LNG Shipping Will Falter Amid Decarbonization And Stiff Competition

Key Takeaways

• Heavy dependence on fossil-fuel vessel demand, rising global competition, and market headwinds threaten long-term revenue growth and margin stability.
  
• Structural labor challenges and substantial legacy debt restrict operational flexibility and investment capacity, undermining future competitiveness and profitability.
  
• Hanwha Ocean is leveraging industry trends, green ship demand, defense spending, and operational improvements to boost margins, cash flow, and long-term market share.

Catalysts

Operates as a shipbuilding and offshore contractor in South Korea and internationally.

• The accelerating global transition toward renewable energy and decarbonization is expected to sharply limit long-term demand for new LNG carriers and fossil-fuel related vessels, which currently make up around 60 percent of Hanwha Ocean's revenue, threatening future top-line growth as orderbooks become increasingly exposed to structural market decline.
  
• Rising geopolitical tensions and protectionist policies, especially the U.S. imposition of tariffs and sanctions on competitors, may provide only a temporary boost; over the long run, escalating global instability and trade barriers risk hampering international contract flows and could suppress future order intake, impacting both revenue visibility and earnings stability.
  
• Intensifying competition from Chinese shipyards with lower labor costs and more aggressive pricing is likely to erode Hanwha Ocean's market share and compress margins, as the company's reliance on premium pricing for high-value vessels faces increasing global price pressure.
  
• Persistent labor shortages and rising personnel costs in Korea's aging economy will drive up capital expenditures and reduce operational flexibility, ultimately constraining margin improvement and limiting the company's ability to maintain cost advantages in heavy industry.
  
• Hanwha Ocean's heavy legacy debt burden from previous restructuring cycles may leave it unable to keep pace with required investments in research and development and environmental compliance, leading to steadily worsening net margins and undermining its long-term competitiveness.

Hanwha Ocean Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hanwha Ocean compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hanwha Ocean's revenue will decrease by 0.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.8% today to 8.8% in 3 years time.
• The bearish analysts expect earnings to reach ₩1019.0 billion (and earnings per share of ₩3242.01) by about August 2028, up from ₩669.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.8x on those 2028 earnings, down from 53.9x today. This future PE is greater than the current PE for the KR Machinery industry at 20.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.43%, as per the Simply Wall St company report.

Hanwha Ocean Future Earnings Per Share Growth

Risks

• Global decarbonization and rising demand for eco-friendly vessels, particularly LNG carriers and ammonia-fueled ships, are expected to support Hanwha Ocean's commercial vessel order book and revenue stream, as seen in the company's successful pivot towards high-margin, technologically advanced vessels with strong, recurring order backlog.
  
• Heightened Asia-Pacific defense spending and international maritime security concerns are driving growth in naval ships and submarines, with Hanwha Ocean expanding its lineup and winning high-profile MRO and vessel contracts with global navies, which could stabilize and boost long-term revenues.
  
• The integration with Hanwha Group has resulted in operational improvements, greater access to capital, and cost-cutting measures, yielding increased operating profit margins and stronger cash flow, thus potentially supporting improved net margins and earnings resilience over time.
  
• Strong secular growth in LNG shipping, alongside increasing LNG export infrastructure in the U.S. and retiring of older vessels, is likely to generate robust replacement and expansion demand, ensuring Hanwha Ocean's production slots remain filled and providing visible revenue and profit growth opportunities.
  
• Industry trends such as digitalization, automation, and industry consolidation are enabling Hanwha Ocean to enhance productivity and cost efficiency, positioning the company to capture greater market share and lift profit margins as overcapacity shrinks to favor larger, competitive players.

Valuation

• The assumed bearish price target for Hanwha Ocean is ₩62270.42, which represents two standard deviations below the consensus price target of ₩106535.0. This valuation is based on what can be assumed as the expectations of Hanwha Ocean's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩130000.0, and the most bearish reporting a price target of just ₩56700.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩11551.8 billion, earnings will come to ₩1019.0 billion, and it would be trading on a PE ratio of 23.8x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of ₩117700.0, the bearish analyst price target of ₩62270.42 is 89.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.