South Korea's 'Big 3' shipbuilders headed for massive 2Q15 loss
South Korea's 'Big 3' shipbuilders headed for massive 2Q15 loss South Korea's 'Big 3' shipbuilders headed for massive 2Q15 loss

Loss provisioning and restructuring will result in big losses for South Korea's three biggest shipbuilders for the second quarter of 2015, sector analysts predict.

KDB Daewoo Securities analysts Sung Ki-jong and Lee Ho-seung have pointed to the dearth of rig and drillship orders and the delays in drillship deliveries as the cause of losses.

They estimate a KRW240 billion (USD207.8 million) loss in the second quarter of 2015 for Hyundai Heavy Industries (HHI), which had a KRW489 billion loss for the second quarter of 2014.

Sung and Lee explained, "Low oil prices should further delay the recovery of the offshore plant market and orders; the global economic slowdown will likely make it more difficult to achieve the overall order target, weighing on the firm's earnings recovery.

"Although the won's weakness and the rise in merchant vessel orders are positive, earnings at other business units are unlikely to recover anytime soon. Hyundai Oilbank's earnings are likely to fluctuate depending on oil prices, increasing HHI's earnings volatility."

South Korea's second-biggest shipbuilder, Samsung Heavy Industries (SHI), could see a KRW145 billion loss for the second quarter of 2015, compared with a KRW206 billion profit for the second quarter of 2014.

The Nigerian courts' decision to suspend the Egina FPSO project in May has dealt a blow. Alleged contract breaches, including SHI's failure to establish a fabrication yard in Nigeria, were cited as reasons.

Accordingly, SHI has made loss provisions of KRW250 billion for the second quarter of 2015, expecting the project to be suspended until year-end.

Sung and Lee said, "In our view, the company's revenue decline will likely accelerate in the second quarter of 2015 because of lacklustre orders last year and the decreasing revenue contribution from the offshore business."

Despite clinching three tentative FLNG orders from Shell, SHI will likely see further deterioration in earnings and cashflow due to the lack of additional orders and delays to vessel deliveries. Customers like OceanRig and Pacific Drilling have delayed the deliveries of drillships this year.

As for South Korea's third-biggest shipbuilder, Daewoo Shipbuilding & Marine Engineering (DSME), the KDB Daewoo analysts have predicted a KRW1.13 trillion loss for the second quarter of 2015, much more than what other analysts estimated previously.

This is mainly due to DSME's recent admission that it concealed up to KRW3 trillion in losses from its balance sheet. The losses arose from cost over-runs in the building of an offshore vessel.

While the government and creditors accused DSME of failing to recognise massive losses related to offshore plant orders received in 2011, the firm argued that it proactively wrote off losses to stave off the incurrence of large-scale operating losses.

Between 2011 and the first quarter of 2015, the firm's cumulative operating cash flow and net profit came in at approximately -KRW3.5 trillion and KRW1 trillion, respectively. During the same period, net borrowings surged from KRW3.8 trillion to KRW8.5 trillion, causing the firm's debt-to-equity ratio to shoot up to 300%.

"In particular, the firm's large accounts receivable, which soared from KRW4.3 trillion in 2011 to KRW9.4 trillion as of end of the first quarter, is an important indicator of potential uncollectable receivables," cautioned Sung and Lee.

(ISH Maritime 360)

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