We maintain a Positive rating on the shipbuilding industry. Strong shipbuilding orders are expected to continue into 2H21 led by both ongoing strong demand for containerships and imminent Qatar LNGC orders. Although LNGC orders may slow next year, the turnaround in tanker demand should accelerate.

We forecast a shipbuilding industry rebound in 2025. Considering the aging of ships and the introduction of additional environmental regulations (IMO 2030), the shipbuilding industry is highly likely to turn around in 2025, and we believe these expectations have yet to be reflected in share prices. In 2025, the LNG cycle will also begin to revive, and the oversupply of offshore rigs is highly likely to be resolved.

We suggest HMD as a sector top pick, and HSD Engine as a preferred stock. Of note, HMD and HSD Engine’s business structures are not overly dependent on LNGC orders. We recommend paying attention to companies that show strength in containerships and tankers.

Top pick 1: HMD (010620.KS); TP of W110,000

Hyundai Mipo Dockyard (HMD) booked US$1.92bn in orders (+102% y-y) by mid-May, with such order growth driven by PCCs and mid-size gas carriers.

Having remained rangebound, its orders and order backlog are ramping up. The firm’s orders are estimated to surpass US$5.5bn in 1H21.

Among domestic shipbuilders, HMD boasts the strongest financials. Being in a net cash position, the shipbuilder is capable of building vessels without capital financing or borrowing.

It is also positive that HMD does not need to rely on certain large projects such as the Qatar LNGC project. The company boasts a strong position in the tanker and containership segments.

Top pick 2: HSD Engine (082740.KS)

As the world’s second-largest ship engine maker, HSD Engine supplies around 70~80% of the engines required by SHI and DSME.

In 2021, orders are projected at W1.1tn (+90% y-y) and order backlog at W1.3tn (+65% y-y). The firm’s earnings are likely to turn around next year.

The company boasts a 20% share of the Chinese market. We expect demand for bulker engines to pick up in China.

Demand for green engines (eg, DF engine) is rising in line with stronger environmental regulations. DF engines are priced roughly 20% higher than diesel engines and generate higher margins. Accordingly, higher demand for DF engines bodes well for HSD Engine’s profitability.
Source: Business Korea