Only the Strong Survive Essay Example

taking out more loans since 2009 due to the rise in heavy-tail payments that require smaller advance payments. However, it is anticipated that shipbuilder loans will decrease by late 2013, which will improve their cashflow and balance sheets. Despite concerns about lower-priced orders, the increasing number of orders and improved cashflow are likely to result in higher share prices. The cashflow of shipbuilders will have an impact on their share prices. Despite facing market competition, Hyundai Mipo Dockyard is predicted to continue receiving more orders, although some may be at lower prices.

The second phase of restructuring aims to solidify the industry through further consolidation. The shipbuilding market is expected to remain weak due to the global economic downturn and stricter ship financing. We predict that the surviving shipbuilding companies will actively pursue new orders to enhance their backlogs. When the market recovers, we believe that the winners of this restructuring phase will greatly benefit. During the current decline in vessel construction, the proportion of bulk carriers and tankers (out of total orders) has decreased significantly, while the percentage of mega containerships and LNG carriers has risen.

In 2013, we expect these trends to continue. We anticipate that major Korean shipbuilders will be able to develop improved efficiency in new types of vessels, which will enhance this company's competitiveness. However, there are risk factors to consider. Shipbuilders' earnings will not recover easily due to orders at lower-than-normal prices and won appreciation. Shipbuilders will need to accept low price orders in order to secure backlogs. Another risk factor is won appreciation. Nevertheless, at current levels, we believe the risks are limited thanks to Korean shipbuilders' technological edge and

dollar-denominated payment for raw materials, which accounts for 40% of total raw material purchase.

The price-to-book ratio (P/B) for Korea's top 3 shipbuilders is expected to rise from around 1.0x to a historically low level of 1.2x due to three significant catalysts mentioned earlier. It is also predicted that the return on equity (ROE) for shipbuilders will increase to 19%. The anticipated new orders are likely to drive strong performance in the first half of the year for these shipbuilders. Furthermore, there have been changes in the relative share performance among global shipbuilders.

Due to an increase in offshore orders, Korean shipbuilders and Hyundai Mipo Dockyard are now aligned with Keppel Corp. and Sembcorp Marine, Singapore companies that specialize in offshore plants. Given the ongoing eurozone crisis and the unstable global economy, shipbuilding shares are projected to have a trading range of a P/B of 1.0x to 1.3x. While we believe the shares have reached their lowest point, we do not anticipate a significant recovery until there is a substantial rebound in new building prices.

We recommend buying the shares at a price-to-book ratio of 1.0x. Shipbuilding shares are expected to fully recover from 2014 onwards, as the market improves and there is an increase in orders for commercial vessels. This will lead to improved cashflow and earnings recovery. We maintain a Buy rating on Hyundai Heavy Industries (HHI) with a target price of W280,000. HHI's share performance was weak in 2012 due to poor earnings and orders. However, we anticipate strong orders for the company in 2013, driven by a resurgence in the offshore/onshore plant market.

The company is expected to see a turnaround in earnings and

improved cash flow in 2013 due to large orders and increased payments. This performance indicates that the weak orders and earnings from 2012 have already been accounted for. Despite having poor orders and disappointing earnings last year, the company has strong investment potential in 2013 as it is projected to win significant orders. By restructuring its business, the company is determined to achieve its order target of US$29 in 2013. It is also anticipated to receive a substantial number of offshore/onshore plant orders.

We believe that SHI possesses attractive investment qualities due to its competitive advantage, consistent profits, strong potential for growth, and enhancement in cash flow. Among the top domestic shipbuilders, SHI receives the highest level of optimism from domestic institutions. The offshore plant sector, which includes FLNG and drillships, is where SHI has demonstrated its superior competitiveness. Consequently, the company maintains a solid earnings position compared to its rivals.

SHI is expanding into the subsea business and is expected to rapidly strengthen its competitiveness in this segment. Despite a tepid performance last year, the commercial vessel unit is likely to recover in 2013. This recovery can be attributed to rising mega containership orders and steady orders for LNG carriers and LNG FSRU.

SHI is projected to display the fastest cash flow improvement in its peer group this year. This improvement is supported by a rise in orders for both offshore plants and commercial vessels, as well as an increase in heavy-tail payments. Consequently, the company will be able to repay its debt and reinforce its financial structure.

SHI's earnings are expected to gradually increase on the back of rising revenue contributions from the offshore

plant unit. Therefore, we maintain our Buy recommendation on Hyundai Mipo Dockyard (HMD) and our target price of W148,000. Despite the global economic slowdown and eurozone fiscal crisis, we anticipate HMD will maintain stable growth in orders and earnings. Shipowners particularly favor HMD among small- to mid-sized shipbuilders.

Despite an expected slowdown in the shipbuilding market, HMD is projected to have a strong share performance in 2013. We believe that HMD will continue to outperform other small- to mid-sized Korean shipbuilders this year, despite increased competition and lower ship prices. The company is expected to maintain stable orders, earnings, and cash flow due to its strong productivity, financing capability, and high-quality products. Additionally, HMD benefits from its cost competitiveness as it procures raw materials at lower prices from the Hyundai Heavy Industries Group.

In 2013, it is anticipated that the product carrier (P/C) segment of the small- to mid-sized merchant ship market, where HMD has a strong competitive advantage, will remain relatively strong. If the shipbuilding market continues to struggle for an extended period, HMD will likely further distance itself from its competitors. The company is expected to benefit the most from a second industry restructuring that is projected to conclude in 2014. Despite HMD's recent initiation of an industrial site development near Incheon port, this project is unlikely to significantly increase operating profit due to high capital requirements and increased interest expenses. The commercial vessel division at the Youngdo shipyard is not expected to recover. With the global commercial vessel market declining, order numbers are decreasing while competition among shipbuilders intensifies, leading shipowners to demand price discounts.

There is a growing possibility that the Subic shipyard will

receive new orders due to its strong price competitiveness. However, the shipyard faces challenges in building high-end vessels, which is expected to hinder the company's earnings recovery in the near future. The shipyard also has unresolved labour-management issues, including employees on leave due to lack of work. HHIC, the company, is currently addressing its short-term capital needs by disposing of real estate. However, it may face difficulties selling large-scale real estate assets due to the slump in the real estate market. The company requires additional capital for a development project near the Incheon port. This information is accurate as of the publication date provided by Daewoo Securities Co.

, Ltd. issued equity-linked warrants with Hyundai Heavy Industries and Samsung Heavy Industries as underlying assets, and besides this, Daewoo Securities has no other specific interests in the mentioned companies. The opinions expressed in this report regarding the securities and companies reflect the personal views of the analysts primarily responsible for it. Daewoo Securities Co., Ltd.

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