Upgrade to In-Line: We upgrade our view on the South
Korea Shipbuilding sector to In-Line from Cautious. 1)
The sector has underperformed the KOSPI by 14% YTD
and 25% for 12 months and we believe share prices
largely reflect order book risks (cancellations/delays)
and a lack of new orders. 2) Top Korean yards have, in
our view, dealt with most of these risks, so earnings
visibility has improved. 3) As recession deepens with
scarce orders, industry consolidation will likely
accelerate, benefitting leaders. Thus, we advise
investors have some exposure to Korea Shipbuilding
sector with tradable angle going forward.
Earnings, ratings, and price target changes: We
revised our EPS estimates, reflecting delivery delays,
and cut cost of our equity assumptions. We upgrade
Hyundai Mipo Dockyard to OW from EW and raise PT
from W141,000 to W170,000 on overlooked strong
competitiveness, valuation, and strong cash positions
and order book. We upgrade Daewoo Shipbuilding &
Marine Engineering to EW from UW and PT from
W13,700 to W20,000 on valuation and potential offshore
order wins. We retain EW on Hyundai Heavy Industries,
increasing PT from W181,750 to W185,000; we remain
Underweight on Samsung Heavy Industries, while PT
rises from W18,100 to W21,000. In order, we prefer
HMD, HHI and DSME to SHI.
Risks to our view: Despite our upgrade to In-Line, we
may continue to see deteriorating industry fundamentals.
Sluggish new orders and continued declines in ship
prices will likely lead to negative top-line growth beyond
2011. Also, there may be further ship financing issues
while pressure to compete through low prices may rise.
Furthermore, with intensifying competition, offshore
orders may be unprofitable.