Hyundai Heavy Industries (009540.KS)
Buy: Unchanged Earnings Outlook – 2Q07 Results
[C:10 August 2007]
? Weaker OP due to W80bn bonus — Due to W80bn bonus payment concentrated
in 2Q07, OP margin fell QoQ to 9.5%. We estimate an upward OP margin trend
from net growth of OP margin by 0.7%pt QoQ before the payment of bonus.
? Cutting OP estimates due to bigger bonus — Assuming the full-year bonus
increases at W153bn, thus implying additional bonus of W73bn in 2H07, we cut
our OP estimates by 4.5~5.0% for 2007E~2010E. Expecting stronger move in
shipbuilding prices, we see unchanged OP outlook for 2011~2012E.
? Unchanged earnings outlook from stronger equity-method gain — HHI posted a
W150bn equity method gain in 2Q07, up 55% from W91bn in 1Q07. The growth
came mainly from its 95% holding in Hyundai Samho Heavy Industries (not
listed). Reflecting larger-than-expected gain from subsidiaries, our net profit outlook is little changed, and we make only minor adjustments.
? Strong outlook, looks oversold at 8.8x ‘08E PE — We are expecting an even
stronger move in shipbuilding prices in 2H07E, and the stock looks oversold, in
our view. Currently, HHI trades at 8.8x ‘08E PE. If we factor in the 18% treasury
stock, the shares trade at 7.2x ‘08E PE. We maintain our Buy / Medium Risk
(1M) rating on the stock with a target price of W840,000 [160.5% total return].
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Hyundai Heavy Industries
Company description
Founded on March 23, 1972, Hyundai Heavy Industries (HHI) builds ships for
commercial and military purposes. It also produces heavy industrial machinery,
electrical components for engines and power trains, and industrial vehicles. The
company completed construction of the world's largest shipyard when it
delivered in June 1974. A decade after its first delivery, Hyundai Shipyard
topped 10 million deadweight tons in aggregate ship production. In February
2002, it completed its spin-off from the Hyundai Group and established the
Hyundai Heavy Industries Group by taking over Hyundai Samho Heavy
Industries and Hyundai Mipo Dockyard.
Investment thesis
We rate Hyundai Heavy Industries shares as Buy / Medium Risk (1M). HHI is
the largest shipbuilder in the world with a vertically integrated business
structure. From its huge scale, the company achieves lower raw material costs
and superior economies of scale than its peers. Also, with the further expansion
of its drydock, we expect accelerated growth of the company going forward. With
an integrated engine business, HHI delivers lower priced vessels earlier and is
able to fully benefit from the current industry cycle. With tighter global
shipbuilding capacity, we expect a continued expansion of shipbuilding prices
going forward. We also expect the Korean shipbuilders to exert strong bargaining
power given the tighter delivery schedules for Japanese and Chinese yards. In
1Q07, all units reported stronger-than expected growth with higher margins
easing remaining uncertainties at non-shipbuilding business units.
Valuation
Korean shipbuilders will start taking orders for 2011 delivery slots. With more
visibility on 2011 earnings for the Korean shipbuilders, our valuation base is set
using 2011E book. We believe average 2007E P/B multiple of global shipping
companies could be comparable with 2011E P/B of Korean shipbuilders as new
orders for 2010 and 2011 delivery slots are placed based on strong sentiment in
the shipping industry. Currently, companies within our global shipping universe
are traded at 2.6x 2007E P/B. However, considering its vertically integrated
business structure and strong growth at its non-shipbuilding business units, we
apply a 20% premium over its peers, at a slightly higher multiple of 3.1x 2011E
P/B and set our target price at W840,000.
Risks
We rate Hyundai Heavy shares Medium Risk based on our quantitative riskrating
system, which tracks 260-day historical share price volatility. Risks that
could impede the stock from reaching our target price include: 1) sharp
deterioration of the global economy - we now see less volatility in ship demand
than historically as demand is mainly from China. In coming years, volatility
should again correlate with the global economy; 2) a decline in oil prices -
current ship demand is related to strong oil prices. We are focusing on oil prices
from two years ago, as shipbuilding contracts lag oil prices by two years. So, if
oil prices weakened below US$40/bbl, it would hurt the shipbuilding industry; 3) structural steel price declines, if they come, could imply weakening demand
for bulk carriers, weaker shipbuilding prices, and a weakening global economy. |
