Daewoo Shipbuilding Faces Concerns Despite Plenty of Orders... What About Operating Funds for Next Year?

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[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] Daewoo Shipbuilding & Marine Engineering (DSME) is facing growing concerns as the European Union (EU) authorities delay approval of the corporate merger. This reflects the aftershock of the COVID-19 order cliff. There are worries that if approval is not granted next year, liquidity pressure will increase.

According to FnGuide on the 3rd, DSME is expected to record an operating loss of 63.5 billion KRW in the third quarter of this year. This is because the impact of the COVID-19 order cliff is reflected in this year's performance. Earlier, DSME posted an operating loss of 1.2203 trillion KRW in the first half, turning to a deficit compared to the previous year. This was due to poor order performance and the increase in steel plate prices, which account for 40% of shipbuilding costs.

DSME has already exceeded its order target of 7.7 billion USD for this year. Although the order boom continues this year, it cannot be all smiles. The shipbuilding industry signs contracts under a 'heavy tail' method, where the balance payment is received upon ship delivery after orders are placed. The more work there is, the more operating funds are needed. This year, cash assets are about 1.4 trillion KRW, providing some leeway, but next year, an additional 1 trillion KRW is expected to be needed for shipbuilding operating funds, labor costs, and so on.

Korea Shipbuilding & Offshore Engineering (KSOE) has agreed with KDB Industrial Bank to provide 1 trillion KRW in support to DSME if necessary, but there is a condition. The corporate merger approval must be completed. KSOE is currently awaiting corporate merger approvals from authorities in the EU, Japan, and Korea.

Meanwhile, KSOE has once again extended the period of the in-kind investment contract with KDB, the major shareholder of DSME, until the end of the year. Since the contract was signed in March 2019, it has been at a standstill for 2 years and 7 months.

An industry insider said, "Due to the order boom this year, the shipbuilding funds have increased more than expected, making borrowing necessary," adding, "If the acquisition process is delayed, DSME's cash flow could turn negative next year."

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