Opportunity costs on the rise at Korean shipping firms

South Korea’s leading shipping companies are being used as funding sources for their parent groups’ business expansion or making up for losses at affiliated companies, rather than putting their cash reserves into future growth areas.

A sharp increase in cargo volumes and freight rates drove shipping companies’ earnings to record highs last year and in the first quarter of this year.

But some of them are rapidly depleting their cash reserves by channeling a substantial amount of reserve money into a possible acquisition target.

SM Line Corp. and Korea Line Corp., two shipping arms under the SM Group, spent a combined 60 billion won ($47 million) last week buying shares in HMM Co., the country’s largest shipping company, according to the Korea Exchange.

Before the purchase, SM Line and Korea Line had put 485.1 billion won and 26.9 billion won into securing a combined 5.52% stake in HMM, which stands for Hyundai Merchant Marine.

SM Line reported its largest-ever net profit of 341.3 billion won in the first quarter, but it appeared to have spent a chunk of its profits buying HMM shares.

That raised speculation that SM Group Chairman Woo Oh-hyun, who tends to snatch up acquisition targets, might be looking to acquire HMM by mobilizing the group’s cash cow SM Line as a financing source.

In that case, SM Line may be at risk of deteriorating its financial condition and end up increasing its opportunity costs as well, analysts warned.

Pan Ocean, a unit of Harim Group, drained 31 billion won in cash to buy a 22.46% stake in Harim USA last January. The stake purchase appeared to be aimed at covering some losses at Harim USA, which has negative equity capital.

The value of the stake has decreased to 20 billion won since then, resulting in a valuation loss of 11 billion won for Pan Ocean as of end-March.

BUILDING CASH RESERVES

By contrast, HMM has been accumulating cash that remains idle. The former unit of Hyundai Group has been under creditors' control since it fell into a liquidity crunch in 2015.

Its cash and cash equivalents amounted to a whopping 9.5 trillion won ($7.4 billion) as of end-March, on the back of its record operating profit of 3.1 trillion won in the first quarter.

In a sense, HMM may need to save money to meet a possible repayment request of 2.7 trillion won in perpetual bonds from its two creditors, including the state-run Korea Development Bank.

But analysts said that HMM’s swelling cash reserves are increasing its management uncertainty since its two creditors with a combined 41% stake seem uninterested in making good use of the idle money.

Write to Ik-Hwan Kim at lovepen@hankyung.com
Yeonhee Kim edited this article.