Initiate coverage with BUY for a target price of KRW140,000

We initiate coverage of Hyundai Mipo Dockyard with BUY for a target price of KRW140,000, based on 2023F BPS of KRW56,864 and a target PBR of 2.45x. Next year should mark the start of an uptrend in BPS, which has stagnated 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 10% 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 shipbuilder’s unrivalled competitiveness in small/medium-size vessels.

Established in 1975, Hyundai Mipo Dockyard ranks right behind Hyundai Heavy Industries with the second-largest number of ships built to date at a total of 1,220 vessels (excluding Vinashin). The company has been acclaimed as the world’s best in the construction of all vessel types, and its proprietary Mipo Tanker is recognized as the global standard in medium-size product/chemical tankers. Through successful management of subsidiary Hyundai-Vietnam Shipbuilding (formerly Hyundai-Vinashin Shipyard), the company also produces an average of 10-20 vessels per year in Vietnam.

Momentum expected from product/chemical tanker replacements

As of end-June, new order intake reaches USD2.2bn, 62% of the company’s full-year target of USD3.6bn. Its order backlog of USD6bn is equivalent to two years’ worth of sales booked in 2021 at the current USD/KRW rate of 1,305. Orders secured in 2021 and 2022 show containerships exceeding product/chemical tankers in total order intake for the first time in the company’s history.

Hyundai Mipo Dockyard used to report faster recovery in earnings during market upturns thanks to its shorter shipbuilding time vs. large-size shipbuilders. However, its recovery pace has now become less distinctive, with market conditions working in favor of larger shipbuilders with a focus on LNG carriers, large-size containerships, etc. Nonetheless, we see ample momentum in store for Hyundai Mipo Dockyard given solid replacement demand expected for product/chemical tankers. The replacement cycle for the total of 2,362 product/chemical tankers ordered in 1996-2007 is likely to shorten due to stricter environmental regulations. Reduced market competition and enhanced brand power will enable the company to expand its market share vs. the past. Considering that Hyundai Mipo Dockyard built 38 product/chemical tankers per year on average over the past 20 years, replacement orders alone could drive earnings for the next 12 years assuming a market share of just 20%.

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