Lost the Canadian Submarine Order to Germany... What’s Next for Shipbuilding Stocks? [Click eStock]

Hanwha Ocean Loses $60 Trillion Canadian Submarine Bid

Short-Term Stock Decline Expected, but Performance and US Investment Hopes Remain

Opportunities Persist: Five for Saudi Arabia, Four for Greece, and More

As Hanwha Ocean failed to secure the contract for Canada's next-generation submarine procurement program (CPSP), it is expected that shipbuilding stocks will inevitably see a short-term decline. However, experts believe that the drop can be quickly recovered based on strong performance and expectations for investment in the US market.

On July 6 (local time), Canada announced that it has selected Germany's Thyssenkrupp Marine Systems (TKMS) as the final preferred negotiator for the CPSP project. However, it stated that if negotiations with TKMS fall through, it will begin talks with Hanwha Ocean, the next in line. The project involves building 12 submarines and covering 30 years of maintenance, operation, and support, with a total contract value reaching several tens of trillions of won.

Kang Kyungtae, a researcher at Korea Investment & Securities, explained, "This order had two key implications for Korean shipbuilders: first, it was a major revenue source for achieving target warship sales by 2030, and second, it would have bought time until Korean shipbuilders could fully enter the US warship construction market."

However, the failure to win the contract has made it inevitable to lower the 2030 sales target for the defense and marine sector. Previously, Hanwha Ocean announced a 2 trillion won paid-in capital increase in August 2023, detailing plans to use these funds to achieve a technological lead in defense and presenting a 2030 annual special-purpose vessel sales target of 4 trillion won. HD Hyundai Heavy Industries also announced a merger plan with HD Hyundai Mipo in August 2023, revealing plans to expand warship production facilities and setting a 2030 warship sales target of 7 trillion won. Kang stated, "It is estimated that one of the assumptions used to calculate such forward-looking sales targets was the possibility of being selected for the Canadian submarine project. Now that Germany's TKMS has been chosen as the preferred negotiator, both companies are expected to inevitably lower their 2030 defense and marine sales targets."

While a short-term decline in stock prices is unavoidable, it is expected that this will be quickly offset by strong results and other positive factors. Kang commented, "Nevertheless, we maintain our overweight recommendation for the shipbuilding sector. Although a temporary stock price shock is inevitable, we believe the decline will be quickly recovered, supported by second-quarter earnings results at the end of July and expectations for investment in US shipbuilding."

Han Youngsoo, a researcher at Samsung Securities, said, "The impact of the failed bid will be temporary and not severe. This is because investors' expectations have already been lowered recently, as evidenced by the substantial discount applied to shipbuilding stock valuations within the industrial sector."

Some analysts emphasize the importance of focusing on future contract opportunities. Yang Seungyoon, a researcher at Eugene Investment & Securities, remarked, "Although the outcome is disappointing, as this was one of the biggest focal points for the shipbuilding sector this year, it is positive that Korea has demonstrated, both at home and abroad, its ability to compete on par with Germany, the world leader in submarines. Now, attention should shift to the next submarine pipeline. There are numerous follow-up projects, including four submarines for Greece, two for the Philippines, between two and six for Peru, five for Saudi Arabia, two for Morocco, four for Egypt, as well as projects in Colombia and Chile."

Um Kyunga, a researcher at Shin Young Securities, stated, "The order backlog for Germany, one of Europe's major export countries, is lengthening, and as international access to Chinese and Russian weapons declines, the value of Korea's defense and marine weapon system export slots will rise further. The order pipeline remains strong across merchant ships, marine, defense, and engine businesses, with most domestic shipbuilders' new orders now exceeding 70% of their annual targets set at the beginning of the year. Therefore, I believe the valuation of shipbuilders will not be shaken simply based on the outcome of a single long-lead-time project in a particular division."

This content was produced with the assistance of AI translation services.