Posted on October 2, 2024
South Korea’s HD Hyundai Heavy Industries Co. is seeking to acquire Leeyoung Industrial Machinery Co., a domestic shipbuilding equipment maker, as Hyundai is gearing up for growing demand amid an emerging shipbuilding boom.
According to industry sources, HD Hyundai Heavy submitted its bid to acquire Leeyoung on Monday, the last day for bid submission. The shipbuilder’s submitted acquisition price is known to be in the hundreds of billions of won, or hundreds of millions of dollars.
Ships are typically constructed by assembling around 200 large blocks of parts. Leeyoung specializes in manufacturing curved blocks – the most challenging blocks to produce given their shape.
If successful, the deal would be HD Hyundai’s first acquisition of a block-making partner.
The move comes as the shipbuilding industry is set to enter a boom period.
Analysts said Korea’s Big Three shipbuilders, also the world’s three largest, stand to benefit from the emerging industry supercycle.
Shares of the Korean Big Three – HD Korea Shipbuilding & Offshore Engineering Co. (HD KSOE), Hanwha Ocean Co. and Samsung Heavy Industries – have risen significantly, reflecting such expectations.
Shares of HD Hyundai Heavy, a unit of HD Hyundai Co., and other Korean shipbuilders are hovering around 52-week highs after posting strong earnings.
CURVED BLOCK SPECIALIST
When building a ship, shipbuilders use cranes to move blocks of the required size and then weld them together, much like stacking Lego blocks.
Leeyoung Industrial Machinery specializes in manufacturing the curved blocks of a ship – the most challenging blocks to produce given their shape
Unlike flat blocks, curved blocks are difficult to manufacture due to their curvature, according to industry officials. Because of the manufacturing difficulties, only a few companies, including Leeyoung, can produce curved blocks.
To construct a 250-meter-long liquefied natural gas (LNG) carrier, about 200 blocks are needed, of which 37.5% or 75 blocks are curved.
Leeyoung, which posted around 70 billion won ($53.3 million) in revenue last year, has facilities capable of producing up to 20,000 tons of “mega blocks,” made by combining about 10 curved blocks used in the construction of a ship’s bow and stern.
Korean shipbuilders typically source around 30% of the necessary blocks through partner companies.
Despite its technical prowess, Leeyoung posted operating losses for 11 straight years through 2023, leading to its financial difficulties and eventual sale.
HD Hyundai Heavy Industries plans to increase its in-house block production capacity by acquiring Leeyoung.
TO CAPITALIZE ON INDUSTRY BOOM
Industry officials said HD Hyundai Heavy Industries is eager to acquire Leeyoung Industrial Machinery to capitalize on the upcoming boom – the first in a decade.
If a shipbuilder fails to meet delivery deadlines, it could face penalties of up to hundreds of billions of won.
HD Hyundai Heavy shipbuilding dockyard in Ulsan
HD Hyundai and its domestic rivals are bringing in blocks from China amid signs of a block shortage.
Since July, HD KSOE has been importing blocks for merchant ships from China. Hanwha Ocean has a subsidiary in China that manufactures blocks, while Samsung Heavy Industries is sourcing blocks through Chinese companies, including Hengli Heavy Industry.
Data from global market research firm Clarkson Research Service showed the Clarkson Newbuilding Price Index hit 189.96 on Sept 27, inching closer to the historic high of 191.58 set in September 2008 when the industry was enjoying its second industry supercycle.
Industry officials expect the newbuilding index to surpass the historic high by the end of the year.
RISING ORDERS, REPLACEMENT DEMAND
Newbuilding prices significantly fell during the COVID-19 pandemic and are now staging a rebound on the back of rising orders and replacement demand.
Tighter environmental regulations are also boosting demand.
Analysts said Korean shipbuilders stand to benefit from tougher regulations and growing demand for eco-friendly vessels, including methanol-powered ships.
The International Maritime Organization (IMO), a UN maritime safety agency, requires its member states to cut carbon emissions from ships by 30% of their 2008 levels by 2030 and raise the target to 80% by 2040. All ships must aim to achieve zero emissions by 2050.
Given the rosy industry outlook, brokerage analysts are raising their target prices for Korean shipbuilders.
