Short Sellers Bet Korean Shipyards’ Misery to Deepen

By Seonjin Cha 

South Korean shipbuilders, last year’s biggest stock-market losers, are the most popular target for short sellers in 2015 as falling crude hurts oil-rig demand.
Bearish wagers used borrowed stock against Hyundai Mipo Dockyard Co. (010620) rose to 7.3 percent of shares outstanding on Jan. 8, the highest level on the Kospi index and up from 4.3 percent a year ago, according to data compiled by Bloomberg and Markit Group Ltd. Short interest in Daewoo Shipbuilding & Marine Engineering Co. and Hyundai Heavy Industries Co. (009540) has more than tripled in the past 12 months.
While shipbuilding’s importance to the Korean economy has diminished since former President Park Chung Hee promoted the industry in the 1970s, the nation’s 10 biggest shipyards still provided 183,000 jobs at the end of 2013. As demand for ships to move consumer goods declined amid
a global economic slowdown, Korean shipbuilders have become increasingly reliant on orders for rigs and drill ships.
“It’s hard to expect much upside for shipbuilders as long as oil prices remain low,” Lee Jin Woo, a money manager at Seoul-based KTB Asset Management Co., which oversees about $8.8 billion, said by phone. “Companies will have to delay capital investments and orders for ships and offshore projects.”

Photographer: SeongJoon Cho/Bloomberg

Employees work on a vessel under construction at the Hyundai Mipo Dockyard Co.... Read More

A gauge of Korean shipbuilders plunged 51 percent last year, the biggest drop among more than 100 industry groups on the nation’s benchmark stock gauge. Hyundai Heavy, the fourth-largest company by market capitalization in the benchmark Kospi at its peak in April 2011, now ranks 34th after losing about $31 billion in value.
Hyundai Mipo dropped 3 percent, the most since Dec. 26, at the close in Seoul. Daewoo Shipbuilding slid 1.2 percent, while Hyundai Heavy closed unchanged. The Kospi (KOSPI) retreated 0.2 percent. Press offices of the three companies declined to comment on stock performance.

Net Loss

Hyundai Mipo shares fell to their lowest level since 2006 this month. The company received $1.8 billion worth of new orders in 2014, the lowest in five years and almost half its annual target of $3.5 billion. The company recorded a net loss of 416 billion won ($385 million) in the third quarter, its widest in at least four years.
“The amount of short selling shows investors’ pessimism,” said Chang Keun Ho, a Seoul-based analyst at Samsung Asset Management Co., which oversees about $112 billion of assets. “New orders have dropped and earnings came in as a shock. It’ll take time for people to believe the shipbuilding business has stabilized, especially given the oil price hit.”
Short interest in Hyundai Heavy has surged to 3.5 percent, its highest since at least 2006, from 0.5 percent a year ago. Oil exploration comprised 19 percent of last year’s new orders, almost double the 11 percent recorded in 2012. The company swung to a loss of 1.18 trillion won in the third quarter from a profit of 25.4 billion won a year earlier.

New Orders

Daewoo Shipbuilding’s short interest increased to 5.3 percent from 1.7 percent a year ago. New orders for drill ships and other offshore production vessels accounted for 60 percent of the company’s total in 2013, compared with 44 percent in 2011. The stock has fallen 73 percent from its high in October 2007 through yesterday.
Oil prices slumped almost 50 percent last year as the Organization of Petroleum Exporting Countries resisted output cuts even amid a global surplus that Qatar estimates at 2 million barrels a day. West Texas Intermediate will trade at $41 a barrel in three months, down from a previous forecast of $70 for the first quarter, Goldman Sachs Group Inc. said in a report distributed yesterday.
Shares in shipbuilders will probably rebound because selling has been excessive and demand for tankers may rise as falling oil boosts crude and gas shipments, said Park Moo Hyun, an analyst at Hana Daetoo Securities Co. in Seoul. Earnings may pick up from as early as the second quarter, he said.

Chinese Demand

China’s efforts to lift reserves may increase its imports by as much as 700,000 barrels a day this year, according to London-based Energy Aspects Ltd. China boosted imports by 8.3 percent, or 460,000 barrels a day, in the first nine months of this year, the fastest pace since 2010, customs data show.
The average price-to-book ratio for the six companies in Korea’s shipbuilder index is around 0.6 times net assets, a 43 percent discount to the Kospi.
“The current valuation on the sector is ridiculous,” said Park. “Worries about shipbuilders are overdone.”
While analysts predict gains of more than 20 percent over the next 12 months for both Hyundai Mipo and Daewoo Shipbuilding, the average price targets have fallen to their lowest levels in at least four years, according to data compiled by Bloomberg. The Baltic Dry Index (BDIY), a measure of commodity shipping rates, tumbled 66 percent last year.
“People are still uncertain about shipbuilders,” said KTB’s Lee. “Any share rebound from short-covering won’t last without fundamental improvement. I don’t see a reason to overweight the sector in the short term. They may have to suffer a little more.”