Hyundai Heavy's hurt continues

OCTOBER 26, 2015 —  Hyundai Heavy Industries (HHI), the world's largest shipbuilder, reported its 3Q15 earnings today. Operating loss  came in at 678.4 billion won ($595 million and net loss at 451.4 billion won ($396 million).


Both figures were far worse than analysts had predicted. 

On a quarter-on-quarter basis, sales declined 8.7%, while operating loss and net loss widened by 507.4 billion won and 209 billion won respectively, due to delays in offshore projects and lackluster sales by HHI's construction equipment business. 

HHI said the rise in operating loss was attributable to early recognition of losses from contract cancellation of a semi-submersible rig; a loss provision for adverse changes in the offshore business environment such as the oil price decline; and an increase in the restructuring cost from divestiture of underperforming subsidiaries. 

A source said, "The shipbuilding business was hit by cancellation of a semi-submersible rig as oil prices nosedived to $40 a barrel. The offshore business set up a reserve for possible losses that may be incurred from belated change orders, increased manhours or delays in delivery caused by design changes." 

HHI also booked the cost of liquidating unprofitable overseas subsidiaries, which started in 2014, as 3Q15 losses. 

A source in HHI said, "With a heavy focus on profitable businesses, HHI has taken bold steps to eliminate ailing subsidiaries since September 2014, as keeping them would only inflate the losses. The restructuring process is nearing its end, and part of the cost has been recognized as losses this quarter." Meanwhile, HHI sees 4Q15 as a critical juncture for earnings turnaround. A source in HHI said, "4Q15 can be the starting point of earnings improvement: the shipbuilding business is recovering, with the phase-out of low-price orders and profit turnaround of commercial vessels. The offshore business has also booked all perceivable losses. Also, other businesses such as electro electric systems and engine and machinery have continued to cut costs.

"Even though the company has failed to turn a profit in 3Q15, it will spare no effort to normalize its operations, with a focus on profitable businesses, reshuffle for more responsible management of each business division, cost competitiveness enhancement, disposal of stock holdings and elimination of poor-performing subsidiaries to set the stage for a turnaround." 

Time will tell.

Hyundai Heavy's shares were down 2.3% at the end of trading in Seoul today

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