Initiate hedging with BUY for a target price of KRW 180,000
We are launching our Hyundai Heavy Industries hedge with BUY for a target price of KRW 180,000, based on a 2023F BPS of KRW 64,535 and a target PBR of 2.9x. Next year should mark the start of a visible recovery in the BPS, which has continued to decline over the past six years due to losses in shipbuilding activity. Our price target reflects a conservative BPS forecast, given that earnings are expected to begin to recover in earnest from 2023 in a long market cycle and stock price movements are expected to precede actual earnings improvement, as shown. is the case for shipbuilding stocks.
Our target ACB is derived by applying a 30% premium to the 2005 average ACB of 2.23x of the three national shipbuilders Samsung Heavy Industries, Daewoo Shipbuilding & Marine Engineering and Hyundai Mipo Dockyard. We estimate that current market conditions are similar to those of 2005, with new construction prices on an upward trend and heavy plate prices on a stabilizing downward trend. The premium applied to stock valuations reflects the company’s unparalleled market leadership and strong financial structure.
World leader with an extra boost from in-house engine production
Hyundai Heavy Industries, founded in 1972, is the world’s leading shipbuilder with 1,564 ships built to date in construction yards totaling 6,350,000 m2. Due to its size, the company has an advantage over its peers to achieve economies of scale during bull market cycles.
The company also produces its own engines and remains the world leader in large marine engines. Engines have evolved from mere equipment to a game-changer in the industry with stricter environmental regulations requiring diversification of fuel sources and synergy between engine and vessel technology. Building on its experience in the production of marine engines, Hyundai Heavy Industries is poised to expand its presence in the global market for environmentally friendly vessels.
3Q22 earnings recovery
Listed on KOSPI in September 2021, shares of Hyundai Heavy Industries continue to trade at a higher premium to their peers, supported by the company’s leadership on all fronts, including experience, ability to production, in-house engine production, financial structure and order backlog. We believe a renewed upward trend in new construction prices and more stable heavy plate prices could drive the company’s stock valuations to a 3x PBR going forward.
With more booked sales and lower heavy plate prices, Hyundai Heavy Industries is expected to see a turnaround in profits in 3Q22. The current order book alone guarantees profit growth over at least the next three years, and the time from order intake to delivery is similar to levels seen during the 2007 market boom, at an average of 3.2 years this year. Due to inelastic capacity supply, Hyundai Heavy Industries is likely to experience visible growth regardless of short-term economic conditions.