World’s Third Largest Shipbuilder Crashes 29% Amid Asian Equity Carnage

Shares in Samsung Heavy, the world’s third largest shipbuilder, plunged by 29% during Wednesday’s trading session after unexpectedly forecasting operating losses this year and 2018 and announcing a capital raise. Meanwhile, Asian equities tumbled, led by technology, mining and industrial companies, with the MSCI Asia Pacific Index falling for eight straight days, its longest run of down days since 2015.

“Things are really getting bad for Samsung Heavy because they have been slow to respond to the weakening market conditions,” said Park Moo Hyun, an analyst at Hana Financial Investment Co. in Seoul. “It’s not going to look good for the company next year.”

The news from Samsung Heavy is a blow to hopes that the shipbuilding industry was poised for a revival after order trends across the industry in 2016 fell to a level below that seen at the nadir of the financial crisis.

Shares in Samsung Heavy’s main rivals fell in sympathy with Hyundai Heavy down 6.2% and Daewoo Shipbuilding & Marine 2.8% lower. According to Bloomberg.

The world’s third-largest shipbuilder said Wednesday it plans to raise 1.5 trillion won ($1.4 billion) by selling new shares in a rights offering. Samsung Heavy, saddled with 3.3 trillion won of short-term debt, expects demand for new vessels and offshore projects to continue shrinking and that will push the company into losses this year and next, compared with analyst estimates for a profit.

Shipyards from South Korea to Singapore have been struggling to emerge from losses since the global financial crisis amid excess capacity worldwide and a plunge in oil prices that damped demand for vessels and offshore drilling rigs. Last year was the worst for the industry, with the collapse of Hanjin Shipping Co., previously among the world’s largest container lines, and freight rates tumbling to record lows.

Samsung Heavy cited falling new order demand, losses on some contracts it won this year and higher raw material costs. However, it sees some light at the end of the tunnel…eventually, expecting the “situation to improve in 2019”. The company said in a statement it expects operating losses of 490 billion won in 2017 and 240 billion won in 2018. The Bloomberg analyst consensus had been for an operating profit of 90 billion this year. Today’s news will bring Samsung Heavy’s financial position back into focus. Speaking to Bloomberg, the company’s largest shareholder, Samsung Electronics with 16.9%, said it had not made a decision on the rights offering, while its biggest creditor, Korea Development Bank, said that it is “monitoring the situation closely”. As Bloomberg notes.

As of Sept. 30, Samsung Heavy had 3.3 trillion won of debt maturing within a year, compared with 451 billion won of cash and equivalents, according to its financial report. The company, rated BBB+ by Korea Ratings, has sold 255 billion won of bonds this year via private placement, according to data from Korea Securities Depository.

The share sale is the second in as many years for Samsung Heavy, which raised 1.1 trillion won in 2016. The company, which reported losses in the past two years, said Wednesday it expects to complete the latest sale by May.

Samsung Heavy’s collapse helped to drag the South Korean Kospi Index 1.4% lower during Tuesday’s trading. The weakness in Asian equities was led by Hong Kong with the Hang Seng Index 1.9% lower. Having briefly exceeded the 30,000 mark, it has fallen for seven out of the last eight days and broke the 50-day moving average to the downside.

The momentum trade continued to unwind with some of the year’s best performing shares sharply lower, for example Geely Automobile Holdings (-8.8%), AAC Technologies (-7.8%) and Sunny Optical Technology Group (-12.5%). The Shanghai Composite fell 0.3% to 3,294.0, although it would have been much worse if the National Team hadn’t ridden to the rescue in the last hour, pushing the index up from an intra-day low of 3,259.3.

Before the cavalry arrived, the PBoC conducted its biggest single-day net withdrawal of open-market operation funds since September 2016. The net 240 billion yuan ($36.3 billion) took the aggregate for the last four days to 540 billion yuan ($81.7 billion).

Furthermore, funds added as part of the Medium-term Lending Facility (MLF) matched the amount due. Westpac’s head of Asia macro strategy Frances Cheung told Bloomberg that by breaking the recent pattern of pre-emptively covering maturities for the entire month, the PBoC was sending a mild tightening signal.

Still, sentiment remained bullish as the following excerpts from Bloomberg reveal:

Investors are “locking in profits earlier than usual for the year and not opening any new positions,” said Andrew Clarke, director of trading at Mirabaud (Asia) Ltd. “Eventually, as profit taking subsides, buying for the new year will appear as people look toward 2018,” he added.

(Daniel So, strategist at CMB International Securities) remains bullish on Hong Kong equities, saying this correction shouldn’t last too long and the Hang Seng Index may rise to 35,000 next year, while the H-share index might reach 14,400. That represents gains of more than 20 percent for both.

“Profit-taking trades are putting strong pressures on the markets,” said Ken Peng, an investment strategist at Citi Private Bank in Hong Kong. “This is especially the case in Hong Kong, where equities are among the strongest in Asia this year.”

Peng said a slump in technology stocks in the U.S. is weighing on Asia, and investors are also worried about tighter liquidity and tougher regulations in China. He added that tension between North Korea and the U.S. could be an issue as well.

“The market is nervous but it hasn’t reached a point that there’s a sense of panic,” Peng said. “If a sense of panic appears, I would say it would be a great buying opportunity, because the cycle of global economic recovery isn’t over yet, meaning that stocks still have room to climb. The end of the cycle will appear in 2019 or 2020.”

And so, despite Wednesday’s Asian equity carnage, analysts and portfolio managers approached by Bloomberg remain bullish, looking for the right moment to BTFD.