[Into the Stocks] HMM 'The Shadow of Economic Recovery Approaches'

Freight Rate Increase Due to Economic Recovery Impact
Possibility of Surpassing 1 Trillion Won in Q1 Earnings
Freight Rates Expected to Decline as Economic Recovery Accelerates
Financial Soundness and Short Selling Must Be Considered

[Asia Economy Reporter Junho Hwang] HMM (formerly Hyundai Merchant Marine) continues to be a notable stock in the securities market this year. Due to rising freight rates and achieved earnings, its stock price has surged 137% since the beginning of the year and 990% over the past year. However, its financial soundness is still considered risky, and factors such as short selling and the conversion of convertible bonds (CB) worth 300 billion KRW upon maturity are expected to negatively impact HMM's stock price.

Economic Recovery

On the 10th, one day before the Lunar New Year holiday, export and import containers are stacked at Pyeongtaek Port as seen from a Seoul Metropolitan Police Agency helicopter. Photo by Jinhyung Kang aymsdream@

The securities market has been eager to revise upward the leading digits of HMM's target stock price since the start of this year. The consensus target price is 30,471 KRW. However, the closing price on the 28th was 39,300 KRW. Since the target price was initially set in the 10,000 KRW range at the beginning of the year, the stock price has continuously risen, causing the target price to lag behind the actual stock price.

Daishin Securities raised HMM's target price to 45,000 KRW earlier this month, the highest among target prices. Daishin Securities expects HMM to achieve sales of 2.3513 trillion KRW in Q1 this year (a 79.1% increase year-on-year) and an operating profit of 921.6 billion KRW (turning to black), which led to the upward revision of the target price. The forecast is for earnings to exceed expectations. Some market analysts predict that Q1 operating profit will surpass 1 trillion KRW. Korea Investment & Securities also set HMM's target price at 39,000 KRW last week, noting that container freight rates rose by 5%, reaching an all-time high.

This optimism is a result of increased shipping volumes due to economic recovery following COVID-19 vaccinations. Cargo volumes have increased on East-West routes, and freight rates have risen again due to supply disruptions following the Suez Canal incident.

Along with earnings, HMM is also achieving growth in scale. HMM's global container market share stands at around 3%, similar to the level of Hanjin Shipping before its bankruptcy. Before creditor management, Hyundai Merchant Marine maintained a 2% share. If eight 16,000 TEU-class vessels are delivered, further market share expansion is expected. According to the Ministry of Oceans and Fisheries, HMM plans to order an additional 12 vessels of 13,000 TEU class this year. This is expected to be used to secure transportation capacity on European routes and expand fleet competitiveness on American routes. Considering the shortage of efficient transport vessels in the American region, securities analysts view this as a beneficial mid- to long-term investment.

The Other Side of Economic Recovery

However, if full-scale economic recovery occurs, it could pose a challenge for HMM. The cause of rising freight rates can be attributed to a reduction in the number of vessel operations. COVID-19 has delayed container land transportation and cargo handling. The number of containers in ports rose to 7.84 million TEU in Q2 2021, a 17.0% increase compared to pre-COVID-19 levels. HMM's container ship operation frequency decreased by 33.6%, from 2.7 times per quarter to 1.8 times.

Hwang Eoyeon, Senior Researcher at Shinhan Financial Investment Research Center, stated, "With accelerated vaccine distribution in the U.S. in Q2 this year, waiting times for ships at ports are expected to decrease, and the number of vessel operations is expected to increase. Due to the increase in vessel operations and the resulting effective vessel capacity, the average SCFI is forecasted to drop 48.4% from the previous quarter to 1,436 points."

HMM's financial soundness also remains a concern. Accumulated deficits due to market fluctuations over the past decade amount to 4.4438 trillion KRW. The debt ratio stands at 455.1%, and the current ratio remains at about 77.7%. The impact of short selling is also anticipated, with outstanding short positions around 11.8 billion KRW, gradually increasing from 3.9 billion KRW at the beginning of the year. In June, the Korea Development Bank, a major shareholder holding 12.6%, faces the maturity of convertible bonds worth 300 billion KRW. The market expects that rather than HMM repaying this amount, the Korea Development Bank is likely to convert it into shares. If this happens, a large volume of shares will be released, exerting downward pressure on the stock price.

Um Kyung-ah, a researcher at Shin Young Securities Research Center, analyzed, "Depending on the possibility of the creditor group converting the convertible bonds they hold into shares, HMM's market capitalization could be viewed as either 7 trillion KRW or 21 trillion KRW. Assuming maximum dilution, the current stock value of HMM can be considered to be about half that of competitors with more than five times the market share."

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