[Funding] HSD Engine's Confidence in Eco-Friendly Engines Leads to Expansion

Raised 90.4 Billion KRW Through Rights Offering...Major Shareholder Over-subscribed by 120%
Responding to Increased Demand with Investment in Eco-friendly Fuel Engine Facilities

[Asia Economy Reporter Hyungsoo Park] Inhwa Precision is actively participating in the paid-in capital increase of its affiliate, large ship engine manufacturer HSD Engine. This decision appears to reflect expectations for HSD Engine's growth amid a surge in demand for eco-friendly, high-efficiency ships as governments worldwide tighten greenhouse gas regulations.

According to the Financial Supervisory Service on the 13th, HSD Engine will raise 90.4 billion KRW by issuing 12.9 million new shares. New shares will be allocated at a ratio of 0.22 shares per existing share. The planned issue price for the new shares is 7,010 KRW. Inhwa Precision, the largest shareholder, has decided to participate in the paid-in capital increase by subscribing to all allocated shares and any excess subscription shares. Accordingly, it plans to participate with a 120% excess subscription. The record date for new share allocation is the 27th of this month, and the subscription rights certificate listing and trading period will be from the 14th to the 20th of next month. The issue price will be finalized on the 26th of next month, and subscription for existing shareholders will be conducted over two trading days starting from the 29th of next month.

HSD Engine focuses on manufacturing large ship engines, a core component of the shipbuilding industry, and provides sales and services for engine parts. It is a comprehensive engine manufacturer supplying power generation facilities using diesel engines. The company has achieved cumulative production of 100 million horsepower of low-speed engines and has led technological development by commercializing the world's first dual-fuel (DF) engine for ships in 2014 and developing an eco-friendly denitrification system (DelNOx) with proprietary technology.

HSD Engine anticipates rapid growth in the global eco-friendly engine market and is pursuing capacity expansion. By around 2035, the proportion of LNG-powered ships is expected to surpass that of ships using conventional fuels. The LNG-powered ship market was valued at 18 trillion KRW in 2020 and is projected to grow to 340 trillion KRW by 2030, a 19-fold increase compared to 2020. As the eco-friendly ship market grows rapidly, zero-carbon fuel ships are expected to expand significantly.

In response to the eco-friendly ship trend for decarbonization, HSD Engine established a mutual cooperation system with Daewoo Shipbuilding & Marine Engineering (DSME) on February 17. They are collaborating on the joint development of core technologies and equipment related to eco-friendly ships.

HSD Engine's major customers are DSME and Samsung Heavy Industries, accounting for 40% and 9% of sales in the first quarter of this year, respectively. If Hyundai Heavy Industries Group had acquired DSME, it might have lost one of its major customers. However, on January 13 (local time), the European Commission ultimately rejected the merger between Korea Shipbuilding & Offshore Engineering and DSME, alleviating concerns about profitability deterioration. As DSME competes again with Hyundai Heavy Industries Group, HSD Engine is expected to secure a significant portion of DSME's ship engine orders. Last month, it signed engine supply contracts worth 63.9 billion KRW and 103.9 billion KRW with DSME, respectively.

Of the 90.4 billion KRW raised through the paid-in capital increase, 40 billion KRW will be used for facility investment. The company plans to invest in eco-friendly fuel engine equipment and expand production facilities to respond to increased orders. For the commercialization of eco-friendly fuel engines, funds will be allocated to machinery, piping facilities, electrical equipment, measuring instruments, fuel storage tanks, and commissioning facilities at the Changwon plant. 32.4 billion KRW will be used for purchasing materials for engine manufacturing and eco-friendly research and development (R&D). The remaining 18 billion KRW will be used to repay debt.

The ship engine manufacturing industry’s profitability can vary depending on the prices of major raw materials. When raw material prices rise, new orders benefit from increased contract prices and sales growth, but existing orders or those in progress incur additional raw material costs, which can negatively affect profitability. The rise in major raw material prices from last year through the first quarter of this year was a primary cause of operating losses. Among major raw materials, the price of steel plates increased from 618,000 KRW per ton in 2020 to 1,177,000 KRW per ton in the first quarter of this year.

HSD Engine reflects raw material price increases in the pricing of new orders, so it judged that the possibility of further profitability deterioration due to rising raw material prices is low. However, if raw material prices continue to rise or if increases are not reflected in new order prices, the company may continue to operate at a loss.

Since the end of 2020, new ship prices have risen and new orders have increased due to recovery in maritime cargo volume and rising shipping freight rates. As of the end of the first quarter this year, HSD Engine’s ship engine order backlog stood at 1.3628 trillion KRW, the largest scale in the past five years.

Researcher Kyunga Um of Shin Young Securities explained, "The main reason for securing facility investment funds is to expand production for high value-added engines," adding, "If this is the case for the paid-in capital increase, I recommend subscribing."

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