We maintain BUY and raise our TP by 8.0% (KRW125,000→KRW135,000; 12m fwd BVPS x 2.05x target P/B) for HHI to reflect changes to earnings estimates, ROE, 12m fwd base period and 1y /30y KTB yields (used as /TGR). Our TP offers 17.4% upside.
After short-term fluctuations, stock price has returned to levels seen two months ago
From Mar 21 to Apr 20, the stock surged 50.2%. The increase was linked to supply-demand dynamics, not fundamentals, thanks to inclusion to the MSCI Index, and the effect would dissipate between end-April and early May. Focus should now shift to industry conditions, earnings and valuation; the stock pulled back 28.8% over the recent month, reversing most of the gains.
With negative factors addressed, time to shift focus to fundamentals
We attribute the decline to the heavy valuation burden, the slumping KOSPI, slowing order momentum, the 1Q22 earnings shock, surging commodity prices (e.g., steel plate) and labor costs, the possibility of winning the Qatar LNG carrier project at a low price and KSOE’s partial block deal of its HHI stake. We believe all of these factors have been addressed by the market, and now it is time to go back to the basics.
HHI likely to see stronger order momentum than competitors
Despite the stock price decline, HHI trades at 1.8x 2022E P/B, above that of competitors. We expect the stock to rebound this month on relatively stronger order momentum. New order wins in January–April of USD3.7bn represent 46.5% of guidance, marking the slowest progress among group affiliates. Workload stands at only 34.7 months relative to 2022E revenue, the lowest among large shipbuilders. However, HHI should see stronger order momentum after May, as Hyundai Samho Heavy Industries has already surpassed its order guidance for the year.
