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HMM’s stock loses ground on slowing profit growth, overhang woes

KOBC converts $512.7 million CBs into stocks; number of shares ready to trade to surge

By Oct 28, 2021 (Gmt+09:00)

The vessel HMM GDANSK, a container ship, prepares for sailing
The vessel HMM GDANSK, a container ship, prepares for sailing

South Korea’s largest container liner HMM Co. suffered a tumble in its stock prices despite the rosy outlook on the global shipping industry and the company’s earnings.

The share came under pressure from concerns over slowing profit growth and overhang, analysts said.

PROFIT GROWTH TO SLOW DOWN

In August, a local brokerage house Shinyoung Securities lowered its rating on HMM, formerly known as Hyundai Merchant Marine, to ‘neutral’ right after the liner reported record earnings in the second quarter with an all-time high operating profit of 1.4 trillion won ($1.2 billion). At that time, its stock took a breather trading around 40,000 won after a leap to an all-time high closing of 50,600 won in May fueled by strong earnings in the first quarter. Investors had still hoped that the stock would resume its rally, given rising ocean freight charges. Few doubted the forecast of HMM’s record earnings in the third quarter.

But its stock lost ground. HMM on Oct. 27 lost 8.5% to close the local market at 26,900 won, about a half of the record.
Graphics by Jerry Lee
Graphics by Jerry Lee

Shinyoung said its stock has already priced in strong earnings in the third quarter, expecting the share to react more sensitively to profit growth than profit itself.

“It is the period of the best business condition. Let’s leave before the freight rate growth slows down,” said a Shinyoung analyst Eom Kyung-ah.

The global shipping industry stayed healthy. The Shanghai Containerized Freight Index (SCFI) had soared nearly 70% this year on the global logistics crisis with production and consumption resuming. But the index has been correcting for the recent two weeks.

The industry still expected the global shipping business to hold firm, saying the supply chain disruption has yet to be resolved. Sea carriers scrambled for ordering vessels due to a sudden container supply shortage, but those new ships will not be delivered until 2023. It is also difficult to cut freight rates that were raised. Given those factors, HMM’s operating profit in 2022 was forecast at around 6 trillion won.

HMM earnings forecasts
Unit: trillion won

Source: FnGuide

Graphics by Jerry Lee


CONVERTIBLE BONDS

HMM’s stock, however, skidded as state-run Korea Ocean Business Corporation (KOBC) decided to convert all of its convertible bonds to the liner’s shares. KOBC exercised its rights to convert HMM’s unsecured convertible bonds, worth 600 billion won, into common shares, according to HMM’s filing to a financial regulator on Oct. 26. After the move, Shinyoung cut a target price of HMM stock to 27,000 won from 31,000 won.

KOBC, providing financial support to the local shipping industry, acquired the convertible bonds to bail out HMM in 2018. The state-backed institute still holds some 2.3 trillion won worth of such bonds. If those bonds are converted into stocks in phases, the number of HMM’s shares ready to trade is expected to be up to 1 billion from the current 400 million.

“KOBC, along with the Korea Development Bank, may face breach of trust if they do not convert the bonds with a conversion price of 5,000 won,” Shinyoung’s Eom said.

In July, the KDB planned to sell 2.6 trillion won in perpetual convertible bonds issued by HMM in the second half of this year. HMM issued over 3 trillion won in bonds in 2017 to raise operating funds, and the state-run bank assumed most of them.

“Its stock prices are expected to keep affected until the overhang issues are resolved, given the sustained CB risk,” said Eugene Investment & Securities analyst Bang Min-jin. “A rise in the number of stocks will play a negative role on the stock price.”

HMM is able to repay the remaining perpetual bonds in stages from 2023, according to the company.

Domestic brokerage houses lowered their target prices to 28,200-31,000 won as the overhang issues were expected to offset benefits from the healthy global shipping sector.

Samsung Securities’ analyst Kim Young-ho set HMM’s target price at 28,200 won.

“That was based on assumption that the number of shares ready to trade will rise to 1 billion. I saw its fair valuation around 28,000 won since I didn’t predict business conditions to deteriorate next year,” Kim said. “A fall below the level could be a chance to buy.”

Brokerages ratings on HMM stocks and target prices (Unit: won)
Brokerages Ratings Target prices
Shinyoung Securities Neutral 27,000
KTB Investment & Securities Hold 30,000
Daishin Securities Buy 48,000
Eugene Investment & Securities Hold 31,000
Samsung Securities Hold 28,200
Meritz Securities Buy 47,000

Write to Jae-Won Park at wonderful@hankyung.com

Jongwoo Cheon edited this article.
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