Shipbuilding Biweekly:HHI treasury share sale hints at restructuring

类别:行业研究 机构:三星证券公司 研究员:Youmgsoo Han 日期:2016-01-15

Hyundai Heavy Industries on Dec 9 decided to sell 1.4m treasury shares worth aroundKRW129.5b and equivalent to 1.9% of shares outstanding to improve its financialstructure. After the sale, the company will hold 12.1m shares, which equate to 15.9% ofshares outstanding (down from 17.8%). Since 4Q14, HHI group has sold investmentsecurities worth KRW1.7t.

    Background behind decision: Considering HHI shares are trading at 0.5x 2016 P/B(their lowest level since 2004), we identify three explanations as the most likely onesbehind the move. The company may believe: 1) its treasury shares will lose attractivenessas assets in the near term for a lack of momentum or upside; 2) selling treasury shares ismore attractive than borrowing is, given rising funding costs; or 3) it needs to secure cashto prepare for additional deteriorations in the business environment. Investors are likelyto view all three explanations negatively. Most of the firm’s losses of KRW3.2t in 2014 andKRW1.3t over 1Q-3Q15 are attributable to provisioning, so it is no surprise the shipbuilderneeds cash for this year and next year. Cancelled drilling rig orders likely added to cashflow woes. For reference, HHI’s consolidated net debt is KRW2.3t (or 21%) greater than itwas at end-2013 even after disposals of investment assets from 4Q14.

    Sector implications: Most troubling is that increasing working capital burden andrisks related to drilling rigs affect shipbuilders overall and not just HHI. Rather, HHIgroup is best positioned among Korea’s big three in terms of debt ratio, order backlogexposure to drilling rigs, and available-for-sale assets. The treasury sale implies thatKorean shipbuilders will continue to cut costs and eventually restructure—positive in thelong term but painful in the near one. We stay conservative on the shipbuilding sector(see our 2016 outlook report published on Dec 1).

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