046 points at the end of last year. Amid the prolonged COVID-19 pandemic, incidents such as the Suez Canal blockage, closure of Shenzhen Port in China, lockdowns in Vietnam, closure of Ningbo Port in China, and power shortages occurred. Additionally, the North American shipping and logistics supply chain could not handle the rapidly increased transportation demand, exacerbating port congestion and significantly raising shipping freight rates.

As a result, HMM's operating profit last year increased by 652% year-on-year to 7.3775 trillion won. It wiped out losses totaling 3.8401 trillion won accumulated over the past nine years in one fell swoop. This performance ranks fourth among domestic companies, following Samsung Electronics, SK Hynix, and POSCO. It also exceeded Hyundai Motor's operating profit of 6.6789 trillion won by about 700 billion won.

The strong performance continued this year. With increases in sales and operating profit, the financial structure also greatly improved. As of the end of June this year, the debt ratio was 46%, improved from 73% at the end of December last year. The debt ratio was 590% in 2020. Cash assets nearly doubled to 12.6858 trillion won compared to 6.5272 trillion won at the end of last year. A company that had been in perennial deficit has been completely transformed.

A shipping industry official said, "Internal factors such as the introduction of ultra-large vessels, full membership in the shipping alliance, and employees' cost-cutting efforts influenced this," adding, "Externally, the market upswing due to COVID-19 also played a role, but without such internal efforts, it would have been difficult to achieve the current performance."