We maintain our 12m TP of KRW140,000 (12m fwd BVPS x 2.09x target P/B) on HHI, as our earnings estimate revisions offset change in total equity (12m fwd base period changed) and adjustments to 1y MSB yield (RFR) and 30y KTB yield (TGR). We maintain BUY, as the stock holds 27.9% upside (vs. Oct 28 closing price).
Cyclical stocks unlikely to outperform amid economic downturn
Shipbuilding stocks are cyclical, and the buzzword for global investors these days is “economic downturn,” so it seems stock performance will be tepid for now. That said, one or two stocks bode well amid industry uncertainty.
As industry’s representative stock, HHI stock performance to stand out
The industry’s representative stock has strong cost competitiveness given that it can internally source equipment and buy in bulk, standing out in terms of profitability improvement. It also carries no risk involving Russia and drillships. Its stock valuation pressure has eased after a recent price decline, and its strengths were confirmed in 3Q22 earnings; while its main competitor saw sales hit by shrinking work volume due to labor shortages, HHI saw revenue rise YoY and profit after three consecutive quarters of losses.
Expect full-swing improvement in earnings on large-scale, high-margin orders
As of end-September, HHI won USD11.9bn in annual orders (USD8.8bn for Shipbuilding, USD3.1bn for /Machinery) vs. last year’s USD14.7bn in orders (incl. USD10.8bn for Shipbuilding, USD1.8bn for Offshore). The revenue-based order backlog totals USD25.3bn (KRW33.5tn), equivalent to 3.1 years of work (based on 2023E revenue). Given its massive orders won during uptrends in newbuilding prices and FX rate amid relatively low hedge ratios, HHI should see a full-swing improvement in earnings going forward.
