Hyundai Heavy Foresees Strong Earnings Recovery

Hyundai Heavy Industries, the world's largest shipbuilder, sees a strong earnings recovery after cleaning up the last of its soured investments in sister firms, a company executive said on Thursday.

The South Korean company expects to have to write off most of its equity investment in ailing Hynix Semiconductor, formerly Hyundai Electronics, in either 2002 or 2003.

"It seems our stake in Hynix has soured," Suh Tae-hwan, a senior vice president in charge of finance affairs, said in an interview with Reuters. "It will be the last of the messes stemming from other firms."

Hyundai Heavy built up a 7.01 percent stake in Hynix for 592 billion won. But after the global chip depression that stake is now worth only about 57 billion won ($44.7 million).

Sales of stakes in Hynix held by Hyundai companies are being handled by Salomon Smith Barney and are due to be completed within two years.

Despite sitting on enough backlogged orders to keep its yards fully occupied for three years, Hyundai Heavy reported a half-year net loss of 53.1 billion won ($41.6 million). This was mainly because it had to write off 260 billion won for its holdings in Hyundai Petrochemical and other sister firms.

Shares of Hyundai Heavy dropped 1,100 won to close at 26,650 on Thursday.

The executive said profitability had also worsened in the first half because ships delivered in the period had come from orders received in 1999 when the market and margins were weak.

"But the percentage of operating profits to sales revenues will jump to about 14 or 15 percent in the second half from 8.8 percent in the first half," Suh said.

The profit-sales ratio would rise further to 17 or 18 percent in 2002, guaranteeing a hefty profit for the business year.

"Ship prices began rebounding from the second half of 1999. So we are now poised to enjoy fat earnings in years to come," Suh said. He declined to give estimates for operating profits for 2002. The company should benefit from a higher credit rating once the shipbuilder breaks away from the troubled Hyundai Group by the end of this year, as it has vowed to do so.

"We can eliminate risks coming from other Hyundai companies through the spinoff," Suh said. "Then we can secure much more favorable borrowing conditions from next year."

Analysts have said the long-term future for Hyundai Heavy is bright as Korean yards will benefit from tightening environmental rules that will boost demand for double-hulled tankers to replace single-hulled ones and on good demand for liquefied natural gas carriers.

But Suh said Hyundai Heavy's net profit would only be around 80 to 100 billion won this year, sharply lower than his earlier forecast of 300 billion won, after the company had had to unexpectedly cancel its 49.8 percent stake in troubled Hyundai Petrochemical in the second half.