"HMM Faces Falling Freight Rates, but Shareholder Returns Take Center Stage" [Click e-Stock]

Despite the Downturn, the Floor Has Risen...
Shipping Companies' Bargaining Power Increases in Freight Rate Negotiations
Expectations for Expanded Shareholder Returns...
Attention on KDB's Decision

The container shipping market has been stabilizing at a lower level since the second half of last year, resulting in a slight decrease in HMM's profits. Nevertheless, shipping companies still hold the upper hand in freight rate negotiations, which has led to the assessment that HMM's performance floor has risen. As a result, shareholder return plans such as share buybacks and freight rates are considered more important factors for the stock price.

On the 21st, Korea Investment & Securities maintained its 'neutral' investment opinion on HMM in light of these circumstances. The target price of 33,000 won, set in July 2022, also remains unchanged. The previous trading day's closing price was 25,250 won.

The company expects second-quarter results of 2.368 trillion won in revenue and 370 billion won in operating profit. Compared to the same period last year, revenue is expected to decrease by 11.1% and operating profit by 42.6%. These figures are expected to meet market consensus.

The decline in profits was anticipated, as the container shipping market has been gradually stabilizing downward since the second half of last year, moving past the Suez Canal bottleneck effects. The China Containerized Freight Index (CCFI) dropped to 1,162, down 14% from the previous quarter, and HMM's container freight rates are also estimated to fall by 10%. Although freight rates rebounded in mid-May due to the US-China tariff suspension, the benefit is expected to be concentrated in the third quarter, considering the lag in reflecting these results.

Even as freight rates decline, the bottom is considered higher than in the past. Since the 2020s, the container shipping market has been moving independently of the traditional supply-demand structure. In the second half of the year, volatility remains high due to tariff uncertainties, and shipping companies are leveraging such geopolitical variables to their advantage. The market had previously assumed a structural recession similar to a decade ago, based on the largest-ever order backlog, but in reality, the freight rate floor has risen and sharp surges have become more frequent.

Choi Goun, a researcher at Korea Investment & Securities, explained, "Even though shipping capacity has surged by 30% since 2022, shippers are struggling to manage shipping schedules due to increased travel distances and port congestion. As a result, they are accepting higher freight rates, which will allow HMM to secure more than 1 trillion won in additional profits this year."

Although this upward trend in freight rates is not expected to be sustainable in the long term, given the scheduled delivery of new vessels, there is analysis that even one-off profits could lead to a stock price revaluation if actively used for shareholder returns. At this point, it is becoming increasingly difficult to postpone the 2 trillion won share buyback plan announced at the beginning of the year.

Researcher Choi analyzed, "Once the tender offer price is determined, it may temporarily limit further stock price increases, but even after that, HMM will have more than 10 trillion won in cash available for shareholder returns. Attention should be paid to the possibility that the largest shareholder, Korea Development Bank, may lead additional share buybacks and cancellations in line with the new government policy direction."