Initiate coverage with BUY for a target price of KRW180,000

We initiate our coverage of Hyundai Heavy Industries with BUY for a target price of KRW180,000, based on 2023F BPS of KRW64,535 and a target PBR of 2.9x. Next year should mark the start of a visible recovery in BPS, which has continued downward over the past six years due to losses of the shipbuilding business. Our target price reflects a conservative BPS forecast, given that earnings are expected to start recovering in earnest from 2023 in a long market cycle and that share price movements are likely to precede actual earnings improvement as typical of shipbuilding stocks.

Our target PBR is derived by applying a 30% premium to the 2005 average PBR of 2.23x of the three domestic shipbuilders Samsung Heavy Industries, Daewoo Shipbuilding & Marine Engineering and Hyundai Mipo Dockyard. We believe current market conditions are similar to 2005, with newbuilding prices on an uptrend and heavy plate prices embarking on a downward stabilizing trend. The premium applied to share valuations reflects the company’s unrivalled market leadership and solid financial structure.

Global leader with an added boost from in-house engine production

Hyundai Heavy Industries, founded in 1972, is the world’s top shipbuilder with 1,564 vessels built to date at construction yards reaching a total of 6,350,000m2. Backed by its size, the company stands at an advantage over peers in achieving economies of scale during upward market cycles.

The company also produces its own engines and remains the global leader in large-size marine engines. Engines have evolved in status from mere equipment to game changers in the industry with stricter environmental regulations requiring diversification of fuel sources and synergy between engine and vessel technology. Building on its experience in producing marine engines, Hyundai Heavy Industries is poised to expand its foothold in the global market for eco-friendly vessels.

Earnings to turn around in 3Q22

Listed on the KOSPI in September 2021, Hyundai Heavy Industries shares continue to trade at a higher premium vs. peers backed by the company’s leadership on all fronts including experience, production capacity, in-house engine production, financial structure, and order backlog. We believe a further uptrend in newbuilding prices and steadier heavy plate prices could drive the company’s share valuations to a PBR of 3x going forward.

With more sales booked and heavy plate prices settling lower, Hyundai Heavy Industries is expected to report a turnaround in earnings in 3Q22. Current order backlog alone guarantees earnings growth over the next three years at the least, and the lead time between order intake and delivery is similar to levels seen during the market boom of 2007 at an average of 3.2 years this year. Due to inelastic supply of capacity, Hyundai Heavy Industries will likely enjoy visible growth regardless of economic conditions in the near term.

Source: BusinessKorea, the authors are analysts of Shinhan Investment Corp. They can be reached at idh@shinhan.com and jiunmyoung@shinhan.com, respectively