20170110-三星证券-4Q16_preview_and_2017_outlook_12页_402kb

Sector Update Summary: Korean Shipbuilding Industry

Core Content Overview

This document provides an analysis of the Korean shipbuilding sector, focusing on the performance and outlook of key players: Hyundai Heavy Industries (HHI), Samsung Heavy Industries (SHI), and Hyundai Mipo Dockyard (HMD). The report also examines global shipbuilding data, the offshore structure market, and the impact of recent market events on the sector's valuation and investment strategy.

Main Points and Key Information

1. Share Price Volatility and Market Outlook

• Korean shipbuilders experienced significant share price volatility during the first week of 2017, particularly after HHI Group released disappointing 2017 sales guidance.
• Despite this, the sector showed a rebound due to news of new offshore orders.
• The market is seen as cautious due to low expectations following a strong 2016 performance (42% surge).
• Buying on weakness is recommended as a valid strategy.

2. 4Q16 Preview and 2017 Outlook

• Fourth-quarter results are expected to be in line with low expectations, but HHI is anticipated to outperform due to its refining business performance.
• HHI is projected to report a slightly better-than-forecast operating profit.
• HMD is likely to meet consensus estimates due to won depreciation.
• SHI is still determining the timing of one-off gains and losses from offshore project changes and a construction site incident.

3. HHI Group Sales Guidance

• HHI and HMD released parent-based 2017 sales guidance that fell short of consensus by KRW1.5t and KRW0.6t, respectively.
• However, the gap is attributed to reduced onshore plant project sales, which are less burdened by fixed costs.
• HHI's parent-based guidance is expected to align more closely with the consensus once green energy and global services businesses are excluded.
• The guidance may not lead to downward pressure on earnings estimates.

4. Global Shipbuilding Data

• Global shipbuilding orders dropped 72% in 2016, reaching 11.2m CGT, the lowest since 1996.
• Korea's order backlogs (based on CGT) were outpaced by Japan for the first time in 17 years, but this is not necessarily negative:
  • Korea's big three shipbuilders still lead in CGT-based order backlogs.
  • Korea's order backlog in USD still significantly outpaces Japan.
• Smaller shipbuilders with only commercial vessel backlogs may face market exclusion.

5. Offshore Structure Market Recovery

• SHI won a USD1.3b FPU order for BP's Mad Dog II project, marking the first large offshore order in 18 months.
• DSME delivered a large jack-up rig to Maersk Drilling, which is positive for cash flow and industry sentiment.
• The offshore structure market is expected to recover due to rising oil prices and renewed demand for offshore projects.
• Offshore drilling rigs are more sensitive to oil prices than offshore production facilities.

Key Financial Metrics and Valuations

Valuation Context

• The sector trades at 0.6x P/B, which is undemanding compared to historical levels.
• This valuation is lower than 2014-2015, but the previous period saw massive capital impairment due to falling oil prices.
• The current P/B valuation is expected to remain stable as orders improve due to:
  • Rising oil prices.
  • Base effect from the 2016 order vacuum.
• HHI is highlighted as the top pick due to its non-shipbuilding spinoffs and potential for long-term growth.

Investment Recommendations

• HHI is recommended as the top pick, with a target price of KRW190,000 (35.7% upside).
• SHI has a target price of KRW11,200, with a 12% increase from previous estimates.
• HMD has a target price of KRW78,000 (18.2% upside), though its 2017 guidance was below expectations.
• Buying on weakness is encouraged, especially for HHI, which is expected to benefit from industry restructuring and offshore market normalization.

Conclusion

• Sales declines are expected to hit profitability in 2017, particularly in the second half.
• Unbound sector pessimism is not warranted, as valuations are already low.
• The offshore structure market is expected to recover with rising oil prices.
• Investors should consider the possibility of new order rebounds and focus on large listed players like HHI for long-term value.