05-12-2018

Hyundai Merchant struggling with deteriorating financial health

Concerns are growing over the financial health of Hyundai Merchant Marine (HMM). Korea’s largest shipping firm has been failing to make money over the past three years as a result of surging costs and stagnant global freight demand, according to industry analysts.

Despite a series of rescue loans from the state-run Korea Development Bank (KDB), the struggling shipper has been unable to get its operations back on track amid higher transportation costs, falling freight charges and sluggish cross-border trade, they said, adding the company’s capital could be completely depleted by 2020 on soaring debts.

In the third quarter, HMM earned 1.43 trillion won ($12.8 billion) in sales but its operating loss more than tripled to 123.1 billion won from a year ago.

Its sales increased 10.5 percent year-on-year, but failed to snap 14 consecutive quarters of operating losses, which started in the second quarter of 2015. Initially, the company anticipated to be in the black this fall, but postponed the recovery to the second half of 2020.

In the third quarter, HMM’s sales grew due largely to the increase in transported volume, which soared 12.76 percent to stand at 1.18 million twenty-foot equivalent units. But the increased volume adversely hurt its profits, due to higher oil prices and low freight charges.

As HMM continues to show disappointing performances, its financial prudence is also at stake.

According to Samil PricewaterhouseCoopers’ report on HMM, the company’s liabilities will stand at 2.55 trillion won at the end of this year and will grow to 3.32 trillion won in 2019 and 5.22 trillion won in 2020.

Given HMM’s total assets stand at 3.03 trillion won, its total debt will surpass its assets next year, meaning its capital will be fully impaired.

KDB Chairman Lee Dong-gull recently criticized the firm, stating that “HMM tends to resort to the government aid, while a moral hazard is seen among its employees,” adding the creditor may enforce a strict management overhaul, including a dismissal of executives and employees.

In 2015, the government launched a massive restructuring of the country’s shipping industry, sinking industry No. 1 Hanjin Shipping, while saving No. 2 HMM. In doing so, the government aided HMM by giving the company 2 trillion won and adding an extra 1 trillion won by purchasing bonds with warrant and convertible bonds.

Despite the helping hands, analysts have been raising doubts on HMM’s willingness to recover through strong restructuring, because the company has become the only flag-carrying shipping line of Korea thus the government has “no other option but to support the company to keep the country’s shipping and shipbuilding industries afloat.”

Adding more concern is the rumor that HMM may not maintain its agreement with the world’s largest shipping alliance 2M, comprised of Maersk Line and MSC.

In April, 2017 HMM entered into 2M+H Strategic Cooperation for a period of 3 years with the option to extend thereafter, but rumors stir that HMM will not pursue an extension because the agreement is not helpful and the alliance recently selected ZIM Integrated Shipping for Asia.

Regarding mounting worries, HMM stressed that “those are unnecessary concerns.”

“Despite several concerns over our management capacity, clients’ trust in HMM has improved in the past two years, which links to the increases in the shipping volume,” an HMM official said.

“Of course it will be difficult to fully recover; in the short term, the company will continue seeking improvements in operating profit and secure capitals in the market if necessary. Also, we expect an operating profit in the second half of 2020, which will raise our credit rating too.”
Source: Korea Times

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