[This Week's Hot Stock] Hanwha Engine, Overflowing Order Backlog... Reasons for Anticipated Growth

Strong First-Quarter Results Despite Fewer Working Days
"Order Backlog Reaches 4 Trillion Won in Q1... Margins and Revenue Expected to Improve Going Forward"

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As the domestic shipbuilding industry enters a boom, Hanwha Engine, which manufactures marine engines, is also drawing attention from investors. Its stock price has risen by nearly 50% this year. In the first quarter alone, the company secured orders exceeding 1 trillion won and posted strong results. The securities industry expects Hanwha Engine’s performance to continue improving for several years to come.

Hanwha Engine was established in December 1999 and was listed on the KOSPI on January 4, 2011. In 2023, after Hanwha Group acquired HSD Engine, the company changed its name to its current one. Hanwha Impact is the largest shareholder, holding a 32.77% stake. The company focuses on manufacturing large marine engines, which are key components in the shipbuilding industry, and provides sales and services for engine parts. It is also a comprehensive engine maker supplying power generation facilities using diesel engines. In the global marine engine market, Hanwha Engine holds the world’s second-largest market share in the low-speed engine segment.

Hanwha Engine’s main businesses include marine engines and Selective Catalytic Reduction (SCR) systems, After Market (AM) services, diesel power generation, and leasing. As of last year, sales from marine engines and SCR systems reached 1.0552 trillion won, accounting for 87.8% of total revenue. AM, diesel power generation, and leasing contributed 147 billion won, or 12.2% of total sales.

Strong Results Achieved Despite Fewer Working Days in Q1

Hanwha Engine’s performance has been steadily improving. Revenue increased from 764.2 billion won in 2022 to 1.2022 trillion won last year. During the same period, operating profit improved from a loss of 29.5 billion won to a profit of 71.5 billion won. The company also posted strong results in the first quarter of this year, recording 318.2 billion won in revenue and 22.3 billion won in operating profit. Compared to the same period last year, revenue rose by 8.5% and operating profit by 14.8%. Notably, operating profit exceeded market expectations.

Byun Yongjin, an analyst at iM Securities, explained, "Despite an approximately 8% decrease in working days compared to the previous quarter due to the Lunar New Year holiday and the shorter month of February, sales volume was maintained. The operating margin actually improved. There were no significant one-off factors affecting operating profit, but the increase in sales from the high-margin AM business and the favorable exchange rate in the first quarter played a role."

Kang Kyungtae, an analyst at Korea Investment & Securities, commented, "Despite fewer deliveries compared to the monthly average, engines ordered in the second half of 2022 were delivered in the first quarter at high ship prices, helping to maintain revenue. AM sales in the first quarter increased by 14.4% year-on-year, likely due to higher prices for serviced parts."

Um Kyunga, an analyst at Shin Young Securities, also noted, "We are seeing figures reminiscent of the past. An operating margin above 7% is a level not reached since the third quarter of 2012, when the last batch of orders from the 2007 boom period was produced."

Continued Performance Improvement Expected... Order Backlog Exceeds 4 Trillion Won, and High-Margin DF Engine Share Set to Rise

The securities industry expects Hanwha Engine’s performance to continue improving this year. According to FnGuide, securities firms forecast Hanwha Engine’s revenue and operating profit for this year at 1.3327 trillion won and 103.7 billion won, respectively. This is an improvement from three months ago, when the estimates were 1.2794 trillion won and 101.6 billion won.

The main driver behind the expected improvement is a favorable ship market environment. Currently, environmental regulations on ships are tightening. On April 11, the International Maritime Organization (IMO) approved a Mid-Term Measure for reducing greenhouse gas emissions at the 83rd Marine Environment Protection Committee (MEPC) meeting. Under this measure, starting in 2027, ships over 5,000 tons engaged in international voyages must comply with stricter standards for the greenhouse gas intensity of marine fuels.

If carbon emissions exceed the set standard, companies must pay costs proportional to the excess. These regulations are expected to increase demand for replacing aging ships. As ships are replaced, eco-friendly engines will naturally be needed, and Hanwha Engine is expected to benefit. Hanwha Engine produces eco-friendly dual-fuel (DF) engines, which can run on traditional diesel, liquefied natural gas (LNG), methanol, and other eco-friendly fuels. DF engines are considered one of the key solutions to meet IMO regulations.

DF engines are already standing out in Hanwha Engine’s order book. In the first quarter of this year, Hanwha Engine secured new orders worth about 1.0587 trillion won, which is about 64% of last year’s total order volume of 1.649 trillion won. iM Securities analyzed that DF engines accounted for 88% of Hanwha Engine’s first-quarter orders.

As a result, the company’s order volume is expected to reach an all-time high this year. As of the first quarter, Hanwha Engine’s order backlog stood at 4.1138 trillion won. Han Seunghan, an analyst at SK Securities, said, "Considering the final delivery dates of this year’s engine contracts, over 90% are estimated to be for Chinese shipyards. This means that orders for Korean shipyards have not even started yet." He added, "Therefore, there is a very high possibility that Hanwha Engine will achieve a record-high order volume this year."

Byun Yongjin added, "The United States is seeking to revive its shipbuilding industry to regain maritime supremacy and is requesting cooperation from Korean shipbuilders. Hanwha Group’s Philly Shipyard, which Korea has started to invest in and operate directly, is likely to benefit, and Hanwha Engine may naturally supply engines for this shipyard’s orders."

In addition, the increasing share of high-margin DF engines and the effects of capacity expansion are also expected to be positive. In February this year, Hanwha Engine announced a plan to expand production capacity by 80.2 billion won. Um Kyunga stated, "New ship prices have been rising continuously for four years since early 2021. Marine engine prices are partially linked to new ship prices, and the rising share of DF engines will improve the product mix. These factors will be the main reasons for improved performance among marine engine manufacturers in 2025. The expansion of the test bed will lead to visible growth from the second half of 2026, and the revenue growth rate in 2027 will be particularly notable."