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Surpassing expectations

1Q25 review: OP beats consensus by 66%

For 1Q25, HD Hyundai Heavy Industries (HD HHI) reported revenue of W3.82tr (+28% YoY; 1.9% above the consensus), operating profit of W433.7bn (+1,940% YoY; 66% above the consensus), and an OP margin of 11.3% (+4.3%p QoQ, +10.6%p YoY). Despite the seasonally slow period, productivity improvements enabled earlier-than-planned vessel deliveries, which not only boosted revenue but also reduced fixed cost pressures, driving significant margin expansion. FX was also favorable, contributing W22bn to operating profit. The said, the company recognized a one-off loss of W14bn from a change order on the offshore Shenandoah project.

Benefits of increased prices have yet to be reflected

For 1Q25, the shipbuilding division delivered revenue of W2.74tr (+27% YoY) and operating profit of W355.4bn (+345% YoY; OP margin of 13%); notably, the results were strong despite limited recognition of higher-margin orders (with 80% of revenue coming from orders won in 2022 and 16% from orders won in 2023). The main driver was enhanced productivity, which allowed earlier-than-planned deliveries. Looking ahead, the product mix should continue to improve each quarter; gas carriers (which have higher margins) accounted for 60% of deliveries in 1Q25, and this figure is likely to rise to 69% in 2Q25 and 79% in 2H25. We also note that the benefits of higher contract prices (with 2023 prices rising 22% YoY on average) have yet to be fully reflected. Additionally, once lower-margin projects (methanol containerships and the first batch of Qatar LNG carriers) are completed in 2025-26, HD HHI’s shipbuilding margins are likely to rise to the high teens (in line with those of HD Hyundai Samho).

In 1Q25, the company secured new orders worth US$4.7bn, achieving 38% of its full-year guidance (US$12.58bn). Of this amount, commercial ship orders accounted for US$3.2bn, including 12 containerships (18,000 TEU), two Suezmax tankers, two very large gas carriers (VLGCs), and two very large ethane carriers (VLECs). Meanwhile, the engine/machinery division secured new orders worth US$1.46bn.

Reiterate Buy and raise TP by 30% to W610,000

We maintain our Buy rating on HD HHI and raise our target price by 30% to W610,000 (from W470,000). We derived our target price by applying a P/E of 26x (unchanged) to our 2026-27F average EPS of W23,618 (+30% from our previous forecast). Notably, our target price change is purely based on the strengthening earnings outlook; we lifted our operating profit forecasts for 2025, 2026, and 2027 by 72%, 54%, and 36%, respectively. We believe the shipbuilding industry is in the early stages of structural profit growth, and HD HHI is particularly well-positioned to benefit from operating leverage effects thanks to its 11 dockyards. Accordingly, we retain the stock as our top pick in the sector.