20160602-三星证券-Shipbuilding_NEUTRAL_Shipbuilders_in_crisis_35页_1mb

Sector Update Summary

Core Content

This document provides an analysis of the shipbuilding industry in South Korea, highlighting the sector's current crisis and the factors contributing to it. It discusses the impact of oil price fluctuations, the need for restructuring, and the performance of major players in the industry.

Main Points

Industry Crisis Overview

• The shipbuilding industry in South Korea is in crisis, with both small and large shipbuilders affected.
• Large shipbuilders, despite diversifying into offshore and high-value-added vessels, are still struggling due to the oil price crash.
• The crisis is not primarily due to poor strategic decisions but rather to external factors like falling oil prices.

Key Drivers of the Crisis

• Oil Price Slide: The drop in oil prices has led to reduced offshore-structure orders and lower commercial-vessel orders.
• Design Changes: Frequent design changes by clients have caused cost overruns, and with low oil prices, clients can no longer afford to compensate for these.
• Weak Financials: Korean shipbuilders have weaker financial positions compared to their Japanese counterparts, limiting their ability to restructure effectively.
• Competitive Pressure: Chinese shipbuilders have gained significant market share, especially in commercial vessels.

Market Response

• The market is alarmed by the first recession and sales contraction in ten years.
• The crisis may become prolonged if oil prices remain low and Korean firms lose their edge over Chinese competitors.
• Korean shipbuilders are not following the Japanese model of reducing exposure and shifting to other sectors due to their financial constraints.

Investment Strategy

• The report suggests that large shipbuilders like Hyundai Heavy Industries (HHI) and Samsung Heavy Industries (SHI) may benefit from restructuring and a recovery in the high-value-added vessel segment.
• HHI is upgraded to BUY due to its potential for recovery and ability to raise capital through non-shipbuilding units.

Key Information

Performance of Major Shipbuilders

• Hyundai Heavy Industries (009540 KS, KRW109,500): Target price KRW133,000 (22%).
• Samsung Heavy Industries (010140 KS, KRW9,540): Target price KRW11,000 (15%).
• Daewoo Shipbuilding & Marine Engineering (042660 KS, KRW4,890): Not rated.
• Hyundai Mipo Dockyard (010620 KS, KRW71,900): Target price KRW75,000 (4%).

Order Trends

• Combined orders for the big three (HHI, SHI, DSME) have declined sharply, from USD43.5b in 2008 to USD22b in 2015.
• In 2016, the big three received only USD3.888b in new orders, a decline of 94.3% compared to 2015.
• Most of the orders are for bulk carriers, where Chinese shipbuilders have a strong presence.

Market Share and Global Context

• Korean shipbuilders held a 30% market share in 2015, down to 5% in the first four months of 2016.
• The global market share for commercial vessels is dominated by Chinese and other competitors.

Strategic Issues

• The big three are unlikely to merge due to shareholder consent issues and potential operational risks.
• Smaller players are more likely to undergo restructuring, including mergers or liquidations, due to limited financial resources and lack of bargaining power.

Financial Impact

• The big three have suffered significant operating losses, with combined losses exceeding KRW13.6t from 2014 to 2015.
• Offshore projects account for a large portion of order backlogs and have been a major source of losses.

Conclusion

The shipbuilding industry in South Korea is facing a severe crisis driven by falling oil prices and increased competition from Chinese firms. While large shipbuilders are in relatively better financial shape, they are still under pressure due to weak order inflows and high fixed costs. Restructuring is seen as a necessary step, but it is not without challenges. The market is particularly concerned about the potential for a prolonged recession and the structural changes that may be required to survive.