[Weekend Money] Korea Steps Up Massive U.S. Investment... Shipbuilding Stocks Smile

Japan unveils first major U.S. investment plan
Korea prepares to execute its own investment
"Synergies expected in shipbuilding business"

The Japanese government has abruptly announced a massive investment plan totaling 550 billion dollars (about 800 trillion won) in the United States, drawing attention to how Korea will execute its own investment. In the securities industry, analysts say that depending on the Korean government's investment strategy toward the United States, the "shipbuilding" sector should be in focus.

In a recent report, Jeong Hyeonggi, a researcher at DS Investment & Securities, analyzed that "because the Korean government cannot afford an investment on the scale of Japan's, it will seek synergy effects by investing in the shipbuilding sector together with companies, rather than in high-return infrastructure."

"Japan rushes to invest... aiming to preempt promising businesses and strengthen energy security"

Looking at the structure of Japan's latest investment, the targets are mainly concentrated in infrastructure. Until the principal is recovered, the United States and Japan will split profits 50-50. After the principal is fully repaid, the United States will take 90% and Japan only 10% of the profits.

According to calculations by the Federal Reserve Bank of St. Louis based on net present value (NPV), Japan's rate of return is expected to be negative. Even if the investment is assumed to be spread over 10 years, an NPV-based loss of around 20% to 30% could occur. Researcher Jeong said, "Because Japan's share in the perpetual cash flow phase is limited to 10%, the expected rate of return must be at least 20% just to break even," adding, "If you look only at the investment proposal itself, it is difficult to generate profit."

Despite this, regarding why Japan is rushing to invest, Jeong explained, "Japan is trying to achieve a strategic goal of diversifying energy security rather than pursuing a pure investment return." He said, "Currently, Japan imports 93.5% of its energy from the Middle East," and added, "If a conflict related to Taiwan breaks out, its energy supply routes could be severely threatened, so Japan is pursuing diversification."

Another reason is the effect of preempting promising businesses. It is seen as an opportunity to enter U.S. projects that have been difficult to access even with capital. Under the latest agreement, the United States has pledged to provide various conveniences such as deregulation, federal land leases, and electricity and water supply. In fact, all three of the first investment projects (a thermal power plant in Ohio, a synthetic diamond plant in Georgia, and an oil export terminal in Texas) had been stalled for years due to regulatory or cost issues. Immediately after the announcement, the share prices of SoftBank Group and Shosen Mitsui rose. The market effectively interpreted this investment as "positive for corporate earnings."

"With a total 350 billion dollar investment plan, Korea will focus on 'shipbuilding'"

Korea has also signed a memorandum of understanding (MOU) with the United States for large-scale investment. According to the "Korea-U.S. Strategic Investment MOU" signed by the Korean and U.S. governments in November last year, 150 billion dollars out of the 350 billion dollars in planned U.S.-bound investment is earmarked for the shipbuilding sector.

Researcher Jeong Hyeonggi said, "Korea has an annual investment ceiling of 20 billion dollars, so it is practically difficult to participate in large-scale standalone projects like Japan. A more realistic strategy is to focus on the shipbuilding sector and create synergy with domestic shipbuilders," adding, "If the government shoulders part of the risk with funding, and companies take charge of supplying technology and equipment, it will create a structure in which both the government and companies can profit." Coincidentally, shipbuilding-related policy announcements from the United States this week are also helping to revive the upward momentum of shipbuilding stocks.

Regarding some concerns about a "weak won," he explained, "Because Korean suppliers will be given priority consideration during the construction phase, investment costs will be recycled back through the trade balance," and added, "The investment execution is unlikely to cause a sharp rise in the exchange rate, and in the long term, the effect of supply chain diversification could further contribute to exchange rate stability."

However, political risk remains a variable. Given the annual investment ceiling, the total investment period comes to about 20 years, during which the U.S. president could change four times. Researcher Jeong Hyeonggi pointed out, "Although an MOU is a kind of treaty, it can be amended at any time," adding, "Just as the Biden administration rolled back the first-term Trump policies, a future administration could delay the current deregulation stance on grounds such as environmental impact assessments."

He added, "Given Korea's annual investment limit, the long investment horizon of about 20 years itself becomes an additional risk factor," and emphasized that "it is necessary to make judgments that take these long-term factors into account."