Korea Shipbuilding:3Q15review Offshore losses prevail the entire sector

HHI also vulnerable: Hyundai Heavy (HHI) reportedKRW10.9trn of revenue and KRW678bn of operating loss in3Q15. The loss mostly resulted from the offshore segment,including 1) KRW113bn provisions for UAE Nasr project; and2) KRW210bn losses from a rig cancellation by Seadrill(SDRL.NO, Reduce, NOX58.00). Now we admit that it is alsoinevitable for HHI to undergo offshore losses amid contractcancellations and cost overruns under a lack of engineeringexperience. The offshore concern overwhelms our previousoptimism on brighter new order outlook for crude oil tankersand mega-containerships. We reiterate Buy on the longer-termnew order outlook but lower our target price to KRW130k(from KRW180k) for ongoing offshore losses until 2016e.

    Mipo relatively safe: Hyundai Mipo reported KRW1.4trn ofrevenue and KRW26bn of operating profit in 3Q15. Miposhould be able to deliver positive profits going forward giventhat it has no exposure to the offshore segment. Although we arebearish on the company’s new order outlook (mostly underPanamax size), investment sentiment seems to improve on lessuncertainty over earnings. We reiterate our Hold rating and raisetarget price to KRW75k (from KRW60k) owing to therelatively stable earnings outlook.

    SHI still cloudy: Samsung Heavy (SHI) reported KRW2.4trnof revenue and KRW85bn of operating profit in 3Q15. Weattribute the marginal profit to 1) KRW31bn one-off gains fromchanged orders (cost reimbursements); and 2) substantialprovisions against loss-making offshore projects in advanceuntil 2Q15. However, we are still concerned about further lossesfrom the offshore segment. Pacific Drilling (PACD US, notrated, USD1.54), for example, said that it is not obliged to takethe delivery of the Zonda drilling rig if SHI cannot completeconstruction by 27 October (Upstream, 11 September).

    We reiterate Reduce with an unchanged target price of KRW9kfor its sector-highest offshore exposure.