South Korea’s major shipbuilders saw their brokerage target prices cut across the board in the wake of their failure to secure the Canadian next-generation submarine project. Analysts say mid-to-long-term growth uncertainty in the naval defense segment and macroeconomic variables such as rising interest rates drove the corporate value reassessment.
NH Investment & Securities lowered its target prices for HD Hyundai Heavy Industries (329180), Hanwha Ocean (042660), and Samsung Heavy Industries (010140) in a report released on the 10th. HD Hyundai Heavy Industries was cut 17% to 830,000 won (approximately $549.71), Hanwha Ocean 28% to 126,000 won (approximately $83.45), and Samsung Heavy Industries 8% to 34,000 won (approximately $22.52). The brokerage maintained its “Buy” rating on all three stocks.
The biggest factor behind the target price cuts is weakening growth expectations for the naval defense segment. With Germany’s ThyssenKrupp Marine Systems (TKMS) recently selected as the preferred bidder for Canada’s next-generation submarine program, uncertainty has grown around whether HD Hyundai Heavy Industries and Hanwha Ocean can achieve their mid-to-long-term naval defense revenue expansion targets. HD Hyundai Heavy Industries had set a 2030 naval defense revenue target of 7 trillion won (approximately $4.6 billion), while Hanwha Ocean had targeted 4 trillion won (approximately $2.6 billion). The two companies currently generate annual naval defense revenue in the range of 1 trillion to 1.5 trillion won (approximately $662.3 million to $993.5 million) each.
“The failure to secure the Canadian submarine order has increased uncertainty around mid-to-long-term naval defense revenue growth, so we have reduced the corporate value premium from the previous 50% to 30%,” explained Jeong Yeon-seung, an analyst at NH Investment & Securities. “Order opportunities remain in Saudi Arabia, Greece, South America, and Southeast Asia, but it will take time for them to materialize,” Jeong added. “Until momentum for large-scale project orders re-emerges, a reduction in the valuation premium assigned to the naval defense segment is unavoidable.”
Hanwha Ocean suffered the largest target price adjustment among the three shipbuilders due to the fallout from naval defense order uncertainty. While it missed out on the Canadian submarine deal, there are assessments that additional order opportunities exist in Saudi Arabia, Greece, and elsewhere. With competitors having largely filled their order backlogs, Hanwha Ocean could emerge as a strong candidate for the next project. However, the absence of a large-scale order project within the year was noted as a disappointing factor.
Hanwha Ocean is expected to post second-quarter revenue of 4.97 trillion won (approximately $3.3 billion), operating profit of 535.8 billion won (approximately $354.9 million), and an operating margin of 10.8%, exceeding market expectations. One-time revenue from the P-79 FPSO (floating production storage and offloading) project, estimated at around 1.5 trillion won (approximately $993.5 million), is expected to be reflected, reducing the energy plant segment’s losses more than anticipated. The commercial vessel segment is expected to maintain solid profitability due to rising ship prices and favorable exchange rates, but the naval defense segment is forecast to remain in the red due to increased selling, general, and administrative expenses and revenue recognition from low-margin projects.
“For earnings improvement, the outcome of the Venus FPSO order, worth $3 billion (approximately 4.5 trillion won) and expected in late July, will be critical,” Jeong assessed.
For HD Hyundai Heavy Industries, while commercial vessel order performance was solid, the target price was lowered as uncertainty around naval defense segment growth increased. Additionally, the macroeconomic environment was applied unfavorably, with the risk-free rate used in the existing corporate valuation raised from 3% to 3.4%. “Commercial vessel orders are healthy, but meaningful order achievements are needed outside the commercial segment,” Jeong analyzed. “We lowered the target price to reflect the increased uncertainty around naval defense revenue growth.”
According to NH Investment & Securities, HD Hyundai Heavy Industries has already exceeded its annual commercial vessel order target. It secured numerous orders for large LPG carriers, its main vessel type, and LPG carrier prices have risen meaningfully, differentiating the company from competitors in terms of commercial order quality. In the second half of this year, naval defense business opportunities in Thailand, the Philippines, and Peru, along with one offshore plant order opportunity, remain, making it highly likely the company will achieve its full-year order target.
HD Hyundai Heavy Industries’ second-quarter revenue is expected to rise 52.8% year-on-year to 6.34 trillion won (approximately $4.2 billion), with operating profit up 110.5% to 992.6 billion won (approximately $657.4 million), in line with market expectations. Provisions related to the fire accident on a submarine under construction (the Hong Beom-do) last April are not expected to be reflected this quarter.
The expansion of medium-speed engine capacity for data centers was identified as a key variable for future corporate value growth. “We expect 1.5 to 2.0 GW of medium-speed engine capacity expansion, and from 2028, increased engine division profits will drive overall earnings improvement,” Jeong said, adding, “However, the fact that the specific expansion scale has not yet been finalized remains a source of uncertainty.”
Samsung Heavy Industries’ target price was lowered considering the recent sluggish rise in newbuilding prices, but its mid-to-long-term earnings outlook remained positive. Samsung Heavy Industries’ second-quarter revenue is estimated at 3.36 trillion won (approximately $2.2 billion) with operating profit of 345.8 billion won (approximately $229.0 million), falling short of market expectations. This is because revenue from global operations, where tankers are built on an outsourced basis, is increasing, but profitability is somewhat low as the business is in its early stages.
However, NH Investment & Securities raised its 2027 and 2028 operating profit estimates for Samsung Heavy Industries by 12% and 14%, respectively, as the nature of its FLNG (floating liquefied natural gas) facility orders is shifting from simple construction to overseeing entire projects. Samsung Heavy Industries established a “Future Business Division” in June and has begun overseeing future businesses such as floating data centers and U.S. warship newbuilding and maintenance, repair, and overhaul (MRO). It is proceeding with the concretization of the floating data center business utilizing its No. 2 dock, which has resumed operations.
The commercial vessel segment is assessed as relatively healthy. South Korea’s large shipbuilders are highly likely to exceed their annual commercial vessel order targets, driven by expanded orders for tankers, LNG carriers, and LPG carriers. However, the fact that price increases for LNG carriers, their main vessel type, have fallen short of expectations is a burden. According to NH Investment & Securities, the Clarkson newbuilding price for a 174,000-cubic-meter LNG carrier stands at $248.5 million per vessel, remaining flat since a slight upturn in late February.
The watershed moment for an LNG carrier price rebound is seen as late September. The assessment is that if vessel orders related to the Mozambique LNG project are confirmed, upward pressure on ship prices could increase due to reduced available slots. “Global LNG development projects are progressing smoothly, and we expect annual LNG carrier orders of around 70 vessels through 2027,” Jeong said, while explaining, “However, from the shipping companies’ perspective, the urgency to place orders is not strong enough to drive ship prices higher in the short term.”
Offshore plant and medium-speed engine orders were cited as turnaround variables for the second half. Samsung Heavy Industries has already secured orders for the Coral North FLNG and Delfin FLNG Unit 1, earning an assessment that its offshore plant segment risk is limited. In contrast, HD Hyundai Heavy Industries and Hanwha Ocean are seen as needing at least one offshore plant order within the year. In particular, the outcome of Hanwha Ocean’s Venus FPSO bid, scheduled for late July to early August, was presented as a key variable that will determine second-half earnings visibility.
For HD Hyundai Heavy Industries, the scale of medium-speed engine capacity expansion and whether it secures engine orders for data centers were identified as key points for a stock rebound. NH Investment & Securities expects 1.5 to 2.0 GW of medium-speed engine capacity expansion and forecasts that increased engine division profits will drive overall earnings improvement from 2028. However, it noted that the fact that the specific expansion scale has not yet been finalized remains a source of uncertainty.
Regarding Samsung Heavy Industries, Jeong analyzed, “The company is achieving solid order performance based on stable orders for its flagship FLNG production facilities,” adding, “It needs to secure growth engines through achievements in new businesses such as floating data centers.”
“With the recent stock price decline, South Korean shipbuilders’ 2028 price-to-earnings ratios (PER) have fallen to the 10-13x range, easing valuation pressure,” Jeong said. “However, for valuations to re-expand, meaningful orders must be confirmed in segments outside commercial vessels, such as naval defense, offshore plants, and medium-speed engines.”