[넘버스]’Small shipbuilding restructuring puzzle’ tailored to Hanjin Heavy Industries’ M&A

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The restructuring of small and medium-sized shipyards, which was the government’s long-awaited project, has crossed the 9th ridge. Small and medium-sized shipyards were once in a crisis of ‘examination’ due to the rise of Chinese shipyards and lack of work.

Small and medium-sized shipyards sprang up in the 2000s during the booming shipbuilding industry, and in 2010 they fell into a chain of insolvency. From Seongdong Shipbuilding & Marine Engineering (currently HSG Seongdong Shipbuilding & Marine Engineering) to Hanjin Heavy Industries & Construction, the largest shareholders have become creditors.

The government even considered a plan to consolidate small and medium-sized shipyards into one place to save small and medium-sized shipyards in crisis. It was judged that it was possible to survive if Hanjin Heavy Industries was combined. The lack of work in small and medium-sized shipyards and the disagreement between creditors made this not a reality.

Such restructuring has been on the rise since last year. Early this year, Seongdong Shipbuilding & Marine Engineering was acquired by HSG Heavy Industries and re-launched as a ship block company. Last month, Daeseon Shipbuilding signed a memorandum of understanding with Dongil Steel, a steel company in Busan, to transfer management rights. STX Offshore & Shipbuilding selected’Joint Asset Management (Yuamco)·KHI Investment’ as the preferred negotiator last month. Hanjin Heavy Industries & Construction selected Dongbu Construction Consortium as the preferred negotiator on the 22nd.

Hanjin Heavy Industries & Construction is a shipbuilder selected as the last puzzle to complete the restructuring of small and medium shipyards. The restructuring of small and medium-sized shipyards has come to the end as Hanjin Heavy Industries has finished selecting the preferred negotiator.

The shipbuilding industry is welcoming when small and medium-sized shipyards, which have suffered extreme difficulties, prepare to greet the’new owner’. In the future, attention is focused on whether small and medium-sized shipyards will achieve business normalization following M&A.

The shipbuilding industry’s interest is focused on Hanjin Heavy Industries & Construction. Hanjin Heavy Industries & Construction is the only small and medium-sized shipbuilder to operate both construction and shipbuilding at the same time. Due to the high merit of taking over the construction industry, a plan to separate the shipbuilding division was considered. As the Korea Development Bank insisted on selling it, the Dongbu Construction Consortium also took over the shipbuilding sector.

The shipbuilding industry is interested in how the Dongbu Construction Consortium, which is a’out-of-the-box’ to the shipbuilding industry, will come up with a trick.

Dongbu Construction Consortium plans to revitalize the commercial vessel (commercial vessel) division after taking over Hanjin Heavy Industries & Construction. Dongbu Construction official said on the 24th <블로터>In talks with the company, he said, “When taking over Hanjin Heavy Industries, we will increase orders by activating the merchant vessel division.”

Dongbu E&C participated in the consortium as a strategic investor (SI). Korea Land Trust, NH PE and Opus PE participated as financial investors (FIs). As Korea Land Trust is the actual largest shareholder of Dongbu E&C, it is holding the’handle’ of this deal. Participation in the acquisition of Hanjin Heavy Industries is due to the strategic judgment of Korea Land Trust.

Hanjin Heavy Industries is building special ships, such as warships, while removing the Subic Shipyard (HHIC-PHIL) in the Philippines. The demand for special ships is increasing as tensions in the Northeast Asian region increase. As the number of orders ordered by the Defense Acquisition Program Administration is divided between Hyundai Heavy Industries and Daewoo Shipbuilding & Marine Engineering, Hanjin Heavy Industries & Construction is limited in that it does not have a lot of work.

For this reason, investors who participated in the consortium are very interested in the site development and construction of Hanjin Heavy Industries & Construction’s Yeongdo Shipyard. Hanjin Heavy Industries & Construction is the 45th largest construction company in Korea in terms of construction capacity. Hanjin Heavy Industries’ apartment brand’Haemoro’ is very popular in Gyeongbuk. The construction division has an order backlog of KRW 2.404 trillion and has the capability to construct thermal power plants. In the construction sector, it is said that the acquisition merit is relatively high.

According to the investment banking (IB) industry, the merit of the shipbuilding sector is low. Hanjin Heavy Industries & Construction has an 80,000 pyeong shipyard near Busan Port. The Yeongdo Shipyard, built during the Japanese colonial rule, is the first shipyard in Korea. It was built about 40 years earlier than the Mipo Shipyard of Hyundai Heavy Industries, which was built in the 1970s. It also has a’track record’ that once built and delivered the world’s largest container ship (21,000 TEU), but the current status has declined significantly.

The Yeongdo Shipyard had a lot of ups and downs despite the title of’Korea’s No. 1 Joseon’. Nam-ho Cho, chairman of Hanjin Heavy Industries Holdings, built a large shipyard in Subic, Philippines in 2008. The Yeongdo Shipyard promoted’off-shoring’ due to frequent labor disputes, high labor costs, and poor competitiveness due to the narrow site.

Last year, the subic shipyard in the Philippines became a snowball, and the shipyard was sold to a local creditor. As of the end of 2018, the total amount of capital was negative (-) 708.1 billion won, which was completely incapacitated. Chairman Nam-ho Cho’s ambition to build the Subic Shipyard mainly for supersized commercial ships and the Yeongdo Shipyard for special ships was aground. Chairman Cho handed over the management rights of Hanjin Heavy Industries to creditors such as the Korea Development Bank last year and ended the stake relationship.

Currently, Yeongdo Shipyard has a small site and can only build small and medium-sized ships. Small and medium-sized merchant ships have lost orders due to cost competition with Chinese shipbuilders. In October, we managed to win orders for two petrochemical product carriers worth 100 billion won from a shipping company in Asia.

As of the third quarter of this year, the shipbuilding division’s order balance was 9208 billion won. At the end of 2018, the order balance was KRW 1.36 trillion, which is around KRW 1 trillion. The Defense Acquisition Program Administration orders special ships every second half of the year, but Hanjin Heavy Industries & Construction was unable to win orders for a special ship this year. According to Hanjin Heavy Industries, the shipbuilding sector has 3 years of work left. However, it seems difficult to escape from the deficit as orders have not increased significantly.

As such, the shortage of work has led to a decrease in sales and a growing burden of fixed costs, leading to a deficit. In the third quarter of this year, the cumulative sales of the shipbuilding division were KRW 317.5 billion. Sales decreased by 18.2% (581 billion won) from the same period last year. In the third quarter of this year, it posted a deficit of 21.8 billion won. As of the third quarter of this year, Hanjin Heavy Industries & Construction’s cost ratio was 90.9%. The shipbuilding sector is estimated to be higher than this.

For the Dongbu Construction Consortium to normalize the shipbuilding sector, it is necessary to move the shipyard to a wider site. Currently, it is not possible to build a medium-sized or higher merchant ship.

The shipbuilding industry is in a position to re-implement a plan to move the site of Hanjin Heavy Industries to Sinseondae Wharf. In 2018, Hanjin Heavy Industries implemented a plan to move the Yeongdo Shipyard to Sinseondae Wharf, Nam-gu, Busan.

Yeongdo Shipyard is located in the original downtown and the site is narrow. The area around Sinseondae Wharf is large, allowing large commercial ships to be built. Hanjin Heavy Industries & Construction planned to build commercial and special ships by leasing the Sinseondae wharf (1157,000m2) and some 330,000m2 of the Naval Operations Command.

If this site is rented, the shipyard of Hanjin Heavy Industries is 5.6 times larger than the current (260,000㎡). Another advantage is that large merchant ships and special ships can be dried at the same time. The owner of this site is Busan Port Authority. At the time, the Busan Port Authority said, “Seonseondae pier is functioning as a pier until 2030. There is also a plan to move to the Shingamman pier area.”

Chairman Nam-ho Cho withdrew the plan as the management difficulties of the Subic Shipyard intensified while promoting the relocation of the Hanjin Heavy Industries site.

The shipbuilding industry is expected to secure competitiveness if Hanjin Heavy Industries relocates the site. Hanjin Heavy Industries & Construction has the ability to build LNG carriers. From 1995 to 2017, Hanjin Heavy Industries & Construction built and delivered 7 LNG carriers.

Only 5 domestic shipbuilders have the ability to build LNG carriers. △Hyundai Heavy Industries (Hyundai Samho Heavy Industries and Hyundai Mipo Shipbuilding) △Daewoo Shipbuilding & Marine Engineering △Samsung Heavy Industries △Hanjin Heavy Industries & Construction △STX Offshore & Shipbuilding has a’track record’ in the field of LNG carriers.

In October last year, the global LNG fleet was 582, and Korea built 373 (64%). By shipping company, Daewoo Shipbuilding & Marine Engineering had the largest number of 145 vessels, followed by Samsung Heavy Industries and Hyundai Heavy Industries with 124 and 92. STX Offshore & Shipbuilding and Hanjin Heavy Industries & Construction built and delivered 7 ships each.

LNG carriers must liquefy gaseous natural gas below -163 degrees Celsius and transport them safely. LNG carriers can be built only when technology is secured.

Hanjin Heavy Industries & Construction has the ability to build ultra-large container ships and LNG carriers. However, due to the limitations of small and medium-sized shipyards, it is only building warships.

The midsize shipbuilding market is still stagnant. The demand for replacement of old ships has been delayed due to falling oil prices. However, it is fortunate that from January to September this year, the proportion of medium-sized ships in the new shipbuilding market was 42.7%, a slight increase from the same period last year. Hanjin Heavy Industries & Construction cannot guarantee survival with the volume of medium-sized ships such as special ships. Competitiveness must be secured through preemptive investment by the acquired company and relocation of the shipyard.

If the Dongbu Construction Consortium is dependent on the shipbuilding industry, Hanjin Heavy Industries’ shipyards can increase their competitiveness. Fortunately, the Korea Development Bank is also said to have a strong willingness to sell it. If the consortium uses this as a leverage, wouldn’t it be possible to come up with a survival plan for the shipbuilding sector?