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Shipbuilding: Order Momentum to Sustain in 2023

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Winning orders is at the core of the shipbuilding industry. While orders in 2023 will likely fall short of those seen in 2021 and 2022, they should exceed the levels seen before the pandemic in 2018 and 2019, and the increase in order backlog should continue going forward. Key investment points include: 1) the replacement of old oil tankers; 2) steady investment in LNG carriers; 3) a resumption of orders for offshore natural gas facilities; and 4) a switch to vessels that use alternative fuels such as methanol and ammonia.

From 2023, domestic shipbuilders are expected to see their fixed cost burden decline as their sales increase on the back of a jump in construction volume. From 2H21, large-scale provisions were set aside due to rising steel plate prices, but from 2023, construction profitability is expected to improve as steel prices stabilize downwards. The biggest risk is the possibility of construction delays due to a shortage of manpower, but government-wide policy support is in place, and we believe the issue can be resolved gradually.

We expect next year to mark the beginning of a cycle of solid orders and order backlog growth, sales growth, profitability improvement, and capital growth. Operating income is set to turn to the black in 2023. As confidence in earnings improvement is rising, the sector’s P/B valuation should expand again. For DSME, its mid/long-term discount rate should fade on capital injections from the Hanwha Group, and for SHI, solid momentum is expected on FLNG orders.

I. LNG carriers stable; offshore plants and tankers return
The focus on energy security has increased following the Russia-Ukraine war. The role of marine transportation has become more important in stabilizing mid/long-term energy supply and diversifying energy sources. Accordingly, orders at domestic shipbuilders in 2023 are expected to be dominated by energy-related vessels and equipment. Tankers (crude oil carriers, petrochemical products carriers), LNG carriers, and natural gas-related offshore plants will be key. While order amount in 2023 is likely to fall short of that seen over 2021~2022, order backlog should still increase.

II. Environmental regulations to benefit leading shipbuilders
The IMO will implement regulations on existing vessels to reduce GHG emissions from 2023. It ultimately aims to cut emissions by 50% by 2050. Shipping companies that use LNG as fuel are considering ammonia, methanol, and hydrogen fuel cells as mid/long-term alternatives. As ships using alternative fuels will require new engines, fuel supply systems, piping, etc, design capability will become important. Ultimately, the market share of top shipbuilders is expected to increase.

III. Entering structural surplus cycle
From 2023, fixed cost burden is set to decline at domestic shipbuilders as construction volume increases. Profit improvement should expand from 2H23, when vessels ordered in 2H21, when ship prices were high, will be built. The price of steel plate, a key raw material, is expected to gradually stabilize downwards. The biggest risk is the possibility of construction delays due to a shortage of manpower. However, backed by support from shipbuilders and the government, we expect the issue to be resolved gradually.

IV. Top picks
We maintain a Positive rating on the shipbuilding industry. We expect the order backlog growth to continue and operating income to turn to the black thanks to sound orders and increased construction volume. If orders for tankers and offshore plants emerge in 2023, dock efficiency will likely increase and earnings visibility should improve. We present DSME as our sector top pick and SHI as our second-preferred pick. DSME’s discount rate is expected to dissipate as its financial structure improves following its acquisition by Hanwha Group. SHI should benefit from increased FLNG orders.

Source: Business Korea

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