Hyundai Heavy Industries Unable to Smile Despite 22% Stock Price Increase in Q1

by Hwang Yoonju

Published 05 Apr.2022 11:08(KST)

Among the Three Joseon Companies, Highest Stock Price Increase
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Stock Price Rises on Expectations of Increased LNG Ship Orders
Q1 Earnings Below Consensus... Impact of Russian Financial Sanctions
Structural Increase in LNG Ship Orders Difficult to Expect
Burden from Raw Material Cost Increases Including Heavy Plate Price Hikes

Hyundai Heavy Industries Unable to Smile Despite 22% Stock Price Increase in Q1

[Asia Economy Reporter Hwang Yoon-joo] Hyundai Heavy Industries saw the highest stock price increase among the top three shipbuilders in the first quarter of this year due to expectations of LNG (liquefied natural gas) vessel orders, but its earnings are expected to fall short of expectations. There is also a forecast that the strong LNG vessel orders will not structurally exceed last year's levels.

According to the Korea Exchange on the 5th, Hyundai Heavy Industries' stock price rose 22.4%, from 97,600 KRW in the first quarter to 119,500 KRW. This significantly outperformed Samsung Heavy Industries (flat) and Daewoo Shipbuilding & Marine Engineering (+8.0%) during the same period.

The reason for Hyundai Heavy Industries' stock price increase is the expectation of expanded LNG cargo volume due to the Russia-Ukraine war and strong order performance. The European Union (EU) announced plans to reduce dependence on Russian natural gas as part of sanctions and diversify gas import sources such as LNG and PNG. This has influenced expectations that LNG vessel orders will increase due to the expansion of LNG cargo volume.

Additionally, the order news continuing from the beginning of the year was positive. Hyundai Heavy Industries' order amount in the first quarter was 6.37 billion USD (7.7 trillion KRW), already achieving 36.5% of this year's order target (17.44 billion USD).

However, the prevailing view is that LNG vessel orders are structurally unlikely to increase significantly. Lee Bong-jin, a researcher at Hanwha Investment & Securities, explained, "Due to carbon neutrality, LNG maritime cargo volume is expected to increase to about 10% annually going forward," but added, "While the strong LNG vessel orders are expected to continue for the time being, it is difficult to expect a change that significantly exceeds last year's order volume (78 vessels)."

[Image source=Yonhap News]

Profitability improvement is a separate issue. This is due to the increase in steel plate prices, which account for 15-20% of ship manufacturing costs, and financial sanctions on Russia. The top three shipbuilders, including Hyundai Heavy Industries, recorded losses in the second half of last year by setting aside provisions equivalent to the increase in steel plate prices. The cost of ship orders has risen compared to last year, and due to financial sanctions on Russia, payments for vessels ordered by Russian shipowners are currently frozen.

As a result, Hyundai Heavy Industries' first-quarter earnings are expected to fall short of estimates. According to FnGuide's estimates, first-quarter sales are expected to increase by 17.4% year-on-year to 2.3341 trillion KRW. However, operating profit is expected to fall by 73.8% to 7.4 billion KRW, and net loss is expected to turn to a deficit of 64 billion KRW.