We change our valuation method for HMD from P/B to P/S to reflect the firm’s successful transition into a new growth phase. With its lawsuit over ordinary wages reaching an end, potential risk factors are fading. Order backlog expansion and downward pressure on steel plate prices are being highlighted as main drivers of sales and profit improvement.

Order backlog returning to pre-slowdown levels; valuation re-rating to reflect transition to growth stock

We maintain our TP of W110,000 on HMD, deriving the same TP as before despite a change in valuation multiple from a P/B of 2.0x to a P/S of 1.2x. With orders moving away from the previous box range, HMD looks to have entered a full-fledged growth phase. In 2021, order backlog jumped 56.9% y-y to US$6.87bn, returning to the levels seen prior to 2016, when labor restructuring began in the shipbuilding sector. In our view, the firm has successfully escaped from the past order shortages.

4Q21 preview: Potential risks to fade on conclusion of ordinary wage lawsuit

HMD is projected to report 4Q21 sales of W790.5bn and an operating loss of W48.1bn. Estimated OPM of 5.3% reflects potential costs from the firm’s ordinary wage lawsuit as a one-off expense. For reference, Korea’s Supreme Court has ruled that some bonuses paidto workers should be recognized as ordinary wages, and that the company should retroactively cover any shortfalls in overtime and retirement pay found over the past three years.

Rising as growth stock: 2022F sales target of W3.6tn; tanker price hikes expected

HMD has targeted 2022 sales of W3.6tn in reflection of its recent move away from the past box range for orders and resulting production expansion plans. Considering the firm’s relatively short shipbuilding history compared to large constructors, we view the sales target as achievable. Going forward, margins at HMD are predicted to improve faster than at large shipbuilders. Of note, tankers (the firm’s main product) are sensitive to steel plate prices, and steel plate prices have been facing downward pressure as of late. Amid rising expectations towards a 2022 recovery in tanker demand, we expect that HMD will display differentiated earnings versus large shipbuilders focusing on LNG carriers and containerships.
Source: Business Korea