Shipbuilding

2013 Outlook

The law of the jungle

The shipbuilding industry has been characterized by 2~4-year cycles in which changes in
orders are followed by changes in ship prices. Based on this cyclicality, we expect order
growth to turn to positive in 2013, aided by an increase in mega containership orders
and solid orders for LNG carriers. However, we believe that the projected increase in
orders will not necessarily be positive for the industry, as intensifying competition is
likely to force shipbuilders to take low-priced orders amid minimal order backlogs. As
such, the shipbuilding industry is expected to see restructuring accelerate, despite order
growth in 2013, due to a lack of backlogs, intense competition, falling ship prices, and
sluggish new orders. Nevertheless, the three largest domestic shipbuilders are
expected to record YoY order growth in 2013, although competition for orders is
projected to hit a historic high.

Daewoo Securities Co., Ltd.

Ki-jong Sung
+822-768-3263
kijong.sung@dwsec.com

In terms of ship financing, the shipbuilding industry will likely pass through the last stage
of the down cycle in 2013. With the collapse of the ship financing market, several
financial institutions have discontinued ship financing operations, and new players are
entering the market. We expect the ship financing market to see a turnaround in 2H13,
or 2014 at the latest. However, if the global economic recession continues due to the
deepening of the eurozone crisis, or a failure to reach a fiscal cliff deal in the US,
improvement in ship supply/demand conditions will likely be delayed further. Of note,
during a turnaround in the ship financing cycle, improvement in ship supply/demand
conditions and raw material price rises can be interpreted as leading indicators for a
pickup in the shipbuilding market.
Shipbuilders borrowings have increased in line with order growth since 2010, as the
proportion of heavy-tail payment terms (which are characterized by small advance
payments) has increased. However, on a positive note, with the deliveries of these
contracts increasing toward late 2013, shipbuilders borrowings will likely decrease,
leading to improvement in their cash flows.
The offshore plant market is expected to see massive orders in 2013, as in 2012. In
particular, the three largest domestic shipbuilders are projected to display marked order
growth in light of the large-scale projects that experienced delays in 2012. By vessel type,
orders for drilling equipment, including drillships, will likely drop, while orders for highpriced vessels, including FPSO and LNG FPSO, should increase.

(-1Y=100)
140

Shipbuilding
KOSPI

130
120
110
100
90
80
11/11

1/12

3/12

5/12

7/12

9/12

11/12

Source: KDB Daewoo Securities Research

This paper is part of KDB Daewoo Securities 2013 Outlook Report published on December 7, 2012

193

December 7, 2012

Shipbuilding

Industry big picture

Shipbuilding production capacity and new order trend by country
(mn CGT)
90

(mn GT)
180

Japan (L)

Korea (L)

China (L)

Europe (L)

Other (L)

Newbuilding orders (R)

Shipbuilding industry
experienced drastic changes
after global financial crisis
150

75
Tanker orders surged due to
the Middle Eastern conflicts
1st phase of
rest ruct uring

60
Japan's capacity
reduction (2nd phase)

45

120

90

Japan's capacity
reduction (1st phase)
Plaza
Accord

30

2nd phase of
rest ruct uring

Business focus
shifted to
non-shipbuilding areas

60

30

15

0
75

80

85

90

95

00

05

06

07

08

09

10

11

12F

13F

Source: Lloyds list, KOSHIPA, KDB Daewoo Securities

Key valuations
Ticker

Company

Rating

009540 KS
010140 KS
010620 KS
097230 KS

Hyundai Heavy Industries

Samsung Heavy Industries
Hyundai Mipo Dockyard
Hanjin Heavy I&C

Buy
Buy
Buy
Trading Buy

Target price % Upside

(W)
280,000
44,000
148,000
16,200

35.9
24.6
37.0
30.6

P/E (x)
12F
13F

P/B (x)
12F
13F

ROE (%)
12F
13F

9.1
9.2
19.6
-

0.9
1.4
0.9
0.4

10.2
17.8
3.7
-2.3

7.8
8.5
10.6
9.6

0.8
1.2
0.8
0.3

10.9
16.5
7.1
3.4

EPS growth (%)

12F
13F
-31.5
5.2
-43.2
RR

17.2
8.8
85.1
TTB

Notes: All figures are based on consolidated K-IFRS. Pricing as of November 27, 2012.
Source: KDB Daewoo Securities Research

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December 7, 2012

Shipbuilding

2013 Key Issues

1. Severe competition for orders
Shipbuilders are
projected to aggressively
seek new orders to
strengthen backlogs

In 1H13, shipbuilders average backlog is expected to decrease to one and a half years due
to low ship prices and weak new orders. In order to strengthen backlogs, shipbuilders are
projected to aggressively seek new orders, as they did during 2009~2010.
However, while shipbuilders are desperately seeking new orders, shipowners are in no hurry
to place them. Amid the protracted economic slump, raw material prices (e.g., heavy plates)
are expected to decline. In addition, intensifying competition for orders is forecast to keep
ship prices depressed. Shipbuilders are currently in a difficult position: they are too worried
by the possibility of further profitability declines to even think about ship price hikes.
Meanwhile, orders for specialty vessels (e.g., mega containerships, gas carriers) are projected
to grow. While low-priced orders from shipowners are expected to increase, shipbuilders are
likely to eventually accept the low-priced orders for the aforementioned reasons.
It should be noted that growth of low-priced orders does not necessarily signal a market
recovery. Rather, we expect competition among shipbuilders will intensify further.

Figure 1. Major shipbuilders commercial vessel order backlogs and

production capacities (as of 2012)
('000 DWT)
4,000

Production capacity (L)

(US$bn)
30

Figure 2. Newbuilding price trend and forecasts by vessel type

(01.03=100)
300

Tanker
Bulk carrier
Containership
Gas carrier

Order backlogs (R)

250

3,000
20
200

2,000
150

10
1,000

100

0
HHI

SHI

DSME

HMD

50
03

STX

04

05

06

07

08

09

10

Source: Company data, KDB Daewoo Securities Research

Source: Clarkson, KDB Daewoo Securities Research

Figure 3. Heavy plate and VLCC price trends and forecasts

Figure 4. Commercial vessel new order trend

(W'000/tonnne)
1,200

(US$mn)
180

VLCC newbuilding price (L)

11

12

13
13F

(CGTmn)
100

Heavy plate price (R)

80

160
1,000

60

140
800

40

120
600

20

100

0
80

400
06

07

08

09

10

11

12

Source: Clarkson, Bloomberg, KDB Daewoo Securities Research

KDB Daewoo Securities Research

01

02

03

04

05

06

07

08

13F

09

10

11

12(as
of Oct.)

Source: Clarkson, KDB Daewoo Securities Research

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Shipbuilding

2. The second phase of industry restructuring

We expect the second phase of restructuring to weed out less competitive shipbuilders
against a backdrop of falling overall newbuilding orders and tightening ship financing.

The second phase of

restructuring will be
characterized by
competition among the
survivors

Amid a fall in newbuilding orders, the percentage of bulk carriers and tankers in total orders
has sharply shrunk, while the percentage of mega containerships and LNG carriers has
expanded. Despite a prolonged slump in newbuilding orders, the market environment is
expected to become more favorable to large shipbuilders in Korea in 2013.
While the first phase of restructuring in the shipbuilding industry was sparked by order
declines at small- to mid-sized players due to a lack of financial support, the second phase of
restructuring will be characterized by competition among the survivors. We believe the
winners of the second phase of restructuring will benefit significantly when the market
recovers.

Figure 5. Order trends by vessel type (quarterly)

(mnCGT)
25
Tanker
Containership
LPG carrier
20

Figure 6. Commercial vessel market structure

(%)

Bulk carrier
LNG carrier

Tanker

Bulk

Containership

LNG carrier

LPG carrier

100

80

15

60

10

40

20

0
03

04

05

06

07

08

09

10

11

07

12

11

12

Source: Clarkson, KDB Daewoo Securities Research

Source: Clarkson, KDB Daewoo Securities Research

Figure 7. Shipbuilding industry restructuring in Korea and China

Figure 8. Syndicated loans trend

(No. of shipbuilders)
200

197

South Korea
China

(US$bn)
140

Amount of syndicated loans (L)

Number of loans extended (R)

120

(no.)
400
350

160
300

100
120

250

down 88.3%

80
200
60

80

150
40

40

23

24

down 66.7%

50
0

0
2008

2012

Source: Press release, KDB Daewoo Securities Research

196

100

20

03

04

05

06

07

08

09

10

11

1~3Q12

Source: Dealogic, KDB Daewoo Securities Research

KDB Daewoo Securities Research

December 7, 2012

Shipbuilding

3. Ongoing offshore competition among oil majors

The number of large
offshore plant
construction projects is
forecast to increase
30% YoY

Most oil majors forecast E&P projects to expand globally over the next several years. Thus,
their investments in offshore resources are anticipated to grow in 2013. Currently,
development of large-sized facilities (which allow for the more efficient use of equipment)
and various vessel types is ongoing, and E&P sites are expanding. In particular, the
development of higher-efficiency equipment is a key to strengthening competitiveness as it
could bring down costs. And the development of new equipment for deep-sea drilling
facilities is gaining traction as exploration is moving into deeper waters and the need for
production/storage facilities is extending from oil into gas.
Oil majors are planning to make investments as long as the Brent crude price stays above
US$80 bbl/d. Since the price is anticipated to remain over US$100, investments are likely to
rise further.
In 2013, the number of large offshore plant construction projects is forecast to increase 30%
YoY (or 40% YoY in terms of value). The following list includes projects that are known to
the public, but we believe that they represent only a small fraction of the projects in the
pipeline.

Table 1. List of offshore plant projects

Expected start

Project

Country

Owner

Value(US$bn)

Competition details

4Q12~1Q13
4Q12~1Q13
4Q12~1Q13
4Q12~1Q13

Egina FPSO
Martin Linge fixed platform
Upper Zakum EPC2
Mariner fixed platform

Nigeria
Norway
UAE
UK

Total
Total
ZADCO
Statoil

2.5
1
3
1

HHI, SHI
HHI, DSME
HHI, Samsung Engineering
HHI, SHI, DSME

1H13

Umm Lulu EPC2 CPF

UAE

ADMA-OPCO

0.6

HHI, SHI, DSME

1H13
1H13
1H13
1H13
1H13

Moho Nord TLWP

Moho Nord FPU
Block B gas platform
Browse LNG CPF
Gendalo-Gehem FPU 2

Congo
Congo
Vietnam
Australia
Indonesia

Total
Total
Chevron
Woodside
Chevron

0.5
0.5
1.5
1
1

HHI
HHI, SHI, DSME
SHI, DSME
HHI , SHI, DSME
HHI, SHI, DSME

1H13
1H13

Jangkrik FPU
Aasta Hansteen SPAR topsides

Indonesia
Norway

Eni
Statoil

1
0.6

HHI, DSME
HHI, SHI, DSME

2H13
2H13

Rotan LNG FPSO

Shtokman FPU

Malaysia
Russia

PETRONAS
Gazprom

1.5
1.5

SHI
SHI, DSME

2H13
2H13
2H13

Tamar
PNG FLNG
C-Series

Israel
Papua New Guinea
India

Noble
Petromin
ONGC

4
1.5
-

DSME
DSME
-

2014~

Abadi LNG FPSO

Indonesia

INPEX

HHI, SHI

Source: Various press releases, KDB Daewoo Securities Research

KDB Daewoo Securities Research

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December 7, 2012

Shipbuilding

4. Demand for eco-friendly vessels to pick up

Tighter environmental
regulations to accelerate
demand for eco-friendly
vessels

Eco-friendly vessels are projected to see increased demand in 2013, as the International
Maritime Organization (IMO) has strengthened regulations on CO2 emissions and other
environmental issues. Until recently, demand for eco-friendly vessels has been growing very
slowly. However, the global recession, a hike in fuel prices, and a tightening of the IMOs
Energy Efficiency Design Index (EEDI) should boost demand for eco-friendly vessels.
On the other hand, shipowners and shipping companies are not rushing their investments in
eco-friendly vessels because of tight financing. With global merchant ship demand
depressed overall, eco-friendly vessels offer little incentive for shipbuilders. As investment
paybacks could be delayed given the sluggish market conditions, a large-scale investment
does not appear to be an easy decision to make.

Shipowners to take a
long time to start
adopting eco-friendly
vessels

Amid the global economic slowdown, shipowners are stepping up their cost-cutting efforts.
Increased orders for cost-efficient mega containerships are also part of their plans to reduce
costs.
Despite high expectations for eco-friendly vessels, it will be a long time before the vessels
prove acceptable for the shipowners, in our view. There are numerous ways to build ecofriendly vessels, their price range is wide, and R&D efforts to enhance fuel efficiency are still
ongoing. Thus, shipowners will likely put forth great effort to produce optimal ship
performance at reasonable prices.
Considering that it took some time for hybrid car sales (with improved fuel mileage) to pick
up, we believe that demand for eco-friendly vessels will eventually expand over the long
term.

Figure 9. Eco-ship improvement trends and outlook

Figure 10. R&D keys for eco-ships

Source: IMO, KDB Daewoo Securities Research

Source: IMO, KDB Daewoo Securities Research

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December 7, 2012

Shipbuilding

5. Impact of shale gas development on P/C carrier orders

The US, which is currently engaged in shale gas development projects, is stepping up its
efforts to export natural gas. In order to export natural gas, liquefaction facilities are needed.
US firms are planning to build liquefaction facilities in nine areas; in fact, approval for a
facility in Sabine Pass has already been granted by the Federal Energy Regulatory
Commission (FERC) and the Department of Energy (DOE). The DOE approves LNG exports,
while the FERC approves liquefaction facilities.

US firms are stepping up

their efforts to export
natural gas

The US government has granted permission for the export of LNG to countries with which it has
signed FTAs. However, the Sabine Pass LNG Terminal will be allowed to export even to non-FTA
countries. The US is expected to have nine LNG export terminals with a combined natural gas
liquefaction capacity of 14bn cubic feet/day. The US LNG terminals, which are expected to start
to export full swing in 2016~2017, are anticipated to record net exports of 660bn cubic feet,
double the US current import volume, in 2025 (assuming annual net export growth of 70bn cubic
feet). Export volume will likely remain unchanged from 2025 to 2035.
With the expansion of shale gas development projects, petrochemical companies will likely
secure price competitiveness by using cheaper natural gas, instead of naphtha, for raw
material. The US, which has annual ethylene production capacity of 23mn tonnes, is
expected to add ethylene capacity of 12.54mn tonnes by 2018. New ethylene plants are
expected to start producing 3mn tonnes per year in 2016 and increase production by 1mn
tonnes annually through 2020.
The US annual ethylene exports are projected to increase by 1mn tonnes annually, and its
export destinations are projected to be European and Asian countries. As such, eight
additional product carriers/chemical tankers (P/C carriers; 45,000 DWT) will likely be needed
in the US, assuming that each vessel will operate five~six times per year for each country.
However, given that the US chemical imports, which are transported by P/C carriers, have
decreased, the number of additional P/C carriers needed could be lower than our estimates.

Eight additional P/C

carriers (45,000 DWT)
will likely be needed for
US ethylene exports

Nevertheless, the US will likely require additional P/C carriers for ethylene exports beginning
in 2015. And, in light of current order backlogs of one and a half years and a one-year
production period, we project related newbuilding orders to start rolling in at end-2013.
However, these orders, should they materialize, will provide only modest comfort to
domestic firms that build P/C carriers.
Figure 11. US chemical product export volume trend and forecasts
(mn tonnes)
14

Figure 12. P/C carrier fleet trend

(mn DWT)
50

(%)
20

Fleet (L)
YoY growth (R)

12

40

16

30

12

20

10

10
8
6
4
2

0
00

05

10

15F

Source: IHS, KDB Daewoo Securities Research

KDB Daewoo Securities Research

20F

25F

0
00

01

02

03

04

05

06

07

08

09

10

11

12

13F

Source: KDB Daewoo Securities Research

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December 7, 2012

Shipbuilding

Hyundai Heavy Industries (009540 KS)

Believe in the potential

Buy (Maintain)
Target Price (12M, W)
280,000
Share Price (11/27/12,W)
206,000
Expected Return (%)
35.9
EPS Growth (12F, %)
-31.5
Market EPS Growth (12F, %)
9.5
P/E (12F, x)
9.1
Market P/E (12F, x)
10.3
KOSPI
1,925.20
Market Cap (Wbn)
15,656
Shares Outstanding (mn)
76
Avg Trading Volume (60D, '000)
236
Avg Trading Value (60D, Wbn)
55
Dividend Yield (12F, %)
0.0
Free Float (%)
59.3
52-Week Low
193,500
52-Week High
346,500
Beta (12M, Daily Rate of Return)
1.47
Price Return Volatility (12M Daily, %,SD) 2.2
Foreign Ownership (%)
18.7
Major Shareholder(s)
Mong-Jun Jung et al. (21.31%)
Treasury shares (19.36%)
NPS (5.08%)
Price Performance
(%)
1M
6M
12M
Absolute
-9.1
-21.2
-18.3
Relative
-10.8
-26.8
-26.6

Large-scale offshore and onshore projects expected in 2013

An increase in mega containership orders
Result of KAI bid will be a short-term risk factor

2012 was a disappointing year for Hyundai Heavy Industries (HHI) due to overall
sluggish orders, especially for shipbuilding and merchant vessels. This has raised
concerns that the company may have lost its competitiveness. However, we
believe 2013 will turn out to be a better year and are bullish on the companys
ability to restore its order backlog.
We also expect robust order-taking in the offshore and onshore plant divisions,
with orders for the Egina project (US$2.5bn) and the Brass LNG project (US$3.5bn)
likely to materialize very soon. HHI has also bid on many other large-scale projects,
each estimated at US$1~4bn, which should also support the companys
aggressive order-taking goals.
Within HHIs merchant vessels business, we see order growth for mega
containerships given the companys strong competitive position in the category. In
addition, increased demand for LNG vessels and LNG FSRUs is likely to drive YoY
order growth in the merchant vessel segment. We also expect increased exports
of construction machinery and ultra-high voltage transformers, partly supported by
the companys robust overseas marketing.
As of late, HHIs stock has been sinking following the companys announcement
of its KAI bid, in light of uncertainties over how the company will fund the
acquisition. And we believe that this trend could continue as the companys
takeover attempt progresses, since it should prove challenging for HHI to secure
sufficient funding given the recent devaluation of its asset holdings and the
weakness in the broader economy.
That being said, such risks have been partly reflected in share prices. Although we
see further downside risks if HHI wins the bid, we believe such weakness could
provide a good entry point in 2013. With earnings projected to rebound in 4Q and
large-scale orders expected to underpin stable cash flow, we expect that 1H13 will
offer good buying opportunities.
The stock is trading at record-low multiples: a 2013F P/E of 7.8x and a 2013F P/B
of 0.8x. Thus, from a valuation standpoint, the stock looks very appealing.
Earnings & Valuation Metrics

Share price

140

KOSPI

FY

120
100
80
60
11/11

3/12

7/12

11/12

Revenues
(Wbn)
12/10
37,342
12/11
53,712
12/12F
55,560
12/13F
59,310
12/14F
63,962

OP OP Margin
(Wbn)
(%)
5,532
14.8
4,536
8.4
2,611
4.7
3,499
5.9
4,222
6.6

NP
(Wbn)
4,154
2,559
1,753
2,054
2,630

EPS EBITDA
FCF ROE
(Won) (Wbn) (Wbn) (%)
54,652
6,326
88 34.5
33,671
5,473
-504 16.7
23,065
3,335 1,167 10.2
27,027
4,240 2,333 10.9
34,602
4,925 3,510 12.5

P/E
(x)
8.1
7.6
9.1
7.8
6.1

P/B EV/EBITDA
(x)
(x)
2.5
6.5
1.3
5.3
0.9
7.1
0.8
5.1
0.8
3.8

Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests
Source: Company data, KDB Daewoo Securities Research estimates

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KDB Daewoo Securities Research