Past Order Backlogs Drive Current Earnings... Strong Performance Expected This Year
Strengthening of U.S. Naval Power Emerges as a New Growth Driver
The shipbuilding sector, which has been on an upward trend since the second half of last year, is expected to continue its rise through the second half of this year. Analysts attribute this to structural growth driven by existing order backlogs being recognized as revenue. In addition, the potential for entry into the U.S. naval vessel market remains open, providing further momentum for the industry.
According to the Korea Exchange on June 18, the share price of HD Hyundai Heavy Industries had risen by 56.17% as of June 16 compared to the end of last year. Hanwha Ocean and Samsung Heavy Industries also saw increases of 128.38% and 59.91%, respectively. The strong performance of major shipbuilding stocks also translated into excellent returns for related exchange-traded funds (ETFs). TIGER 200 Heavy Industries surged by more than 92%, while SOL Shipbuilding TOP3 Plus and TIGER Shipbuilding TOP10 each rose by over 70%.
Shipbuilding Stocks Deliver Strong Q1 Results, Outlook Remains Positive for 2025
This upward momentum is attributed to improved earnings as the shipbuilding industry enters a supercycle. In the first quarter, the combined revenue of the three major shipbuilders?HD Hyundai Heavy Industries, Hanwha Ocean, and Samsung Heavy Industries?reached 12.4091 trillion won, with operating profit totaling 1.2409 trillion won. HD Hyundai Heavy Industries reported revenue of 3.8225 trillion won and operating profit of 433.7 billion won, up 27.9% and 1,936.2% year-on-year, respectively. Hanwha Ocean posted operating profit of 258.6 billion won, a 388.8% increase. Samsung Heavy Industries also achieved operating profit of 123.1 billion won, an improvement of 58.0%.
Strong earnings are expected to continue this year, as orders placed two to three years ago are now being reflected in results. According to FnGuide, securities firms forecast that HD Hyundai Heavy Industries will record revenue of 16.3537 trillion won and operating profit of 1.8688 trillion won this year, up 12.89% and 164.99% year-on-year, respectively.
Hanwha Ocean is also expected to see revenue of 12.8571 trillion won and operating profit of 1.0353 trillion won, representing improvements of 19.31% and 335.2%, respectively. Samsung Heavy Industries is projected to achieve revenue of 10.8622 trillion won and operating profit of 723.5 billion won, up 9.69% and 43.92% year-on-year, respectively.
Lee Dongheon, a research fellow at Shinhan Investment Corp., emphasized, "The second half of the year marks a period in which earnings growth and structural differentiation will accelerate simultaneously. The share price trend is likely to be newly shaped around the recognition of high-value-added earnings from LNG carriers and special-purpose ships, as well as the differentiation of competitiveness among companies."
He added, "U.S. sanctions on China are impacting the entire shipbuilding supply chain and reshaping the market landscape. Practical measures such as port fee regulations are set to be implemented, and as the trend of avoiding Chinese-built ships spreads, Korean shipbuilders with political reliability and technological capabilities are likely to benefit from structural windfall gains."
Kim Yongbin, a research analyst at Yuanta Securities, also noted, "Earnings improvement for domestic shipbuilders over the next three years is already set. Newbuilding prices have continued to rise, and considering the time lag between orders and revenue recognition, it is natural that the operating margin on future recognized revenue will continue to increase."
However, concerns have recently emerged regarding shipbuilding stocks. This is because global ship orders have plummeted by nearly half, raising worries about growth. According to Clarkson Research, a shipbuilding and shipping analysis firm, global ship orders from January to May this year totaled 15.92 million CGT (compensated gross tonnage), a 45% decrease from 29.18 million CGT (1,242 vessels) during the same period last year.
The sharp decline in orders is attributed to geopolitical instability and U.S. tariff policies. In addition, uncertainty stemming from measures to contain China has also played a role.
The U.S. Naval Vessel Market as a New Growth Driver
While some momentum is already priced in, entry into the U.S. market for special-purpose ships such as naval vessels and submarines is expected to provide new growth opportunities.
Lee Jini, a research analyst at Daishin Securities, stated, "Amid rising global security risks and the U.S. Navy's expansion strategy, expectations for orders of special-purpose ships, based on a stable backlog of merchant ship orders, are expected to prolong the shipbuilding boom."
HD Hyundai Heavy Industries and Hanwha Ocean both hold Maintenance, Repair, and Shipbuilding Agreement (MSRA) qualifications for U.S. Navy vessels. Hanwha Group is actively pursuing entry into the U.S. market. Last year, it acquired Philadelphia Shipyard in the United States. More recently, it received approval from the U.S. government to acquire up to 100% of the shares of Australian defense and shipbuilding company Austal. HD Hyundai Heavy Industries also signed a memorandum of understanding (MOU) for shipbuilding cooperation with U.S. naval shipbuilder Huntington Ingalls.
Recently, the U.S. Congress introduced the "SHIPS for America Act" (Shipbuilding and Harbor Infrastructure for Prosperity and Security for America Act), which encourages domestic shipbuilding to strengthen the military's ability to supply materials during wartime. Lee Jini explained, "The U.S. commitment to strengthening its shipping industry is due to China's rapid naval expansion and the rising possibility of conflict in East Asia. As the U.S. maintains a focus on domestic production of combat ships, opportunities for structural cooperation with Korean shipbuilders are expanding in the merchant ship, support, and maintenance, repair, and overhaul (MRO) sectors."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
