We initiate our coverage of Hyundai Heavy Industries with BUY for a target price of KRW90,000, based on 12-month forward BPS of KRW65,815 and a target PBR of 1.34x. We applied a 10% premium to the peer average PBR to reflect: 1) the value of the marine engine business at KRW2tr; 2) plans for expansion into floating offshore wind power and green hydrogen markets; and 3) capability to maximize productivity during a boom in shipbuilding orders with the largest number of docks among peers. The IPO price translates into a PBR band of 0.77x-0.87x, which is lower vs. Samsung Heavy Industries (1.33x) and Daewoo Shipbuilding & Marine Engineering(1.10x).
The valuation gap with peers should narrow after the IPO on forecasts for: 1) recovery in energy carrier market conditions in 2H21; and 2) strong growth in order backlog and newbuilding prices following the introduction of stricter environmental regulations in 2023. Our target PBR may be raised on SOTP valuation of the engine business. Hyundai Heavy Industries is our top pick in the shipbuilding sector.
Spotlight on up-cycle in orders, technological lead in shipbuilding
Global order placements will likely rise to 118mn DWT (+88.3% YoY) in 2021 and 122mn DWT (+3.2% YoY) in 2022 on continued cargo volume growth driven by global economic recovery. Market conditions for energy carriers (tankers, LNG carriers) should recover from the current slump in 2H21 thanks to real economic growth in emerging countries. The introduction of Energy Efficiency Existing Ship Index (EEXI) and Carbon Intensity Indicator (CII) rules in 2023 should enforce a 9.1% slowdown in the global average steaming speed. We believe the resulting increase in freight rates will help to sustain a boom in order placements for longer than previously expected.
Hyundai Heavy Industries is leading the global gas-fueled vessel market with a market share of 21.1% and thus stands to see higher growth in order backlog and building prices vs. peers during the upcoming up-cycle in orders. The company, with the largest number of docks and biggest capacity, should be able to improve productivity by taking orders for a series of vessels.
Further growth expected in engine/offshore on shift to green fuel
Hyundai Heavy Industries is the global leader in large-size marine engines (market share of 35.6%) and mid-size engines (25.8%). It also dominates the markets for LNG (45%) and methanol (100%) dual-fuel engines, whose portion in order placements is growing ahead of the strengthening of environmental rules. Further sales growth is expected upon approval of the deal to acquire Daewoo Shipbuilding & Marine Engineering.
The company plans to expand into floating offshore wind power and green hydrogen markets amid declining capex in fossil fuel production. Its participation in Ulsan’s renewable energy project should generate sales of KRW1.3tr in 2028, with total order placements estimated at KRW9.1tr.
Source: Shinhan Investment Corp., By Business Korea