The author is an analyst for NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
Over 2021~2023, Korean shipbuilders have landed target-beating new orders. With sufficient order backlogs under their belt, they have raised newbuilding prices to reflect higher costs, and accordingly, the newbuilding index, a key index for earnings, has been uptrending steadily.
In 2024, newbuilding orders are to decline y-y due to higher interest rates and abundant order backlogs at shipbuilders. In particular, with domestic shipbuilders’ slots for short-term deliveries diminished, they are likely to set more conservative new order targets for next year. But, even with selective order taking, their order backlogs (sales basis) should rise y-y. In 2024, about 75 new LNGC orders are to be issued globally, and new orders for offshore plants (FLNGs) and domestic defense projects (submarines) are also expected.
Korean shipbuilders’ earnings should begin to improve in earnest from 2024. They have already reflected some of the increased cost burden (labor, steel plate). With the high-margin LNGC sales portion rising and delivery of low-margin vessels completed, shipbuilders are to enjoy structural margin growth. In particular, we recommend SHI and Hanwha Ocean as sector top picks, noting their strong margin improvement on the securing of high-margin offshore plant orders (SHI) and sustained earnings growth on defense export projects (Hanwha Ocean).
I. Strong newbuilding prices and easing cost pressure
Newbuilding prices rose by 38% over Jan 2021~Nov 2023. With domestic shipbuilders short-term delivery slots in tight supply, newbuilding prices have risen for all vessel types. Based on their abundant order backlogs, shipbuilders are now enjoying strong bargaining power, and they are capable of reflecting cost hikes in newbuilding prices. The worker shortage issue has been easing gradually on strong government support.
II. Selective order taking likely in 2024
Next year, new orders for commercial vessels are to decline y-y. We expect combined new orders at Korea’s top-five shipbuilders to contract 23% y-y to US$32.7bn. But, sales-based order backlog, a key indicator for earnings, should continue to climb. In 2024, gas carrier orders (Korean shipbuilders’ strength) should remain strong, with 75 new LNGC orders expected. In addition, FLNG orders (SHI’s strength) are likely.
III. Blooming of new markets amid environmental regulations and decarbonization push
Ships’ CII ratings are set to be announced in May 2024. Companies will come under greater pressure to update their vessels amid toughening environmental regulations. The market for ammonia co-firing and hydrogen transportation should bloom in earnest. So should the LCO2 carrier market as CCS pilot projects are beginning. Domestic shipbuilders should excel in the construction of these ships, as they are similar to LPGCs
IV. Top picks
We maintain our Positive stance on the shipbuilding sector. Domestic shipbuilders’ order backlogs should expand in 2024, even if they deploy selective order taking strategies. With margin improvement set to begin in earnest, the profit upcycle should continue into 2026. We present SHI and Hanwha Ocean as our top picks for the sector. SHI is likely to enjoy faster profit growth than peers, backed by high-margin FLNG orders. Meanwhile, Hanwha Ocean boasts long-term growth potential, driven by improving corporate fundamentals and strengthening defense business capabilities.