[Into the Stocks] Samsung Heavy Industries Unable to Smile Despite K-Chosun Revival

[Asia Economy Reporter Song Hwajeong] The domestic shipbuilding industry is making a spectacular comeback with record-breaking order achievements. Expectations are rising for Samsung Heavy Industries, which led the historic orders, but the stock price is expected to face obstacles as the deficit phase is still expected to continue this year.

K-Shipbuilding Revival Led by Order Jackpot

Samsung Heavy Industries announced on the 26th of last month that it had secured an order for 20 container ships of 15,000 TEU class (1 TEU equals one 20-foot container) from a shipowner in the Panama region for 2.8099 trillion KRW. This is the largest single shipbuilding contract in the history of the global shipbuilding industry, rewriting shipbuilding history. Including three recently ordered Suezmax-class crude oil tankers, Samsung Heavy Industries has secured a total of 42 ships worth 5.1 billion USD (approximately 5.7 trillion KRW) this year. Before the first quarter ended, it achieved 65%, or two-thirds, of this year’s target of 7.8 billion USD. The order backlog increased to 25.8 billion USD, the highest level in the past five years. According to Clarkson Research, Samsung Heavy Industries secured 34 out of 66 large container ships of 12,000 TEU class or larger (Neopanamax class) ordered worldwide this year, accounting for half. Over the past three years since 2019, it has secured 40 ships, the largest share at 29% out of 138 ships in total.

Not only Samsung Heavy Industries but also other domestic shipbuilders have announced good order news this year, signaling the revival of K-Shipbuilding. According to Clarkson Research, out of a total of 4.02 million CGT (Compensated Gross Tonnage, standard ship tonnage, 101 ships) container ships ordered worldwide this year, Korea swept 1.71 million CGT (31 ships), accounting for 43% market share. For tankers including crude oil tankers, out of a total of 1.61 million CGT (59 ships) ordered, Korea took 1.32 million CGT (40 ships), showing a market share of 82%.

The favorable order trend of domestic shipbuilders is expected to continue. Lee Bongjin, a researcher at Hanwha Investment & Securities, said, "Domestic shipbuilding orders are expected to be stronger than anticipated," adding, "Although the ship supply growth rate has increased compared to last month due to recent order increases, it is still difficult to say that orders have been sufficient, and ship orders will increase unless there is a cargo volume shock."

The recent Suez Canal accident is also expected to have a positive effect on orders for domestic shipbuilders. The container ship stranded in the Suez Canal was the Ever Given, delivered by Japan’s Imabari Shipbuilding in 2018. Park Muhyun, a researcher at Hana Financial Investment, said, "Frequent breakdowns of ships built in China have already become familiar, and ships built in Japan also fail to withstand the wind, causing a loss of trust in ship quality," and predicted, "Ship orders to Korean shipbuilding will increase explosively."

The Unending Deficit Cycle and Unresolved Offshore Plant Risks

Although Samsung Heavy Industries has recorded good order results with a jackpot of orders, the outlook for operating performance this year is not bright.

According to financial information provider FnGuide, the consensus forecast for Samsung Heavy Industries’ annual performance this year is sales of 6.9994 trillion KRW and an operating loss of 71.8 billion KRW. Sales are expected to increase by 2.03% compared to the previous year, but the deficit phase is expected to continue. Samsung Heavy Industries recorded an operating loss of 1.0541 trillion KRW last year, continuing a deficit for six consecutive years since 2015.

Offshore plant risks are cited as the reason for poor performance. Earlier this month, Samsung Heavy Industries lost a lawsuit for the refund of advance payments with Sweden’s Stena. The London arbitration tribunal ruled that the cancellation of the contract for the construction of one semi-submersible drilling rig by Stena was lawful and decided that Samsung Heavy Industries must return a total of 463.2 billion KRW, including the advance payment received and accrued interest, to Stena. Due to this decision, Samsung Heavy Industries additionally reflected a provision of 287.7 billion KRW in last year’s financial statements.

Choi Jinmyung, a researcher at NH Investment & Securities, said, "Samsung Heavy Industries has recorded losses for six consecutive years, and the possibility of turning a profit in the short term is unclear," adding, "Especially, the indication of expanding the offshore plant proportion again in setting the 2021 order target and the additional costs occurring in the drilling rigs ordered in 2013 are concerns from an investment perspective." He added, "Last year, provisions of 410.7 billion KRW related to offshore plants ordered in 2007 and 2013 also occurred, so it is a state where business feasibility cannot be judged solely by rising oil prices."

Stock Price Rose with Order Jackpot but Investment Opinions and Target Prices Remain Unchanged

Samsung Heavy Industries recorded a 52-week high by rising to 8,000 KRW during trading yesterday. It is the first time since October 2019 that Samsung Heavy Industries’ stock price reached the 8,000 KRW mark. However, most securities firms’ target prices fall short of this level. Among 12 securities firms that presented consensus on Samsung Heavy Industries this year, only two have target prices exceeding 8,000 KRW. The rest suggested target prices in the 5,000 to 6,500 KRW range. Only two firms gave a 'buy' recommendation, while the others maintained neutral (HOLD) or market perform ratings.

Kim Hyun, a researcher at Meritz Securities, said, "Concerns about Samsung Heavy Industries include provisions related to drillships and offshore plants and worsening cash flow. The progress of reselling drillship inventory assets is undisclosed, but securing advance payments due to the surge in orders can alleviate liquidity concerns," adding, "With a price-to-book ratio (PBR) of 1.2 times based on total equity at the end of 2020, the valuation level is the highest among peers and is a burdensome level."

This content was produced with the assistance of AI translation services.