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Doosan Group

Doosan Heavy shares rally as investors look beyond financial woes

Sep 01, 2020 (Gmt+09:00)

Shares of Doosan Heavy Industries & Construction Co. Ltd., a South Korean power plant builder, jumped to their highest level in more than two years in heavy trade on Sept. 1 .

Investors looked beyond Doosan Heavy's financial problems to focus on new business opportunities from wind power plants and the US nuclear power market, driving the stock 20% higher on both Friday and Monday.

Shares touched an intraday peak of 16,800 won ($14.2), their highest since May 28, 2018, buoyed by aggressive purchases by pension funds that continued their net buying of the stock for the 17th straight session.

It closed down 0.93% at 15,950 won, reversing earlier gains, compared to a 1% rise on the broader KOSPI. It became the 10th most actively traded stock on the day, with 23.4 million shares changing hands.

Doosan Heavy has rallied by 330% over the past two months, during which time pension funds scooped up a net 57.5 billion won worth of shares in the builder. But its foreign ownership is a mere 7.6%, among the lowest for the 60 biggest stocks on the main bourse by market value.

The recent share price surge marks an abrupt change from the downturn that followed news of the government’s policy to phase out nuclear power. The Doosan Group unit is a key builder of coal-fired and nuclear power plants.

The ruling party’s move to ban South Korean financing on foreign capital power projects dealt another blow to Doosan, given that overseas coal plants account for half of its global business.

Its continuous financial support to troubled affiliate Doosan Engineering & Construction Co. Ltd. has widened shortfalls at Doosan Heavy. The parent group’s $4.9 billion acquisition of Bobcat in 2007 has sent the Doosan Group units into debt due to heavy borrowing costs.

But investors took such issues in stride to focus on the positive news.

“Doosan Heavy now seems able to overcome its crisis of 6 trillion won in debts maturing this year thanks to the 3 trillion won injection in fresh funding by creditors and Export-Import Bank of Korea’s debt refinancing,” said NH Investment & Securities analyst Choi Jin-myung.

“Further, the sale process of Doosan Infracore and other assets is going smoothly, eliminating the default risk surrounding Doosan Heavy.”

Doosan Heavy has a 36.07% stake in Infracore, a construction equipment supplier, which it has put up for sale.

WIND POWER, SMALL MODULAR REACTORS

To fill the void left by the shrinking nuclear and coal-fired plant business, Doosan Heavy will endeavor to secure wind power plant deals. Last month, it announced a plan to generate more than 1 trillion won in annual sales from offshore wind power plant orders.

As the country’s only manufacturer of offshore wind turbines, Doosan is tapped to be a key beneficiary of the South Korean government’s initiative to boost the annual capacity of offshore wind power plants to 12GW by 2030.

Doosan’s foray into the small modular reactor market has added to the upbeat mood.

Aerial view of NuScale Power’s small modular reactor model
Aerial view of NuScale Power’s small modular reactor model


 

On August 30, the power plant builder announced that US small modular reactor (SMR) developer NuScale Power has passed all aspects of the US Nuclear Regulatory Commission’s design certification screening process for its SMR model.

Last year, Doosan agreed to supply NuScale with key components for the first plant based on the SMR design and acquired a stake in the US company for about 52 billion won.

Doosan is its only investor in the SMR developer as an equipment supplier. Its components supply to NuScale is estimated to be worth $1.3 billion in sales.

The US is leading the development of SMRs which are based on small reactors on aircraft carriers and nuclear-powered submarines, said NH Investment’s Choi. South Korea followed suit, having also been developing them since 2011.

“The current share price of Doosan Heavy is beyond its valuation, reflecting expectations that the SMR will change the power generation and supply landscape,” he added.

NEW SHARES

But some have expressed caution against the rapid stock price gains which they said have factored in expectations for additional growth beyond improved financial conditions and a return to normal business conditions.

Doosan Heavy earned 6.2 billion won in first-half operating profits. But its net loss widened to 623.1 billion won in the first half, from the 104.4 billion won shortfall for the whole of 2019 on a consolidated basis.

Considering its heavy shortfalls, Doosan Heavy may need to raise additional capital through a rights offering, which would dilute the ownership of existing shareholders.

“The huge potential for the new businesses aside, Doosan Heavy reported a net loss in the first half and its debt-to-equity ratio reached 292%,” said a credit ratings agency source. “Now would be the right time to sell new shares, when its share price has been at highs regardless of its earnings results.”

By Bum-jin Chun

forward@hankyung.com

Yeonhee Kim edited this article

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