Record-breaking orders! The world's largest ship engine manufacturer is operating at full capacity

With the significant increase in orders for the South Korean shipbuilding industry this year, HHI-EMD, the world's largest manufacturer of marine engines, is also experiencing a boom in orders. It has already exceeded its annual order target in the first half of the year and is expected to set a new record for orders.

Record-breaking orders! HHI-EMD surpasses its annual order target in the first half of the year.

On July 20, Korea Shipbuilding & Offshore Engineering (KSOE), the shipbuilding holding company of Hyundai Heavy Industries Group, announced that its engine and machinery division (HHI-EMD) received orders worth 2.5 trillion won (approximately US\$1.975 billion) in the first half of this year. This represents 103% of its annual target of US\$1.918 billion, exceeding its target ahead of schedule. At this rate, it will not only surpass last year's order intake of US\$2.078 billion but also has the potential to break the annual order record of US\$2.313 billion set in 2013, a peak year for the shipbuilding industry.

It is reported that HSD Engine received orders worth 388.4 billion won (approximately US\$307 million) in the first quarter of this year, a year-on-year increase of 1.6%. This mainly comprised engine orders for container ships and LNG carriers, with dual-fuel engines, a high-value-added product, accounting for 27% of the total. As of the end of the first quarter, HSD Engine had a backlog of 1380.6 billion won (approximately US\$1.09 billion), an increase of 228.2 billion won compared to the end of last year. Of the total backlog, marine engines accounted for 1285.4 billion won (approximately US\$1.016 billion), or 93%, with orders from Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries totaling nearly US\$550 million, or 54%.

According to International Shipbuilding Network, HHI-EMD is the division of Hyundai Heavy Industries that manufactures large and medium-sized marine engines. It is the largest marine engine manufacturer in South Korea and the world, ranking first globally in the number of marine main engines delivered and total power output. Its sales account for 17% of Hyundai Heavy Industries' total sales, second only to the shipbuilding and offshore engineering division, which accounts for 77%. In terms of specific sales, large marine engines account for 50%, medium-sized marine engines and power generation engines account for 17%, land-based power generation engines account for 15%, and marine propellers and shafts account for 6%. HHI-EMD's products are mainly supplied to three shipyards under Korea Shipbuilding & Offshore Engineering: Hyundai Heavy Industries Shipbuilding & Offshore Engineering (Ulsan shipyard), Hyundai Mipo Dockyard, and Hyundai Samho Heavy Industries. A small amount is also supplied to other medium-sized shipyards in South Korea, such as Sungdong Shipbuilding & Marine Engineering.

It is reported that HHI-EMD's order performance in the first half of this year was better than that of Hyundai Heavy Industries' shipbuilding and offshore engineering division. In the first half of this year, the annual order fulfillment rates for Hyundai Heavy Industries' shipbuilding and offshore equipment businesses were 63.6% and 0.2%, respectively. Compared to the same period last year, shipbuilding and offshore equipment businesses decreased by 12.8% and 99.8%, respectively, due to the high order volume in 2021. However, the engine and machinery division increased by 53.2%.

In 2020, HHI-EMD received orders worth only US\$900 million, but this increased significantly to US\$2.078 billion in 2021, more than doubling. In the first half of this year, its order intake has already approached its full-year level of last year.

In this regard, a KSOE official analyzed that HHI-EMD's excellent order performance is due to two factors: the significant increase in orders for environmentally friendly vessels to meet the International Maritime Organization's (IMO) new environmental regulations, and the further development of the trend toward larger main ship types. Specifically, firstly, most of the new vessels ordered by KSOE use dual-fuel engines, which have a high sales price because dual-fuel engines, which can use LNG, methanol, and other alternative fuels that meet environmental regulations, require higher technical capabilities. Secondly, many of the new vessels recently ordered by KSOE are large vessels, such as ultra-large container ships and 174,000-cubic-meter LNG carriers. These ultra-large vessels require multiple high-power auxiliary engines for support. As KSOE's main ship type, these large vessels require 4-5 medium-sized engines independently developed by HHI-EMD—HiMSEN Engine.

Record-high profits! Performance of two major South Korean marine engine companies improves.

With the booming global new shipbuilding market and rising ship prices, while the performance of major shipbuilding companies has yet to recover from the downturn, the profitability of major South Korean marine equipment companies is showing significant improvement.

According to data released by Hyundai Heavy Industries in May, its engine and machinery division (HHI-EMD) achieved an operating profit of 33.7 billion won (approximately US\$26.63 million) in the first quarter of this year, a year-on-year increase of 109.1%, setting a record high for a single quarter. Hyundai Heavy Industries' operating loss in the first quarter reached 217 billion won (approximately US\$171 million), including a loss of 115.5 billion won in shipbuilding, 44.2 billion won in plant equipment, and losses in other business areas. Therefore, HHI-EMD stood out as the only profitable division of Hyundai Heavy Industries.

It is reported that HHI-EMD achieved operating revenue of 1049.2 billion won (approximately US\$830 million) and an operating profit of 133 billion won (approximately US\$105 million) in 2021. According to South Korea's financial investment industry, HHI-EMD's operating revenue and operating profit are expected to reach 1522 billion won (approximately US\$1.203 billion) and 164 billion won (approximately US\$130 million), respectively, this year. Compared to 2018's 1005 billion won and 15 billion won, operating revenue will increase by 50%, and operating profit will increase tenfold.

  Furthermore, according to FnGuide, a South Korean financial information company, on May 25, it predicted that HSD Engine's operating revenue in the third quarter of this year will reach 200.7 billion won (approximately US\$159 million), a year-on-year increase of 69.1%, and its operating profit will reach 1 billion won (approximately US\$80,000), achieving profitability. It is expected that HSD Engine's performance improvement will further expand in the fourth quarter, with operating revenue reaching 228.3 billion won (approximately US\$180 million), a year-on-year increase of 16.6%, and operating profit reaching 4.7 billion won (approximately US\$3.7 million).

In addition, HHI-EMD's predicted operating profit for this year is 164 billion won, fully playing its role as a "cash cow" for Hyundai Heavy Industries. Based on the world's leading medium-sized marine engine, "HiMSEN," HHI-EMD is a major player in the market for large and medium-sized marine engines. Last year, its market share in large marine engines rose to 35%, making it the world's number one. At the same time, HHI-EMD's value has also soared. It is estimated that HHI-EMD's earnings before interest, taxes, depreciation, and amortization (EBITDA) is 200 billion won (approximately US\$158 million). Currently, the total market capitalization of listed companies in South Korea's machinery industry is 10 times their EBITDA. Considering this, HHI-EMD's corporate valuation is estimated to be 2 trillion won (approximately US\$1.58 billion).

In addition to HHI-EMD, HSD Engine, which mainly supplies marine engines to Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries, is also experiencing a favorable order situation. As of the end of May, HSD Engine has received orders worth 850 billion won (approximately US\$672 million) this year. HSD Engine is also expected to return to profitability this year.

According to Clarkson Research Services, global new shipbuilding orders in 2021 reached 46.64 million corrected gross tons (CGT), a year-on-year surge of 95%, reaching the highest level since 2013. South Korea secured 17.44 million CGT, an increase of 112% compared to 2020 and 82% compared to 2019 (pre-COVID-19). Its global market share rose from 31.2% in 2019 and 34.1% in 2020 to 37.1% in 2021. Notably, South Korea's shipbuilding industry received orders for 12.52 million CGT and 10.88 million CGT in high-tech, high-value-added vessels and eco-friendly green vessels, respectively, accounting for 72% and 62% of the total.

Since the beginning of this year, South Korea's shipbuilding industry has seen positive news in its business performance. According to Clarkson Research Services, global new shipbuilding orders in the first half of this year totaled 21.48 million CGT, a 30% year-on-year decrease. However, South Korea regained the top spot globally, securing 9.94 million CGT and a 46% global market share, surpassing China.

A South Korean financial investment research institution stated that the current new shipbuilding market shows a trend of both volume and price increases, indicating a positive signal. In June this year, the Clarkson newbuilding price index reached 161.53 points, the highest since 2009, and has shown an upward trend for 19 consecutive months since December 2020.

A South Korean financial investment research institution indicated that the gradual improvement in the performance of marine engine companies benefits from the recovery of the new shipbuilding order market since last year. As time goes on, ship prices will increase, and order volume will be reflected in performance, leading to improved profits.

Similar to the South Korean financial investment research institution's view, DAOL Investment Securities Co. predicts that HHI-EMD's operating profit will reach 488 billion KRW (approximately US\$386 million) by 2025.

Yu Jae-sun, a researcher at Hana Financial Investment Co., stated: “Shipbuilding companies place engine orders with engine manufacturers 3 to 6 months after receiving new shipbuilding orders, and engine manufacturers deliver engines to shipbuilding companies 6 to 12 months before ship delivery. Considering the time difference between order placement and product delivery, the growth trend of engine manufacturers will continue beyond 2023.” He predicted: “As time goes on, the proportion of orders based on higher ship prices will increase, so engine manufacturers' sales will show significant growth, and their performance will continue to improve.”