20160711-三星证券-Shipbuilding__NEUTRAL__2Q_preview__Orders_more_critical_than_earnings_11页_370kb

Sector Update Summary

Core Content and Key Insights

This document provides a detailed analysis of the Korean shipbuilding sector for the second quarter of 2016, highlighting the impact of restructuring costs, order conditions, and financial performance. The overall outlook for the sector remains NEUTRAL, as shares are unlikely to advance until restructuring uncertainty is resolved and orders improve.

Main Points

• 2Q 2016 Performance:

  • Restructuring costs are expected to lower the financial results of Korean shipbuilders, though excluding these one-off costs, operating profits should remain stable compared to the first quarter.
  • Consensus estimates for operating profits have increased by an average of 62% since the first quarter, with Hyundai Heavy Industries (HHI) and Hyundai Mipo Dockyard (HMD) showing significant increases.
  • HHI's 2Q 2016 operating profit is expected to miss the consensus by 65.2%, primarily due to restructuring costs, while excluding these, profitability should remain steady.
  • HHI's refining business is expected to remain strong, and offshore losses are expected to be minimal due to change orders and completed projects.

• Order Conditions:

  • Global shipbuilding orders in the first half of 2016 dropped by 66% year-over-year, with Korean shipbuilders experiencing an even sharper decline of 88%.
  • This decline is attributed to an unfavorable order mix, particularly in bulk carriers, and ongoing industry restructuring.
  • The sector's market share has dropped to 13%, signaling a challenging environment.

• Restructuring and Uncertainty:

  • Korean shipbuilders have proposed cost-cutting and asset-sale plans, but unions are resisting, and banks are hesitant to provide refund guarantees.
  • This has led to difficulties in finalizing contracts and securing new orders.
  • The government is expected to review a private report in August and may take measures to support the sector.

• Investment Outlook:

  • HHI is rated BUY with a target price of KRW133,000, as it is seen as the only domestic shipbuilder with long-term investment potential.
  • Samsung Heavy Industries (SHI) is rated HOLD with a target price of KRW10,000, due to its weak order backlog and expected sales plunge in 2017.
  • HMD is rated HOLD with a target price of KRW75,000, as it has partially offset restructuring costs through equity sales but faces challenges in order recovery.
  • Daewoo Shipbuilding & Marine Engineering (DSME) is not rated.

• Valuation Metrics:

  • HHI is trading at 0.6x P/B, near the lower end of its historical range.
  • SHI is at 0.4x P/B, while HMD is at 0.7x P/B.
  • Valuation trends indicate a potential for recovery, especially for HHI and HMD, but the sector remains undervalued due to order concerns.

Key Financial Data

2Q 2016 Forecasts

Order Backlog (End of 2016)

Global New Orders (Jan-Jun 2016)

Investment Strategy and Outlook

• HHI is the only shipbuilder with potential for long-term investment due to its lower valuation and restructuring benefits.
• SHI is expected to face the largest sales decline in 2017 due to its weak order backlog and the cancellation of the Browse FLNG project.
• HMD has partially offset restructuring costs through equity sales but is still expected to see a drop in sales next year due to weak orders.
• SHI is scheduled to hold a general shareholders' meeting in August to discuss a rights offering, which adds to the uncertainty.

Valuation Summary (2016E)

Industry Indicators

• New Building Price Index: Fell by 1 point to 126 over the past two weeks.
• Secondhand Price Index: Fell by 1 point to 82.
• Freight Rates:
  • BDI (Baltic Dry Index): Increased by 15.4% to 703.
  • WS (Saudi route): Stable at 43.
  • CCFI: Decreased by 0.9% to 646.
• Energy Prices:
  • Natural Gas: Increased by 3.5% to $2.8 per million BTU.
  • Oil: Decreased by 3.3% to $45.4 per barrel.

Share Performance and Valuation

Summary of Target Price Changes

• HHI: Target price was revised to KRW133,000.
• SHI: Target price was revised to KRW10,000.
• HMD: Target price was revised to KRW75,000.
• DSME: Not rated.

Rating Changes Over the Past Two Years

• HHI has seen a fluctuating rating, with a BUY recommendation in 2014 and HOLD in 2016.
• SHI has seen a shift from BUY to HOLD over the past two years.
• HMD has remained HOLD throughout the period.

Conclusion

The Korean shipbuilding sector is currently facing significant challenges, including a sharp decline in orders and ongoing restructuring efforts. While some companies, such as HHI, have shown resilience and potential for long-term investment, the overall outlook remains cautious. Investors are advised to wait for clarity on restructuring plans and order recovery before making significant moves in the sector.