We raise our 12m TP for HHI by 3.7% from KRW135,000 to KRW140,000 (12m fwd BVPS x 2.09x target P/B) to reflect (1) an 18.6% upward revision to 2023E NP (attributable to controlling interests), (2) a change to 12m fwd period (equity capital affected), (3) an adjustment to ROE and (4) changes in 1y MSB yield (risk-free rate) and 30y KTB yield (terminal growth rate). We maintain BUY, as our new TP has 20.7% upside (vs. last close).

Operating income should turn to black in 3Q22

We forecast 3Q22 consolidated (K-IFRS) revenue at KRW2.5tn (+31.6% YoY) and OP at KRW32.6bn (-56.3% YoY; 1.3% OPM), both above the market consensus. HHI should begin to generate operating profit after posting losses since 4Q21, resulting in EBT and NP entering positive territory.

Earnings improving on better shipbuilding volume/newbuilding prices, rising KRW/USD, stabilizing feedstock prices
Earnings are improving thanks to better shipbuilding volume and newbuilding prices. Furthermore, earnings should be bolstered by surging FX rates (avg. KRW/USD: 1,260 in 2Q22→1,326 in 3Q22) and unhedged revenue and profit. Lower feedstock prices (e.g., heavy steel plates) should make loss provisioning unnecessary in 3Q22 while creating potential for provision reversals.

Total orders YTD at USD8.8bn (93.6% of annual target)

As of July, HHI won USD7.0bn in orders for 44 ships (incl. 23 containerships, 15 LNG carriers), equivalent to 75% of its annual target. Taking into account the seven LNG carriers and three LPG ship orders won since August, total orders won YTD stands at USD8.8bn (93.6%). With potential for commercial ship/offshore plant orders in 4Q22, HHI is likely to exceed its target this year.
Source: Business Korea