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An LPG carrier built by Hyundai Heavy Industries Co. (provided by Korea Shipbuilding and Offshore Engineering)

A rise in demand for new ships amid a trend of economic recovery has translated into a historic boom for orders in the Korean shipbuilding industry, but actual performance and stock values have been comparatively unimpressive.

The phenomenon is particularly evident with the Hyundai Heavy Industries Group, which ranks as the world’s top shipbuilder.

On Thursday, Korea Shipbuilding and Offshore Engineering (KSOE), the Hyundai Heavy Industries Group’s intermediate shipbuilding holding company, announced its performance figures for the third quarter of 2021. Third quarter sales were calculated at 3.56 trillion won (US$3 billion), up 3% from the same quarter in 2020, while operating profits were up by 248% to 140 billion won (US$119 million).

The KSOE figures reflect the performance of three shipbuilding affiliates: Hyundai Heavy Industries (HHI), Hyundai Samho Heavy Industries (HSHI), and Hyundai Mipo Dockyard (HMD).

On their own, the numbers suggest that profits have improved substantially, but a closer look tells a different story.

The third quarter operation profits include a large amount of one-off gains. For instance, around 180 billion won in profit was the result of a higher exchange rate — that is, a decline in the value of the won. As an export-based industry, sales for the same amount in foreign-denominated currency translate into higher values when converted into won.

Also contributing to the higher profits was the omission of 60 billion won from third quarter operating expenses — an increase in production costs that the companies previously factored into their expenses in anticipation of a rise in the price of the rear panels used to build vessels. While an expected increase of roughly 900 billion won in expenses due to higher iron plate costs was already reflected last quarter, the actual price of the rear panels purchased from POSCO and other steel companies turned out to be less than anticipated.

In a conference Thursday to announce the performance numbers, KSOE Managing Director/IR Sung Ki-jong said, “If you factor out the various one-off factors, third quarter operating profits were around the break-even point.”

Recently, order trends and company figures have been moving in opposite directions.

HHI and other KSOE affiliates have swept up the 199 vessel orders made by global shipping companies so far this year. With a total of US$17.7 billion in orders, they have reached 124% of their target for this year — the result of a sharp rise in demand for ultra-large container ships and other vessels amid increased distribution and higher shipping fees.

The problem is that it will take some time before the order boom translates into financial performance for the shipping companies. The time between the order receipt and actual construction is around one to three years, and the results from the recent orders will be spread out over time to reflect progress with the building.

Most of the sales and operating profits in the current figures are based on past contracted volumes commissioned at low costs due to factors such as the effects of the COVID-19 pandemic.

“Even if we maintain a profit through next year, a major improvement in performance is unlikely,” Sung said.

“Two years from now, in 2023, we should start to see a turnaround, with both sales and operating profits improving sharply in 2024,” he predicted.

The same goes for the discrepancy with stock prices, which reflect anticipated performance a year or two down the road.

The stock price slump has been especially apparent for KSOE, the Hyundai Heavy Industry Group’s holding company for shipbuilding. After reaching a 2021 high of 160,500 won per share on May 11, its stock price closed all the way down at 102,000 won on Thursday.

Two factors are at play here. Within the group, many believe that the listing of HHI, the largest shipbuilding company, on the KOSPI index in September had a negative impact. With the KSOE’s single biggest shipbuilding affiliate’s arrival on the stock market, investors have been flocking in that direction.

In contrast with the steep drop in KSOE stock prices, HHI shares finished Thursday at 112,000 won — similar to the initial price of 111,000 won recorded when the company was first listed on KOSPI on Sept. 17.

By Park Jong-o, staff reporter

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