South Korean shipbuilders, led by Hyundai Heavy Industries Co., are racking up massive orders this year, but their profitability is unlikely to see a sharp upturn any time soon due to lower ship prices and an unfavorable payment method, analysts said Monday.
South Korean shipbuilders won orders totaling 1.68 million compensated gross tons (CGTs) in January, more than double 779,356 CGTs from a year earlier, according to the data compiled by market researcher Clarkson Research Services.
The figure accounts for 45.4 percent of overall global vessel orders of 3.7 million CGTs placed in the month.
"Increased orders for January is positive for local shipbuilders at the moment, but their earnings will not improve sharply as it takes some two or three years for them to reflect such earnings in their books," said Cho Byong-hyun, an analyst at Tong Yang Securities.
Affected by low ship prices and decreased orders for new ships, local shipbuilders suffered a sharp drop in their earnings last year despite the massive orders.
Hyundai Heavy, the sector's No. 1 player, logged 146 billion won (US$138 million) in net profit last year, a sharp fall of 86 percent from a year earlier. Samsung Heavy Industries Co. saw its net profit drop 21 percent on-year to 633 billion won last year. Its operating income also declined 24 percent on-year to 914 billion won.
New shipbuilding prices have been on the decline for years, as demand for new ships dropped amid the global economic downturn and oversupply, squeezing local shipbuilders' profit margin.
Clarkson's index measuring new building prices stood at 132 points in November of last year, steadily rising from 130 in September, 128 in July and 126 in May. But the comparable figures for 2007 and 2009 were far higher at 184 and 138.
Also, most South Korean shipbuilders are struggling with a new payment system called the "heavy-tail" method.
Under the new system introduced in the wake of the 2008 global financial crisis, some 70 percent of contract money is paid after the contract deadline.
The previous payment method allowed South Korean shipbuilders to receive some 60 percent of the total payment before delivering ships even if orders are canceled, which guaranteed a stable cash flow.
According to industry data, about 70 percent of ship orders won by South Korean shipbuilders were signed on the heavy-tail payment method as of the end of last year.
"Even if they scoop up massive orders, the new payment method will become a drag on their earnings," said Park Moo-hyun, an analyst at Etrade Securities.
Some analysts, however, said their orders will increase sharply on rising demand for LNG and offshore plants, which will eventually help boost their earnings.
Hyundai Heavy is targeting $25 billion in orders this year, up 5 percent from last year. Samsung Heavy also raised its order target to $15 billion for this year, compared with $13.3 billion posted last year.
Daewoo Shipbuilding & Marine Engineering Co., another major shipyard, is considering raising its orders target by 10 percent to $14 billion for the year.
Shares of local shipbuilders rose sharply on Monday on expectations that Europe's economic recovery will gather steam this year, raising demand for new ships.
The eurozone saw its economy grow at a faster than expected rate of 0.3 percent in the fourth quarter, fanning hopes that the recovery is getting a foothold in the economic bloc.
Shares of Hyundai Heavy advanced 2.28 percent to close at 224,000 won on the Seoul bourse. Prices for Samsung Heavy and Daewoo Shipbuilding soared 3.31 percent and 4.1 percent, respectively, closing at an identical 34,300 won.
South Korean shipbuilders won orders totaling 1.68 million compensated gross tons (CGTs) in January, more than double 779,356 CGTs from a year earlier, according to the data compiled by market researcher Clarkson Research Services.
The figure accounts for 45.4 percent of overall global vessel orders of 3.7 million CGTs placed in the month.
"Increased orders for January is positive for local shipbuilders at the moment, but their earnings will not improve sharply as it takes some two or three years for them to reflect such earnings in their books," said Cho Byong-hyun, an analyst at Tong Yang Securities.
Affected by low ship prices and decreased orders for new ships, local shipbuilders suffered a sharp drop in their earnings last year despite the massive orders.
Hyundai Heavy, the sector's No. 1 player, logged 146 billion won (US$138 million) in net profit last year, a sharp fall of 86 percent from a year earlier. Samsung Heavy Industries Co. saw its net profit drop 21 percent on-year to 633 billion won last year. Its operating income also declined 24 percent on-year to 914 billion won.
New shipbuilding prices have been on the decline for years, as demand for new ships dropped amid the global economic downturn and oversupply, squeezing local shipbuilders' profit margin.
Clarkson's index measuring new building prices stood at 132 points in November of last year, steadily rising from 130 in September, 128 in July and 126 in May. But the comparable figures for 2007 and 2009 were far higher at 184 and 138.
Also, most South Korean shipbuilders are struggling with a new payment system called the "heavy-tail" method.
Under the new system introduced in the wake of the 2008 global financial crisis, some 70 percent of contract money is paid after the contract deadline.
The previous payment method allowed South Korean shipbuilders to receive some 60 percent of the total payment before delivering ships even if orders are canceled, which guaranteed a stable cash flow.
According to industry data, about 70 percent of ship orders won by South Korean shipbuilders were signed on the heavy-tail payment method as of the end of last year.
"Even if they scoop up massive orders, the new payment method will become a drag on their earnings," said Park Moo-hyun, an analyst at Etrade Securities.
Some analysts, however, said their orders will increase sharply on rising demand for LNG and offshore plants, which will eventually help boost their earnings.
Hyundai Heavy is targeting $25 billion in orders this year, up 5 percent from last year. Samsung Heavy also raised its order target to $15 billion for this year, compared with $13.3 billion posted last year.
Daewoo Shipbuilding & Marine Engineering Co., another major shipyard, is considering raising its orders target by 10 percent to $14 billion for the year.
Shares of local shipbuilders rose sharply on Monday on expectations that Europe's economic recovery will gather steam this year, raising demand for new ships.
The eurozone saw its economy grow at a faster than expected rate of 0.3 percent in the fourth quarter, fanning hopes that the recovery is getting a foothold in the economic bloc.
Shares of Hyundai Heavy advanced 2.28 percent to close at 224,000 won on the Seoul bourse. Prices for Samsung Heavy and Daewoo Shipbuilding soared 3.31 percent and 4.1 percent, respectively, closing at an identical 34,300 won.