Hanwha Ocean, a Beneficiary of Trump Policies, Explains Why 'Blind Investment' Is Risky [Business & Issues]

Yoon Suk-yeol and Trump’s First Call Sparks Surge
Special Ties with Trump Raise Hopes for US Defense Contracts
Lock-up Shares Released on 29th... Caution on Selling

Yonhap News

Hanwha Ocean, a leading domestic shipbuilding company, surged more than 40% around the U.S. presidential election, earning the nickname "Trump theme stock." Expectations that the second Trump administration will focus on orders for private commercial ships as well as defense contracts such as warship repairs have bolstered hopes for improved performance. However, due to the increased volatility from the rapid short-term price surge and the risk of a large sell-off when some of the shares from the rights offering at the end of this month are released from lock-up, investors need to exercise caution.

Trump: "Cooperation with Korean Shipbuilding Needed"… Hanwha Ocean Wins U.S. Navy MRO Contract

On the 14th, Hanwha Ocean's stock price reached 39,200 KRW, a rise of more than 46% compared to 26,800 KRW at the beginning of this month. Since November 4th, the day before the U.S. presidential election, the stock rose on all trading days except the 12th and 13th, totaling nine trading days.

On November 7th, during the first phone call between President Yoon Seok-yeol and President-elect Trump, Trump’s remark about the need for cooperation with Korean shipbuilders led to the stock price surge. Trump stated, "I am aware of Korea's shipbuilding capabilities, and cooperation is needed with Korea in maintenance, repair, and overhaul (MRO) as well. I want to discuss this more concretely." This has raised expectations that the Korean shipbuilding industry may be entrusted with MRO and even warship construction in the future.

Following Trump’s remarks, on the 12th, Hanwha Ocean announced it had secured a contract for the regular maintenance of the USNS Yukon, a replenishment oiler assigned to the U.S. Navy’s 7th Fleet, further boosting expectations for defense sector benefits. On August 28th, Hanwha Ocean became the first domestic shipyard to win an MRO contract for the U.S. Navy’s logistics support ship USNS Walter S. Diehl, and within three months, it secured an additional contract. This is seen as a sign of the U.S. Navy’s trust in Hanwha Ocean’s shipbuilding technology, raising hopes for significant revenue growth in the defense sector.

"Profitability Improvement Slower Than Expected"… Caution on Increased Stock Volatility

A photo of Donald Trump, then President-elect of the United States in June 1998, visiting the Okpo Shipyard of Daewoo Shipbuilding & Marine Engineering (now Hanwha Ocean) in Geoje, Gyeongnam, together with his eldest son, Trump Jr. Photo by Yonhap News

Investors are paying close attention to the special relationship between President-elect Trump and Hanwha Ocean alongside expectations for U.S. Navy defense contracts. A photo from June 1998 showing Trump and his eldest son, Donald Trump Jr., visiting Daewoo Heavy Industries’ Okpo Shipyard, the predecessor of Hanwha Ocean, has attracted attention. The relationship between Trump and Hanwha Group Chairman Kim Seung-yeon is also notable.

Chairman Kim is recognized as a leading business figure who has maintained a friendly relationship with Trump, having been invited to Trump’s first presidential inauguration in 2016 alongside Samsung Electronics Chairman Lee Jae-yong. The invitation was arranged by Edwin Feulner, founder of the Heritage Foundation and a member of Trump’s first presidential transition team. Kim is known to have maintained a relationship with Feulner for over 20 years.

However, warnings have been issued against indiscriminate investment solely based on this special relationship and labeling Hanwha Ocean as a "Trump theme stock." It takes time for the Trump effect to translate into improved performance, and the current stock price surge is considered burdensome.

Hanwha Ocean’s sales for the third quarter (July to September) this year increased by 41% year-on-year to 2.7031 trillion KRW, but operating profit fell by 65.5% to 25.6 billion KRW. Although it succeeded in turning a profit compared to the previous quarter, the pace of profit improvement has not met market expectations. Samsung Securities analyst Han Young-soo pointed out, "Operating profit in the third quarter turned positive compared to the previous quarter but was 55% below expectations. Due to absorbing low-priced ship orders recently, there are many loss-making units, so the pace of profitability improvement is slower than expected."

Employee Stock Ownership Plan Rights Offering Lock-up Ends on 29th… Beware of Sell-off Pressure

On the 12th, Hanwha Ocean secured a regular maintenance contract for the US Navy 7th Fleet's replenishment ship, the USNS Yukon. Yonhap News

Another factor that could increase stock price volatility is that the lock-up period for shares from the rights offering allocated to Hanwha Ocean employees will end on the 29th of this month. This raises the risk of a large volume of sell orders and a potential sharp price drop in the short term.

According to the Financial Supervisory Service’s electronic disclosure system, Hanwha Ocean employee stock ownership association members will be able to trade shares from the rights offering they participated in last November starting on the 29th, as the lock-up period expires. The total shares subscribed by the employee stock ownership association amount to 15,203,285 shares, accounting for 4.96% of the total outstanding shares.

At that time, Hanwha Ocean had 8,289 employees, and it is estimated that each purchased an average of 1,834 shares at 16,730 KRW per new share. Selling at the closing price of 39,200 KRW on the 14th would yield a profit of over 134%. Once the lock-up ends, employees will have to decide whether to continue holding to benefit from the upward trend or to realize profits immediately. Since some employees purchased shares using loans supported by the company’s interest subsidies when subscribing to the rights offering, it is expected that the volume of shares sold could be significant.