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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

Mostly Clear Sailing Ahead

Korean shipbuilders are ready for shifting tides


LOOKING FOR GOOD STOCKS with long-term potential in the depressed Korean stock market? Then analysts recommend three shipbuilding companies: Hyundai Heavy Industries (which is neither listed on the main board nor charted below), Samsung Heavy Industries and Hanjin Heavy Industries. The consensus view holds that these heavyweights are a good buy now because demand is shifting from containers and dry bulk carriers to tankers, "a sector in which Korean shipbuilders should benefit more than their Japanese competitors," says analyst Sonia Song of Dongbang Peregrine Securities Co. in Seoul. The Korea Development Bank expects the demand for new tankers to grow by an average of 19.6% a year from 1997 to 2000, compared to 2% for dry-bulk carriers and 7.6% for containers.

Bolstering the optimism: a general upturn in ship prices, which rose about 3% year-on-year as of the first quarter. The outlook is even better, says Suh Sang Moon, a senior analyst at Daewoo Securities, who expects prices to rise by 6% to 7% annually over the next three years because both Korean and Japanese shipbuilders have more-than-full order books. In addition, costs should come down, thanks to the introduction of new technologies and production processes. Further, says Eum Yun Sung of Hanwha Securities, Korean shipbuilders enjoy strong demand for the LNG tankers that transport light natural gas [LNG] from Indonesia to Korea Gas Corp. The construction prices -- and profitability -- of LNG tankers are higher than for other ships.

Analyst Song of Dongbang likes Hyundai because it "appears to be the cheapest, trading at a 31% discount to its price/earnings multiple of 4.6 in 2000." Yet it has the world's largest backlog of orders -- 4.9 million gross tons -- while its capacity stands at 3 million gross tons. The company generates about 30% of its revenues from its industrial-plant-and power-systems divisions, which are poised for stable long-term growth as demand for electricity generation continues to grow at an expected 5.4% annually, says Song. Not only should Hyundai see strong growth in earnings per share on falling costs, rising orders and improving ship prices, but, as of the fourth quarter, foreigners will be able to buy the stock.

Samsung does not have quite so much going for it, but the company will still be a beneficiary of the boom in tanker construction -- from 1993 to 1996, it expanded production capacity to better accommodate tankers. Samsung is also serious about cost cutting. Management, in its effort to carve 15% out of unit production costs by 1998, has laid off 800 workers (out of 12,000) and closed or restructured some machinery-making divisions. This should be enough to restore profitability in 1998. Hanwha's Eum expects a 100% appreciation in Samsung's share price over the next three years.

Of the three, Hanjin may be the best bargain. Analysts predict as much as a 120% increase in earnings per share by the year 2000. Since Hanjin depends on shipbuilding for as much as 70% of total revenues, the expected increase in ship prices should greatly improve its profits. Though the stock has outperformed the market by 53% since early 1997, it still trades at only 3.4 times its 2000 earnings.

Analysts are generally pessimistic about Daewoo, which is less dependent on shipbuilding than the others. Besides, it has a huge 3.2-trillion-won foreign debt, which could cause earnings to fluctuate. It also holds payment guarantees of about 6.1 trillion won to other Daewoo companies -- a significant off-balance-sheet risk.

All money values in U.S. dollars except share prices, which are in Korean won. Sources: Asiaweek Research, Datastream, First Call/World Equities


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