S. Korea's shipbuilding giant STX O&S boasts huge growth potential

SEOUL, April 9 (Xinhua) -- As the world's fourth-largest shipbuilder, STX Offshore & Shipbuilding, a South Korean shipyard, has bigger growth potential than local shipbuilding firms, analysts said.

The company has the ability to build every type of vessels ranging from LNG carriers, containerships, tankers and bulk carriers to drill ships, cruise ships, offshore service vessels and ice breakers.

Moreover, it has built a vertically-integrated business structure, covering the areas of ship component, ship engine, shipbuilding, shipping and even energy and power plant.

As the global shipbuilding industry bottoms out, the company is expected to enjoy faster growth with most diverse product mix and vertical integration of business structure.

The vertical integration will give STX O&S various advantages such as timely supply of components, consistent quality control, stability of cash flow and faster growth opportunities, according to Mirae Asset Securities.

Timely supply of ship components is required to meet strong demand when the shipbuilding industry is in a boom as seen from 2002 to 2007. Having ship parts makers as affiliates, shipyards can maintain timely deliveries of ships and expand capacity faster than peers. And it is easier to control quality of ships by having a good supplier of components as affiliates.

Given shipbuilders' cash inflows tend to lag behind those of shipping firms, stable cash flow management can be achieved by having shipbuilding and shipping companies together.

"No other yards globally are as vertically integrated as STX O& S, which has generated many new business opportunities as seen in several cases. In the long term, STX Group are moving towards becoming a total solution provider," Lee Sok-je, a Seoul-based shipbuilding analyst at Mirae Asset Securities said.

The shipbuilder's share price has soared recently. STX O&S surged by the daily limit of 15 percent to 27,250 won on Thursday, posting the biggest advance since September 2008. It also jumped 4. 77 percent to close at 28,550 won on Friday.

"STX O&S is the cheapest shipbuilding stock globally. We expect a sharp recovery of its profitability this year, while strong order flows will clear the massive discount levied on the company, " Lee said in a report.

Founded in 1967 as Daedong Shipbuilding, STX O&S saw the most robust growth after being acquired by STX Group in 2001. Revenue increased from 442.7 billion won (409 million U.S. dollars) in 2001 to 4.19 trillion won (3.87 billion dollars) in 2009, with total assets rising from 608.2 billion won to 7.62 trillion won over the cited period.

Daedong was a small shipyard specializing in PC tankers and small bulk carriers, but STX O&S has included LNG carriers, containerships and larger bulk carriers in its product mix by investing more than 1 trillion won in new facilities over the past years.

Building new types of vessels incurred high costs at an early stage. When the shipbuilder delivered its first LNG carrier in August 2010, it posted a weaker margin in the third quarter last year. But, such efforts resulted in the improved stability of its operations, Lee at Mirae Asset Securities said.

Besides manufacturing new products, STX O&S also expanded its business by taking over European parallels and forayed into the Chinese market.

Back in 2008, STX O&S acquired STX Europe, formerly called Aker Yards, which builds large cruise ships, offshore service vessels, ferries and arctic vessels. STX Europe has a market share of 57 percent among cruise ships with more than 3,000 berths delivered since 1990, according to Clarksons, the world's largest ship broker.

STX OSV Holdings, one of STX Europe's three units, is the world 's biggest maker of oil-rig support vessels. Another unit STX Finland has a strong presence in arctic vessels by securing a market share of 60 percent in ice breakers, which are forecast to be attractive because of the effect of global warming.

STX Dalian Shipbuilding Complex (STX DSC), a Chinese subsidiary of STX O&S, also added diverse offerings to the company's product mix, including bulk carriers, car carriers and containerships to offshore structures such as drill ships, pipe layers and floating storage units (FSU).

STX DSC started construction of its vessels in March 2007 and delivered its first ships in 2009. Even though STX DSC has incurred continued losses for the past four years, it is expected to show positive profit figures this year, Mirae Asset predicted.

South Korea's Ministry of Knowledge Economy estimated in January that global shipbuilding orders may increase 4 percent this year to 35 million compensated gross tons (CGT) as economic recovery drives demand for containerships and LNG carriers.

STX O&S is expected to benefit from the boom as it is well positioned to deal with the potential new orders thanks to smaller order books and vertical integration of business structure.

The current small order book will give STX O&S opportunities to secure higher priced orders later. Global ship prices are forecast to keep rising due to the appreciation of Asian currencies and the expected rise in steel prices.

"Most yards, starved for cash, tend to rush for low-priced contracts at the bottom of the cycle, but STX O&S is able to resist the temptation of low-priced contracts as it did during the global financial crisis," Lee at Mirae Asset said.
Source: Xinhua