[This Week's Focus Stock] Shipbuilding Sector Sets Sail on US Momentum... Spotlight on Equipment Stocks

Key Partner to Korea’s Top Three Shipbuilders, Sejin Heavy Industries
Stock Price Up 147% from This Year’s Low
"Sharp Performance Improvement Expected in the Second Half"
Securities Firms Raise Target Prices Across the Board

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While the domestic stock market remains stagnant within a narrow range, shipbuilding stocks alone continue to show a strong upward trend. This is based on the belief that momentum will persist in the mid- to long-term due to Korea-US cooperation in shipbuilding and expectations of additional orders.

However, despite positive reviews from securities firms, investors are hesitant to invest in the leading stocks due to their high valuations. As a result, the market is turning its attention to shipbuilding equipment stocks and expanding investment in this area. In particular, the securities industry is focusing on Sejin Heavy Industries, which is considered undervalued despite having a higher operating margin than its competitors.

Sejin Heavy Industries, a Core Partner of HD Hyundai Group

Sejin Heavy Industries, which was listed on the Korea Exchange in 2015, specializes in producing essential ship components such as deckhouses and liquefied petroleum gas (LPG) tanks. Deckhouses, also known as crew quarters, are living spaces for sailors. They are high-value-added products that are custom-designed for each ship type, making mass production difficult.

Since its establishment in 1999, Sejin Heavy Industries has exclusively supplied deckhouses and gas tanks to subsidiaries of HD Korea Shipbuilding & Offshore Engineering, including HD Hyundai Heavy Industries and HD Hyundai Mipo Dockyard, for over 20 years. As the domestic shipbuilding industry entered a supercycle and major shipbuilders secured more orders, Sejin Heavy Industries also gained additional clients. Since last year, the company has signed supply contracts with Hanwha Ocean and Samsung Heavy Industries, enabling it to supply key equipment to all three major Korean shipbuilders.

This has driven steady growth in the company's performance. Operating profit increased from 24.9 billion won in 2022 to 33.5 billion won in 2023, and reached 35.9 billion won last year. In the first half of this year, operating profit stood at 26.5 billion won.

The operating margin is also solid. In the first quarter, the company posted an operating margin of 18.1%, far surpassing its competitors. However, due to increased costs in the second quarter, the first-half operating margin retreated to 13.5%. During the same period, Hanwha Engine recorded an operating margin of 7.9%, while HD Hyundai Marine Engine posted 15%.

Oh Jihoon, a researcher at IBK Investment & Securities, stated in a report on August 27, "Second-quarter operating profit was 8.8 billion won, falling short of consensus, but the main reason was increased inventory purchases in preparation for a rise in tank deliveries in the second half." He added, "We expect a sharp improvement in performance in the second half and believe now is the time to buy with the second half in mind."

Sharp Stock Price Increase... Securities Firms Say "More Upside Ahead"

Sejin Heavy Industries' stock price has risen sharply this year. After dropping to 6,420 won in April, it soared as the shipbuilding sector gained momentum. On May 21, the stock jumped 29.91%, and continued its upward trend, closing at 15,860 won on September 1. This represents a 147% increase from this year's low.

Despite the sharp rise, securities firms have unanimously raised their target prices for Sejin Heavy Industries. Researcher Oh cited growing demand for LPG tanks and raised the target price to 21,000 won. The company plans to expand its tank production capacity by enlarging its Vietnamese shipyard by 2027.

Oh added, "Clients are in such urgent need of tanks that they are considering acquiring the company," and "Sejin Heavy Industries' target of delivering 40 tanks annually by 2027 remains valid. After 2027, the supply of substructures for floating offshore wind power projects, which Hyundai is currently bidding for, will also be reflected in the company's performance."

Um Kyunga, a researcher at Shin Young Securities, set a target price of 18,000 won for Sejin Heavy Industries. Um explained, "We previously raised the target multiples for shipbuilders due to expansion in the US market, and we are raising Sejin Heavy Industries' target multiple from 4 times to 4.5 times," adding, "It is certain that increased orders for shipbuilders will translate into higher sales for their partners."

There are also expectations of indirect benefits from the US "Burns-Tollefson Act," which prohibits building US warships, hulls, or key components overseas. Recently, the US has been considering building its warships in Korea through executive orders by President Trump that would allow circumvention of the Burns-Tollefson Act.

Stunning Value Research stated in a report, "HD Hyundai Heavy Industries and HD Hyundai Mipo Dockyard now account for nearly 50% of the global LPG carrier market," adding, "Since Sejin Heavy Industries exclusively supplies deckhouses and gas tanks to these two companies, it is likely to become the global leader." The report continued, "If a concrete plan to circumvent the US 'Burns-Tollefson Act' is implemented, US warships will be built in Korea, and Sejin Heavy Industries will benefit as a result."

"Optimism Across the Entire Shipbuilding Sector"

The securities industry expects continued positive momentum in the shipbuilding sector thanks to the Korea-US shipbuilding cooperation "MASGA (Make American Shipbuilding Great Again) Project." Most plans by Korean shipbuilders to cooperate with or enter the US market are still in the early stages of building partnerships with local companies. While it is too early to quantify the impact or benefits of these projects, the lack of concrete details is actually fueling optimism across the shipbuilding sector.

Han Youngsoo, a researcher at Samsung Securities, said, "Even considering uncertainties, there is no reason to interpret Korean shipbuilders' US expansion negatively. Most projects are likely to proceed with full support from both governments, and additional business opportunities such as US government purchases of Korean-built ships may arise."

Han Seunghan, a researcher at SK Securities, stated, "Considering the MASGA project's scale of 150 billion dollars and the nature of the shipbuilding industry, which requires long-term facility investment, workforce supply, and supply chain establishment, it will remain a growth driver for at least five years and will not disappear in the short term." He added, "When the MASGA effect fades, a new merchant ship cycle driven by demand for eco-friendly and replacement vessels-similar to the second supercycle-will inevitably emerge."