Posted on July 31, 2024
South Korea’s Big Three shipbuilders, also the world’s three largest, stand to benefit from the emerging industry supercycle and the so-called Trump Trade – investor hopes that a second Donald Trump presidency could spell good news for markets.
Shares of the Korean Big Three – HD Korea Shipbuilding & Offshore Engineering Co. (HD KSOE), Hanwha Ocean Co. and Samsung Heavy Industries Co. – as well as other smaller shipbuilders, have risen significantly, reflecting such expectations.
Shares of HD Hyundai Heavy Industries Co., a unit of HD Hyundai Co., surged 17% to a fresh 52-week high of 207,500 won on Friday following a strong second-quarter earnings announcement the previous day.
HD Hyundai Heavy’s market capitalization has risen to over 18 trillion won ($13 billion), ranking 19th, up from 23rd previously.
On Friday, STX Heavy Industries Co. rose 12% while HD Hyundai Mipo Co. gained 10.3%. Samsung Heavy advanced 8.4% and HD KSOE gained 8.2%. With the price gains, the four companies saw their shares reach new highs for the year.
Exchange-traded funds (ETFs) linked to shipbuilding and shipping shares are also performing well.
As of Friday, the Shinhan SOL Shipbuilding TOP3 Plus ETF and the HANARO Fn Shipbuilding & Shipping ETF posted return rates of 8.95% and 7.94%, respectively – the two highest-yielding ETFs on the main Kospi bourse.
CLARKSON NEWBUILDING INDEX NEAR 16-YEAR HIGH
An LNG carrier
Analysts said the rising shipbuilding share prices reflect growing industry expectations that the shipbuilding industry will soon enter a super cycle.
Data from global market research firm Clarkson Research Service showed the Clarkson Newbuilding Price Index hit 187.91 on July 19 – the highest since November 2008 and close to the historic high of 191.58 set in September 2008 when the industry was enjoying its second industry supercycle.
Newbuilding prices significantly fell during the COVID-19 pandemic and are now staging a rebound on the back of rising orders and replacement demand.
An image of an ammonia fuel cell-powered very large ammonia carrier (VLAC) under development by Samsung Heavy Industries
Tighter environmental regulations are also boosting shipbuilders’ share prices.
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.
Methanol had been a less-favored fuel for ships because of higher production costs. With increased natural gas production globally, however, demand for methanol-powered ships is increasing from operators of very large gas carriers (VLGCs).
TRUMP TRADE
Analysts said the shipbuilding industry is one of the beneficiaries of the Trump Trade.
Former US President Donald Trump raises his fist after being shot at an election rally on July 13, 2024
If the former president, the Republican candidate for the US presidency, wins the election in November, investments in fossil fuels instead of renewable energy are expected to rise, with LNG ship orders also likely to increase, analysts said.
The strong dollar versus the won is also expected to provide a tailwind for Korean shipbuilders as they receive payments in dollars, meaning more gains when translated into Korean won.
ANALYSTS RAISE TARGE PRICES
With the rosy industry outlook, brokerage analysts are raising their target prices for Korean shipbuilders.
Over the past few days, four securities houses have raised their target prices for HD KOSE, eight firms upped target prices for Samsung Heavy and 11 brokerages for HD Hyundai Heavy.
“Shipbuilding prices are moving at elevated levels in recent months due to rising shipbuilding orders. We maintain an overweight rating on shipbuilders,” said Lee Dong-heon, an analyst at Shinhan Securities Co.
JPMorgan last week said it maintained an overweight investment view on HD KSOE and HD Hyundai Heavy Industries.
In mid-July, HD KSOE said it won a 3.68 trillion won deal to build 12 very large container ships for a European company. With that deal, its cumulative order value so far this year has reached 120.5% of its entire 2024 target.
Samsung Heavy said it has won contracts to build a combined 22 vessels this year worth $9.7 billion, or 51% of its 2024 target.
