Korea Shipbuilding:3Q17review –mixed results under one umbrella
Hyundai Heavy (HHI) reported sales of KRW3.8trn and operating profit of KRW94bnfor 3Q17, both largely in line with market expectations. Sales fell 27.3% y-o-y mainlydue to diminished work volume at the Shipbuilding division (sales down 31.2% y-o-y).
The Offshore (-26.7% y-o-y) and Industrial Plant (-47.5% y-o-y) divisions also sawtheir sales drop with the completion of major projects scheduled for delivery this year.
Operating profit fell 20.8% y-o-y. The positives were 1) KRW25.6bn P&Lcontribution from change-orders on offshore and 2) liquidation damage provisionwrite-back of KRW56bn on plant and offshore projects. The negatives for OP were1) one-off provision of KRW45.3bn for its construction equipment in Brazil and 2)increased warranty provision of KRW54.8bn for the plant division. During theconference call, HHI said it sees clear signs of new order recovery (especiallycontainers, bulk and liquefied natural gas carrier). HHI Group shipyards receivedcombined new orders to build 120 vessels (worth USD7.5bn, +216.6% y-o-y) as of 27October 2017; among the 120 vessels, 88% will meet the regulation. HHI largelyexpects better new orders in 2018 but we think HHI is fairly valued at 0.7x PB, with adeteriorating margin profile; vessel pricing should be the key catalyst for the stock.
Hyundai Mipo posted weaker-than-expected sales of KRW698.5bn due to workvolume decline (from 174k tonnage to 164k tonnage) caused by summer holidays.
However, its operating profit surged 69.9% y-o-y with OPM at 9.3% on the back ofimproved production efficiency and material cost reduction at the Vinashin yard. Thecompany secured new orders worth USD2.1bn and guided USD200-400m for theremaining 2017. We also expect Mipo to achieve similar new orders in 2018 given itsleading position and reduced competition in mid-sized vessels, especially mid-rangeMR tankers. Although sales declines seem inevitable due to weak orders in 2016, itsimproved labour efficiency and lower material costs at Vinashin should protect itsmargins relative to peers. With diminished earnings risk, the focus should be more onthe order flows, which we expect to improve going forward. Mipo remains ourpreferred pick in the sector with a target price of KRW140,000.