By Lee Gyu-sun

Established in 1984 as a manufacturer of carbon fibers used in fishing rods, Hankuk Carbon entered the liquid natural gas (LNG) storage insulation panel business in 2001. The firm began supplying heat insulation panels to Samsung Heavy Industries in 2002 and Hyundai Heavy Industries in 2005. Since then, the company has diversified its business portfolio, which now includes glass paper, composite materials and electronic components.

The LNG unit’s contribution to the revenue peaked at around 60 percent during the 2007 and 2008 boom, but its portion is expected to fall to a record low of 16 percent this year given the global downturn in LNG ship orders after 2008.

Since production is driven by orders, the LNG storage insulation panel business is vulnerable to downstream industry cycles and also requires massive capital expenditure. Hankuk Carbon considers its LNG unit to be its main growth driver, but relies on its cash cows — the carbon and glass paper units — to enhance its earnings capability.

Heat insulation panels are designed to cool down natural gas to -163 degrees Celsius to store and transport LNG. Typically, they account for five to six percent of the contract value of an LNG carrier.

The global insulation panel market for LNG vessels was estimated at 500 to 600 billion won, equivalent to 40 ships, for 2011, but the figure is larger if offshore facilities and onshore storage tanks are taken into account.

Because consumers of the panels have high safety standards and demand very efficient products, the industry has high entry barriers and is thus dominated by a handful of manufacturers, including Hankuk Carbon, Finetec, and Kanglim Bonaeng, with the former two each commanding 40 percent of the market.

Hankuk Carbon’s annual capacity stands at 15 ships, which translates into annual revenues of 150 to 180 billion won.
Insulation panel modules consist of polyurethane foams, panels, membranes, a primary containment; triplexes, a secondary containment; and pipe insulations. Hankuk Carbon manufactures all of them except the last.

Over the past ten years, the global LNG shipping volume expanded at an average annual rate of seven percent. Growing demand in China and the massive earthquake in Japan helped boost growth even further.

The spot charter rate per day, an indicator for the LNG shipping market, rose 100 percent to $110,000 per day as of late November from a year earlier, indicating that LNG carriers are currently in short supply. Accordingly, LNG carrier orders are projected to increase.

In the global LNG carrier market, 80 percent of which is dominated by Korean shipbuilders, orders surged to 49 vessels in 2011 from just five a year ago. The increase is comparable to the growth during 2004 and 2005. Assuming that the global LNG shipping volume will grow at an average annual rate of six percent by the end of 2015, orders for at least 85 vessels will be placed over the next two years.

In addition, markets for LNG floating production, storage and offloading vessels and floating storage and regasification units are expanding steadily. Heat insulator panel producers like Hankuk Carbon should enjoy large order backlogs for at least the next three years.

Earnings forecast

Daewoo Securities projects Hankuk Carbon’s fourth quarter revenue at 28.6 billion won, down 4 percent from a year ago, and an operating profit of 1.7 billion won, up 109 percent. The operating profit margin is anticipated to slightly improve to 8 percent from a year ago.

As orders for two LNG carriers from gas shipping firm GasLog began to generate revenues in the latter part of the third quarter, earnings of the LNG unit are expected to improve. Despite a meager improvement in earnings, the company’s performance in the fourth quarter should pave the way for a full-scale turnaround next year.

For the entire 2011, Daewoo Securities project an annual revenue at 104.3 billion won, down 20 percent from 2010, and an operating profit of 5 billion won, down 36 percent. The company is expected to remain in the black this year on the back of strong profitability at the carbon and glass paper units.

The revenue is estimated to grow 61 percent to 167.7 billion won in 2012 while the operating profit shoots up a whopping 258 percent to 17.8 billion won. The operating profit margin is expected to improve markedly to 10.6 percent.

Revenues at the LNG unit are anticipated to surge from 16.2 billion won in 2011 to 75.5 billion won in 2012 and to 118.9 billion won in 2013. The recovery of the flagship business should help non-LNG businesses regain investors’ attention as steady cash cows.

In short, the 2012 earnings forecast reflects the following: firstly, insulation panel orders skyrocketed 230 percent to 168.4 billion won in 2011 from a year ago on an increase in LNG carrier orders; secondly, the revenue of the LNG unit is projected to grow 366 percent in 2012; and thirdly, non-LNG businesses including carbon and glass fiber units continue to generate stable earnings.

Daewoo Securities suggest a “Buy rating” on Hankuk Carbon shares with a target price of 6,300 won.

Lee Gyu-sun is the leader of KDB Daewoo Securities' small cap team.