Samsung Heavy Industries' stock lost thirty percent of its value on Wednesday after the number three shipbuilder announced new losses and a $1.4 billion rights offering, which will dilute existing shareholders. It will be the second time that Samsung has issued new shares in a year, following a $900 million rights issue in November 2017.
Today’s price drop wipes out most of the gains that Samsung's stock made over the course of this year, and the news of SHI’s losses also led to a fall in the share prices of competitors DSME and Hyundai Heavy Industries.
Park Moo Hyun, an analyst at Hana Financial Investment, told Bloomberg that Samsung's outlook is troubled because SHI has not adapted to the steep drop-off in vessel and offshore equipment orders that began two years ago. “It’s not going to look good for the company [in 2018]," he said.
In a regulatory filing, Samsung said that it expects to lose $450 million this year and $220 million next year. The firm missed its sales targets by a wide margin in 2017 and expects just $4.6 billion in new orders next year, roughly half the annual volume that it took in before the downturn began. It does not foresee a sales turnaround until 2019, and the low ordering activity has combined with higher material costs and weak pricing power to produce growing losses. SHI has also missed its targets for cost savings from restructuring and layoffs, limiting its ability to offset its difficulties with weak margins.
SHI loses out to Asian competitors
Last Friday, the head of Samsung Heavy Industries expressed concern that other nations' shipbuilders have been catching up to South Korean yards for the lucrative business of building offshore plants, among other product lines. Park Dae-young, SHI's president and CEO, said that "it is a great shock that Singapore has won offshore plant orders which South Korean companies were expected to receive.”
Samsung and DSME recently lost major orders to Sembcorp Marine of Singapore, a smaller firm that has not historically competed directly with Korea's "Big Three" yards for the largest offshore projects. In years past, Samsung relied on offshore plants and related facilities for about two-thirds of its revenue, with the remaining third composed largely of sophisticated ships like LNG carriers. Chinese and Singaporean labor rates are a part of SHI’s difficulties in securing large offshore orders: Business Korea reports that South Korean shipyard workers receive about $65 per hour, while Sembcorp's Southeast Asian employees work for about $25 per hour.