Data Center Power Shortage Becomes Opportunity for Shipbuilding Industry…HD Hyundai Heavy Industries and Others Secure 1.6 Trillion Won in Engine Orders

In the U.S., the biggest issue in data center construction is not building the facilities themselves, but the grid bottleneck for connecting power. This leads hyperscalers to demand faster delivery, even at higher costs, resulting in increased demand for power generation engines over shipbuilding demand. In the era of energy transition, the shipbuilding industry's engine technology is emerging as a core solution.

It was one of the industries that suffered prolonged damage from the semiconductor-focused investment trend, enduring a tough year overall.

In the past, the defense sector of domestic shipbuilders primarily focused on the domestic market, leading to profit limitations and small revenue scale, thus not receiving any special valuation premium. However, recent opportunities to enter the U.S. market are changing the situation. The defense business in the U.S. market is significantly larger, and if it leads to exports, it will have a different market value than the domestic market, making entry into a high-price market a positive valuation factor.

Hanwha Ocean is drawing significant attention as a beneficiary of the relaxed U.S. Jones Act, adopting a strategy of direct investment in the U.S. market. This approach contrasts with competitors who enter through indirect partnerships. If the U.S. prioritizes companies with direct investment, Hanwha Ocean could benefit more. However, whether such large-scale direct investment will yield tangible results (payback) remains to be seen over time.

Deliveries are scheduled until 2030. These engines are 100% gas engines, requiring different technological development compared to traditional diesel or dual-fuel (DF) systems. Given that data center customers are offering higher prices compared to marine deliveries, high profitability is expected.

Thanks to the high prices offered by hyperscalers, they are contributing to alleviating power grid bottlenecks. This suggests that the shipbuilding industry must quickly adapt to new demands.

When news of power generation engine orders broke in April, market expectations were high, leading to a general rise in shipbuilding stocks. However, recently, the market has not reacted as strongly as anticipated. This is likely due to the fact that the orders have not yet translated into actual revenue, and the profitability of land-based deliveries has not been fully verified.

As seen in the Blackstone QTS project halt in July, projects are being abandoned due to environmental factors such as power consumption, cooling water shortages, and noise issues, as well as local complaints. These challenges highlight the need for new types of data center solutions.

This floating design can minimize land acquisition issues, permitting processes, and resident opposition. The strategy is to install them in coastal waters to enhance practicality, emerging as a new alternative in the data center market.

In the past, passing the peak of order volumes caused concerns about deteriorating performance among investors, but now, performance improvement is underway. The shipbuilding price index peaked in September 2024, then declined for about a year before recently rebounding. This indicates the need to re-evaluate shipbuilding order indicators, along with a reassessment based on a global production capacity of 40 million tons.

With a decrease in the number of global shipbuilding players, a seller's market has formed in the industry. This means shipyards do not need to accept low-price orders. Order backlogs continue to increase, and as orders again gravitate towards specific shipyards, ship prices have recently rebounded. This trend is expected to sustain the improvement in the shipbuilding industry's performance.

This means performance improvement is in sight for 2027-2028, and major domestic shipbuilders have already secured several years' worth of work. Their selective ordering strategy, focused on profitability, is paying off.

Most shipbuilders have transitioned to a net cash position, significantly improving their financial soundness. Based on these positive changes, shipbuilders are strengthening shareholder return policies, with interim dividends substantially higher than the previous year. This demonstrates confidence in performance improvement and a commitment to enhancing shareholder value.

As China became the world's largest LNG importer by a single country, it is accelerating the construction of LNG carriers to handle its domestic volume. Chinese private shipbuilders are growing rapidly, recording high operating profit margins of around 30%. For the Korean shipbuilding industry, maintaining a technological advantage in high-value-added vessels is crucial to prepare for China's pursuit.

Beyond Hudong-Zhonghua, several other Chinese shipbuilders have actively begun participating in the LNG carrier bidding, with four already securing orders. The first Chinese-made LNG carrier is scheduled for delivery this year, indicating visible advancements in technology. As order volumes based on Chinese capital are difficult for Korea to secure, the Korean shipbuilding industry increasingly needs to maintain its technological gap and explore new markets.

The shipbuilding industry faces concerns that the high-value-added segment in existing container ship and LNG carrier markets may gradually shrink. Therefore, there is a growing emphasis on seeking new breakthroughs. Innovative business models like floating data centers are expected to be crucial opportunities for the shipbuilding industry to expand into high-value-added markets and secure new growth engines.

The U.S. has emerged as the world's top LNG exporter in eight years, issuing many LNG export permits last year. However, for actual orders to commence, permitted private businesses must first complete sales contracts. Therefore, the expansion of U.S. LNG exports is expected to fully begin next year rather than this year. U.S. LNG export volumes are projected to primarily supply mature economies rather than China.

When investing in the top three shipbuilders, it is important to consider that the company with the best actual profitability (operating profit margin) maintains a higher valuation. In the short term, a strong Korean won may lead to differences in performance depending on hedging strategies. Samsung Heavy Industries implements 100% currency hedging, while Hanwha Ocean does almost no hedging, which can cause short-term profitability discrepancies. In the long term, HD Korea Shipbuilding & Offshore Engineering, equipped with comprehensive energy transition 대응력, is recommended as the most promising investment.