This article was posted on Jan. 16, 2025, at 4:23 p.m. on the CHOSUNBIZ MoneyMove site.
With the upcoming inauguration of Donald Trump's second administration, domestic shipbuilding stocks are experiencing a positive trend. However, Hanwha Ocean and its shareholders cannot fully enjoy the rise in stock prices. This is due to concerns that the 2.3 trillion won worth of convertible bonds (CB) issued during the Daewoo Shipbuilding & Marine Engineering era could convert to stocks at any time, potentially leading to a decline in share prices.
In the past, HMM’s stock soared from 2,000 won to 50,000 won during the COVID-19 pandemic, but it also experienced a decline related to CB conversion issues.
On the 16th, according to the Korea Exchange, Hanwha Ocean recorded a price of 51,500 won, up 500 won (0.98%) from the previous trading day, reaching its highest price in a year. The stock price of Hanwha Ocean, which had been around 26,000 won at the end of last year, has nearly doubled in two months, surpassing the 50,000 won mark.
Recently, shipbuilding stocks have shown strength ahead of Donald Trump's presidential inauguration due to expectations for strengthened defense cooperation and increased energy demand. The day before, a report from the U.S. Congressional Budget Office revealed that the U.S. Navy will need to allocate a budget of $1 trillion for shipbuilding over the next 30 years.
On the 6th (local time), President-elect Trump, in an interview with the conservative 'Hugh Hewitt Radio,' responded to questions about the Navy's rebuilding plans by stating, "We need ships," adding, "We are just getting started. We will utilize our allies in shipbuilding." The market interprets the allies mentioned by President-elect Trump as including South Korea, leading to growing expectations.
◇ Starting price of 50,000 won… CB conversion price surpasses 40,350 won
The issue is that Hanwha Ocean's stock price has recently surpassed the CB conversion price of 40,350 won issued to the Export-Import Bank of Korea. Given the substantial volume of the CB, if the Export-Import Bank chooses to convert, it could create downward pressure on the stock price. The total amount in CBs that will convert is 57.81 million shares, accounting for 18.9% of Hanwha Ocean's total shares (306,413,394 shares). The total amount based on the conversion price is worth 23,328 million won. The CBs were issued in three series with maturities in 2046, 2047, and 2048.
The issuer (Hanwha Ocean) can repay the money to the investor (Export-Import Bank) before the CB is converted to stock. However, it is not easy for Hanwha Ocean to repay the CB early due to the necessary funds being considerable. This year, Hanwha Ocean's estimated operating profit is around 156.6 billion won, with cash-equivalent assets of slightly over 1 trillion won as of the third quarter. Although this amount is not insignificant, it is grossly insufficient to absorb the entire CB volume.
This CB can be repaid in full or in part starting from Dec. 31, 2021, and can be repaid annually thereafter. From May 23, 2028, only partial amounts can be repaid. Five years after the transaction completion date (May 23, 2023), until the sixth year, 0.5% of the total face value of the bonds can be repaid, 1.5% every six months from the sixth to the seventh year, and 2.5% every six months from the seventh year until maturity.
A representative from Hanwha Ocean said, "There is a repayment plan according to the detailed schedule of the disclosures."
◇ CB owners include public institutions… opinions on conversions vary
However, there are opinions that it will not be easy for the state-owned Export-Import Bank to make choices that could trigger a decline in stock prices. The Export-Import Bank is classified as a public institution under the Ministry of Strategy and Finance. A source from the investment banking industry noted, "The drop in stock prices is a foregone conclusion if a conversion request is made, and it is questionable whether anyone from a public institution would make such a choice."
Securities firms also seem unconcerned for now about the overhang risk from CB conversions (large-scale potential sell orders). An analyst from Kyobo Securities stated, "If the Export-Import Bank requests conversion now, the stock will fall, resulting in losses for the investing bank as well."
Another industry source commented, "If the Industrial Bank had only considered profits during the HMM case, they should have converted shares at the peak and sold, but they were unable to make timely conversion decisions due to the ensuing controversies," adding, "Due to the overhang issue, the stock price has shown sluggishness, and a similar trend is likely for Hanwha Ocean."
Hanwha Ocean is a shipbuilding company that constructs LNG carriers, oil tankers, container ships, LPG carriers, as well as floating production storage and offloading units (FPSOs), offshore facilities, submarines, and destroyers. The Hanwha Group acquired Daewoo Shipbuilding & Marine Engineering (now Hanwha Ocean) in 2022.