Despite a decrease in natural gas prices, LNG development continues to accelerate. FLNG market growth is set to continue on the back of new usage trends. Helped by increased shipbuilding volume, SHI should report favorable 1Q23 earnings. Also positive, provisioning for steel plate is likely to be limited.

Market expansion continues despite lower LNG prices
We maintain a Buy rating and TP of W7,000 on SHI, expecting that the firm will see limited profit volatility in 2023. In addition, SHI’s annual order intake target should be met on the securing of additional LNG carrier and FLNG orders this year.

Adding to its robust LNG carrier manufacturing capacity, SHI is becoming a key player in offshore natural gas development projects, backed by its significant FLNG knowhow. Despite a decline in natural gas prices, LNG development and export projects continue to be approved. The Plaquemines LNG Phase 2 (Capacity of 10mn tons pa) and Port Arthur (13mn tons pa) projects are set to announce final investment decisions (FIDs) in 2023. The Rio Grande LNG and CP2 projects are also expected to take FIDs within 2Q23.

The emergence of new FLNG developers such as Delfin is also good news for SHI’s long-term offshore LNG plant orders. In addition to the existing LNG-FPSO method of developing offshore gas fields, the emergence of FLNG liquefiers, which liquefy, store, and ship gas from onshore gas fields, is expected to accelerate FLNG standardization and market expansion. Of note, SHI has already received one FLNG order, and another is expected within 2H23.

Expect turn to profit in 1Q23 on increased shipbuilding volume; provisioning concerns are overblown
We forecast 1Q23 sales of W1.84tn (+24.2% y-y) and OP of W3.7bn (TTP y-y; OPM of 0.2%). The firm should turn to profit, as revenue growth is likely to offset fixed cost burden. No provisioning is expected in 1Q23.

Shipbuilding volume should rise in 2H23, and high-value vessels are to be recognized in sales. While potential delays in subcontracted work and concerns over the skill level of new hires are possible risk factors, we note that SHI is expanding its workforce as part of a mid/long-term plan. The firm’s 2023 guidance (sales of W8tn and OP of W200bn) seems achievable at this point. Depending on price negotiations for steel plate in 1H23, there is a possibility of provisioning for plate in 2Q23; however, given the high level of plate prices reflected in company’s order backlog, even if prices are increased, large-scale provision is unlikely.
Source: Business Korea