Korean Shipping Companies 'Under Severe Stress' as Debt Mounts

Korean container shipping companies have mirrored the weakness in global container shipping sector in the past few years. They have seen profitability eroded in the wake of volatile freight rates and irrational industry discipline. Losses in their key segments of container shipping have led to severe deterioration in their financial health. They have failed to generate enough cash flow to suffice their operational needs and instead relied heavily on short term debt capital from the local markets.

Rahul Kapoor, senior analyst at Drewry Maritime Equity Research stated, “Korean container shipping companies have their backs against the wall with mounting debt and piling losses. Both HMM and Hanjin have severely strained their balance sheets in the current industry downturn and the near term outlook doesn’t seem benign. They have seen massive book value erosion between 2009-12, to the tune of 60% and will need years of profitability and massive capital increase to tide over what we see as still challenging freight markets. Even as we see the worst is behind them in terms of losses, we are not optimistic of a major turnaround near term and expect the two to continue grappling with weak financial health.”

DMER takes a negative view on both Hyundai Merchant Marine (011200 KS) and Hanjin Shipping (117930 KS) as it finds valuations expensive and financial health poor. Their overall evaluations are below:

HMM is seeing an unsustainable debt level with capital raise imminent is our view. The company’s financial health remains under tremendous strain with any further stress will likely put HMM’s ability to meet its maturing debts under stress. We find consensus to be too optimistic and expect HMM to be loss making in FY13.

Hanjin will continue to be in the red in 2013 as weak fundamentals and high interest costs weigh. Losses in the past two years have  eroded the book value and Company’s gearing has shot up to over 6x as of 2Q13. Further, our estimates suggest Hanjin needs KRW 4tr to fund its capex and debt maturities and with continued losses the company could find financing highly expensive in a challenging environment. We remain negative on the company’s prospects.