Hyundai Heavy bottoming out

By Lee Hyo-sik

Have Hyundai Heavy Industries (HHI) shares hit bottom?

That is the question that has dogged many investors looking for the right time to buy a piece of Korea’s largest shipbuilder.

A recent development involving KCC Corp. has added to the optimism that HHI shares may have bottomed out and will soon resume an ascent on improving business conditions.

According to an electronic disclosure system operated by the Financial Supervisory Service Friday, KCC, a chemical and auto parts manufacturer, purchased 83,414 HHI shares for 7.9 billion won on Jan. 16, boosting its stake to 5.28 percent from the previous 3.04 percent.

This has attracted keen attention from analysts and investors, as the company has an extensive track record of successful equity investment. KCC realized substantial capital gains from its investments in HHI, Mando, Hyundai Motor and Cheil Industries among others.

For instance, it bought an 8 percent stake in HHI in 2003 for 148 billion won, or 24,000 won per share. In 2012, it disposed of a 5 percent stake for 280,000 won per share, realizing huge capital gains.

KCC’s latest move came when it already sustained more than a 300 billion won appraisal loss from holding a 3.04 percent stake in HHI as the shipbuilder’s shares fell sharply over the past year.

Analysts say the chemical firm bought HHI shares, thinking that the stock has hit the bottom and will soon head upward.

HHI shares traded sharply higher early Friday before closing down 1.9 percent at 103,000 won. The benchmark KOSPI closed up 15.27 points or 0.79 percent, at 1,936.09 points.

Most analysts believe that the worst is over for HHI.

“Things cannot get any worse for the shipbuilder,” said Lee Kang-rock, an analyst at Kyobo Securities. “It posted huge operating losses totaling billions of dollars in 2014. I don’t think the company will go into the red this year as it settled most of its liabilities last year. Improving business conditions will place it in a better position.”

Touching on HHI’s troubled labor-management relations, Lee said even if workers stage a strike it would end quickly.

“The ongoing labor-management conflict is a part of the normalization process. It is only a short-term risk,” the analyst said. “The company’s focus on building LPG carriers and other high value-added ships will differentiate itself from Chinese competitors.”

In 2014, the shipbuilder's bottom line deteriorated because of fierce competition for contracts amid a sluggish global market. To secure orders, it had to build ships and offshore plants at lower prices, which chipped away at its profitability.

Chinese shipbuilders in particular have caught up with HHI and other Korean manufacturers, making it harder for local players to win orders abroad. Falling oil prices have also slashed demand for oil tankers and other types of ships.