"Buy When Share Prices Swing"... Stellar Earnings and Strong Orders for This Stock [Weekend Money]

Q2 Results for Shipbuilding Stocks Surpass Market Expectations
Operating Margins Rise Over 5 Percentage Points Year-on-Year
High-Value Ships and Productivity Improvements Drive Profitability
Growth Engines Expand to Engines, SMRs, and Offsh

Yonhap News Agency

The sentiment among shipbuilding industry investors has become increasingly complex. While financial results are strong, share prices are experiencing volatility. Revenues from high-priced vessels have increased alongside improved productivity. Order volumes have nearly reached annual targets. Nevertheless, concerns over a peak-out in the cycle and the pressure from profit-taking are weighing on share prices.

Shinhan Securities stated that, given the shipbuilding sector’s robust fundamentals and growth drivers, the current period offers a long-term buying opportunity. The results for the second quarter this year are particularly outstanding. HD Korea Shipbuilding & Offshore Engineering posted sales of 8.9 trillion won and an operating profit of 1.6451 trillion won. These figures represent an increase of 20% and 73%, respectively, compared to the same period last year. The operating margin rose to 18.4%, up 5.6 percentage points year-on-year. Operating profit also exceeded the market consensus by 11%.

HD Hyundai Heavy Industries also achieved strong performance. Second quarter revenue amounted to 6.3 trillion won, while operating profit reached 1.0399 trillion won. Compared to the previous year, sales jumped by 53% and operating profit by a remarkable 121%. The operating margin stood at 16.4%, an increase of over 5 percentage points from a year earlier.

The strong results are attributed to high value-added ship types. The revenue proportion from high-priced ships such as LNG carriers and Very Large Gas Carriers (VLGC) remained high, and productivity improvements continued as well. The companies benefited from a stronger currency, and there was little burden from one-off issues or from the cost of steel materials for ships.

Order intake has also been solid. In the first half, HD Hyundai’s shipbuilding affiliates achieved 96% of their annual order target. Although the declining share price may make the shipbuilding cycle appear to be in downturn, the actual workload and earnings remain robust.

Growth drivers are not limited to merchant ships. In the engine and machinery segment, demand for Himsen engines used in land-based power generation is rising. At present, Ulsan has a production capacity of about 3 gigawatts (GW), but given existing orders and additional inquiries, capacity expansion appears unavoidable.

Small Modular Reactors (SMRs) are also seen as a mid- to long-term growth engine. HD Hyundai Heavy Industries has signed a contract with TerraPower to supply cylindrical reactor vessels for the sodium-cooled SMR demonstration facility, and it has also secured preliminary exclusive negotiation rights for manufacturing and supplying key primary equipment. Offshore data centers are another growth area under consideration.

Despite these positives, Shinhan Securities lowered its target prices. The target price for HD Korea Shipbuilding & Offshore Engineering was reduced from 610,000 won to 470,000 won, and that for HD Hyundai Heavy Industries from 830,000 won to 650,000 won. Dongheon Lee, a research analyst at Shinhan Securities, explained, “We adjusted valuation multiples to reflect the stock price corrections at subsidiaries, concerns about a cycle peak, and the phase of profit realization.”

This does not mean a change in the overall trajectory. Shinhan Securities views the recognition of revenues from high-priced order backlogs, structural growth in the engine and machinery segment, overseas orders for specialty ships, and expansion into new businesses such as SMRs and offshore data centers as mid- to long-term growth drivers. Analyst Lee commented, “Earnings are solid, and growth momentum is increasing,” adding, “Sharply rising share price volatility should be regarded as a long-term buying opportunity.”

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