The author is an analyst of NH Investment & Securities. He can be reached at email@example.com. — Ed.
We initiate coverage on HHI with a TP of W110,000 (target P/B of 1.6x). An increased raw materials cost burden looks now to be behind, and ship prices are continuing to rise. Given ongoing order backlog expansion, we expect the shipping industry to boost employment.
Initiate coverage with TP of W110,000; target P/B of 1.6x
We initiate coverage on HHI with a Buy rating and a TP W110,000. Our target P/B of 1.6x was calculated based upon the average 2022F P/B for shipping industry peers.
With tanker ship demand set to recover from 2022, HHI should see overall new orders of around US$10bn next year, a level 35% higher than its 2017~2020 order average. An increased order backlog is likely to accompany. Considering an ongoing global strengthening in environmental regulations, HHI should continue to display top-line growth and margin improvement going forward.
Increased raw materials cost woes now behind; to turn to the black in 2022
An amplified cost burden stemming from higher raw material prices looks now to have been completely resolved, with the cost hikes being passed along to the prices for orders received in 2021. For the other existing orders, related costs were already been reflected in 2Q21. Given likely stronger production volume in addition to the price tag increases, HHI’s operating income should turn to positive territory in 2022.
Order backlog on the rise since 2017
The domestic shipbuilding industry recession is considered to be virtually over. HHI’s order backlog has widened 48% over the past four years, and industry experts are beginning to say that there will be a shortage of employees in shipping industry from 2022. Noting that new global environmental regulations are slated to be introduced from 2023, we believe that demand for eco-friendly ships will continue to climb.