Samsung’s shipbuilding unit tries turnaround

Struggling Samsung Heavy Industries submitted a self-rescue plan to its main creditor, Korea Development Bank, late on Tuesday. It was the first time in 17 years that a Samsung affiliate was forced to come up with a turnaround plan for a creditor. The last time was during the Asian financial crisis of the late 1990s when Samsung Motors, then the automotive arm of group, faced a major liquidity crunch.

According to industry sources, creditors are hoping that Samsung Electronics, which is the largest stakeholder with 17.62 percent, will get more involved, including offering financial support. In fact, the largest Korean family-owned conglomerate has a 24.08 percent stake in the company if you add shares held by other Samsung affiliates, including the second-largest stakeholder, Samsung Life Insurance.

Details of the rescue plan were not disclosed. However, analysts expect the sales of several assets including the Geoje Samsung Hotel. It already sold a 14.12 percent stake in Doosan Engine on May 11. Those sales are expected to help the shipbuilder raise 220 billion won ($184 million). The plan also reportedly calls for the shutting down of docks and layoffs of between 1,500 and 2,000 employees.

Samsung Heavy Industries has been belt-tightening since last year, including layoffs. Since last September, the company has sold a plant in Dangjin, South Chungcheong, as well as employee apartments in Geoje, South Gyeongsang, which helped raise 100 billion won. It laid off roughly 500 employees.

In the first quarter, the company reported 16 billion won in net profit, a turnaround from a 43 billion won net loss in the fourth quarter of 2015. However, operating profits in the first three months plummeted 80 percent compared to the last three months of 2015 to 6 billion won. Revenue fell 21.6 percent to 2.53 trillion won. When compared to a year ago, operating profit tumbled 76.9 percent while revenue sunk 3 percent.

The biggest reason for the disappointing performance was the shipbuilder’s plant business.

“Profit margins deteriorated on sales declines as the delivery of the Shell Prelude F-LNG was postponed from September 2016 to April 2017,” said Kim Hyun, a Shinhan Investment Corp. analyst.

“Samsung Heavy Industries disclosed cancellations of orders for three hulls of Browse F-LNG carriers on April 28,” the analyst said. The orders included the construction of topsides, which are the top portion of the ships’ outer surfaces. The projects were estimated to be worth $7 billion.

The analyst said the annual order target of Samsung Heavy Industries will likely be “unattainable” even if it meets its merchant vessel targets and wins a bid on another F-LNG project ordered by the Italian state-run energy company ENI.

According to a recent report by the Hana Institute of Finance, the company’s order backlog is declining. At the end of 2013, Samsung Heavy Industries’ backlog was $37.5 billion, which fell to $30 billion as of March.

“Backlog depletion is a problem shared in the shipbuilding sector, but for Samsung Heavy industries, whose troubled offshore projects are still ongoing, the company faces a more complicated situation,” said Lee Kyung-ja, an analyst at Korea Investment and Securities. “As its net debt has grown by 1 trillion won due to a drop in advance payments, Samsung Heavy Industries must make risk management including liquidity control as its top priority for this year.”

The biggest question is whether the creditors will accept the self-rescue plan.

Creditors want Samsung Group to be involved as they consider the Samsung Heavy Industries situation not as desperate as other shipbuilders like Daewoo Shipbuilding and Marine Engineering, whose debt-to-capital ratio exceeds 7,308 percent, whereas Samsung Heavy Industries’ is at 305 percent.

Samsung Group has not indicated it will help its struggling shipbuilding arm and the possibility appears low. Lee Jae-yong, vice chairman of Samsung Electronics, reportedly met with Samsung Heavy Industries CEO Park Dae-young and told him to survive on his own.

Lee, Samsung’s heir apparent, is emphasizing pragmatism and the need for each affiliate to survive on its own.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]