Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

The Yara Birkeland will be the world's first unmanned container vessel running on electric power that was developed by Kongsberg of Norway for the fertilizer company YARA. For those readers more familiar with AI in autonomous vehicle, the Yara Birkeland should be seen as a prototype that is designed to ultimately navigate on unmanned basis but with final control functions onshore rather than onboard.  Hence, what the shipping industry refers to as fully autonomous vessels will be very similar to Level 4 autonomous vehicles with autonomy limited to the operational domain of the vessel's navigational route, with a control/monitor crew on shore.  Off the bat, this goal will be technologically easier to achieve than Level 5 AVs in our view.<table class="table table-striped"><tbody><tr><td colspan="2"><h2>The Yara Birkeland: Key Specifications</h2></td></tr><tr><td>Vessel Type</td><td style="text-align: center;">Container Vessel</td></tr><tr><td>Size</td><td style="text-align: center;">120 TEU (3200 DWT)</td></tr><tr><td>Propulsion System</td><td style="text-align: center;">Electric</td></tr><tr><td>Battery Pack</td><td style="text-align: center;">7-9 MWh</td></tr><tr><td>Proximity Sensors</td><td style="text-align: center;">Radar, Lidar, AIS, Camera, IR Camera</td></tr><tr><td>Connectivity &amp; Communications</td><td style="text-align: center;">Maritaime Broadband Radio, Satellite Communications, GSM</td></tr><tr><td>Operational Area</td><td style="text-align: center;">12 Nautical Miles between 3 ports in southern Norway (Coastal Waters)</td></tr><tr><td>Operation/Control Centers</td><td style="text-align: center;">YARA at Porsgrunn, Kongsberg Maritime, Kystverket VTS centre at Brevik</td></tr></tbody></table><div class="content-caption">Source: Kongsberg</div>What we like about the Yara Birkeland: finite set of variability with a well defined goal in the vessel's operational domain, which is distinguishable from a Level 5 AV in the automotive industry whose operational domain is basically infinite.  In other words, commercialization can come very quickly under the right set of regulatory circumstances.Where we remain skeptical about the Yara Birkeland: Cost (USD25mn vs. about USD10mn for similar class new container vessels, plus data validation issues that can potentially arise once the vessel is placed into operation.  IMO regulations currently do not address unmanned vessels and it can take years before a global regulatory framework comes into existence but then again eeder class container vessels are not generally used for international navigation.Implications for Investors: Kongsberg shares have increased by 45.7% over a 1 year period.  Especially in regards to shipbuilding, we suspect it is going to be the technology IP holder who benefits in the long run, as it has happened in the global automotive industry so it will not necessarily be shipyards can undergo potential valuation expansion on the back of this theme.  In Korea, where shipyard related AI has been progressing more briskly than what many sellside analysts are aware of (especially in production process related areas), IP is held closely by the university system, especially KAIST.  For the foreseeable future, autonomous vessels will be mostly for coastal and river route navigational needs, with small to medium sized shipyards which will be ideally suited to fabricate such vessels if cost/benefit justifies ship owner needs.

The Yara Birkeland will be the world's first unmanned container vessel running on electric power that was developed by Kongsberg of Norway for the fertilizer company YARA. For those readers more familiar with AI in autonomous vehicle, the Yara Birkeland should be seen as a prototype that is designed to ultimately navigate on unmanned basis but with final control functions onshore rather than onboard.  Hence, what the shipping industry refers to as fully autonomous vessels will be very similar to Level 4 autonomous vehicles with autonomy limited to the operational domain of the vessel's navigational route, with a control/monitor crew on shore.  Off the bat, this goal will be technologically easier to achieve than Level 5 AVs in our view.The Yara Birkeland: Key SpecificationsVessel TypeContainer VesselSize120 TEU (3200 DWT)Propulsion SystemElectricBattery Pack7-9 MWhProximity SensorsRadar, Lidar, AIS, Camera, IR CameraConnectivity &amp; CommunicationsMaritaime Broadband Radio, Satellite Communications, GSMOperational Area12 Nautical Miles between 3 ports in southern Norway (Coastal Waters)Operation/Control CentersYARA at Porsgrunn, Kongsberg Maritime, Kystverket VTS centre at BrevikSource: KongsbergWhat we like about the Yara Birkeland: finite set of variability with a well defined goal in the vessel's operational domain, which is distinguishable from a Level 5 AV in the automotive industry whose operational domain is basically infinite.  In other words, commercialization can come very quickly under the right set of regulatory circumstances.Where we remain skeptical about the Yara Birkeland: Cost (USD25mn vs. about USD10mn for similar class new container vessels, plus data validation issues that can potentially arise once the vessel is placed into operation.  IMO regulations currently do not address unmanned vessels and it can take years before a global regulatory framework comes into existence but then again eeder class container vessels are not generally used for international navigation.Implications for Investors: Kongsberg shares have increased by 45.7% over a 1 year period.  Especially in regards to shipbuilding, we suspect it is going to be the technology IP holder who benefits in the long run, as it has happened in the global automotive industry so it will not necessarily be shipyards can undergo potential valuation expansion on the back of this theme.  In Korea, where shipyard related AI has been progressing more briskly than what many sellside analysts are aware of (especially in production process related areas), IP is held closely by the university system, especially KAIST.  For the foreseeable future, autonomous vessels will be mostly for coastal and river route navigational needs, with small to medium sized shipyards which will be ideally suited to fabricate such vessels if cost/benefit justifies ship owner needs.

The Yara Birkeland: The World's First Autonomous Ship - Kongsberg's Answer to Tesla?

Korea / Special Situations, Clepsydra Capital

Sanghyun Park

Korea / Special Situations

Event-Driven

Currently, Daewoo Shipbuilding &amp; Marine Engineering (042660 KS) is one of the Korea's hottest stocks that are making many investors quite happy. This year alone, DSME shares have more than doubled. (DSME 3M price chart - Courtesy Naver Finance)DateClosing price (₩)Daily ΔTrade volumeTrade value (₩)Market cap (₩ mil)2018/03/2026,6505.34%1,204,51431,556,428,4502,842,3902018/03/1925,300-2.88%408,38410,348,629,6502,698,4042018/03/1626,050-2.62%534,92313,928,307,2002,778,3962018/03/1526,7505.31%1,052,39527,262,524,3002,853,0562018/03/1425,400-6.45%1,142,87729,362,840,0502,709,0702018/03/1327,150-1.81%1,340,09435,770,234,1502,895,7182018/03/1227,6502.22%455,95812,522,455,5002,949,0462018/03/0927,0500.56%1,003,74527,637,639,6502,885,0532018/03/0826,9002.09%817,98122,014,244,9002,869,0542018/03/0726,3500.96%1,482,88139,900,758,8502,810,3932018/03/0626,10010.36%1,267,72732,251,616,7002,783,7292018/03/0523,650-3.67%497,17911,979,914,2502,522,4212018/03/0224,550-1.80%529,67112,948,693,5002,618,4122018/02/2825,0000.20%733,64818,568,280,4502,666,4072018/02/2724,9500.00%604,30014,963,480,3002,661,0742018/02/2624,9501.84%961,53724,143,424,4502,661,0742018/02/2324,5007.69%1,670,74940,599,078,9002,613,0792018/02/2222,7500.66%1,109,21525,570,608,1502,426,4312018/02/2122,6006.10%730,55616,186,340,6502,410,4322018/02/2021,300-2.52%639,38013,895,574,0502,271,7792018/02/1921,8508.98%858,00518,578,074,7502,330,4402018/02/1420,0505.80%306,9846,057,677,0002,138,4592018/02/1318,950-2.82%410,5077,903,616,3502,021,1372018/02/1219,500-5.34%1,020,22820,062,908,7002,079,7982018/02/0920,600-3.96%632,15012,995,170,9002,197,1202018/02/0821,4502.63%964,18020,247,724,0002,287,7772018/02/0720,900-5.00%686,58815,029,868,9502,229,1162018/02/0622,0000.00%1,303,24727,957,493,5002,346,4382018/02/0522,000-5.78%789,14317,761,460,7502,346,4382018/02/0223,350-0.43%928,45821,767,425,5502,490,4242018/02/0123,450-3.30%689,13516,222,407,5502,501,0902018/01/3124,2502.11%1,368,90831,629,987,2002,586,4152018/01/3023,7505.79%1,859,12943,981,051,4502,533,0872018/01/2922,4503.70%953,73721,266,539,3502,394,4342018/01/2621,6502.36%1,234,47427,171,036,7002,309,1092018/01/2521,1506.82%1,587,98833,237,115,9002,255,7802018/01/2419,8001.54%769,98715,247,511,4502,111,7952018/01/2319,5000.52%678,05013,101,614,0502,079,7982018/01/2219,4007.18%1,091,23720,707,064,0502,069,1322018/01/1918,1000.84%244,9824,436,406,7501,930,4792018/01/1817,950-1.10%247,3804,416,216,1501,914,4802018/01/1718,150-4.47%728,90513,218,451,1501,935,8122018/01/1619,000-0.52%637,65612,001,978,7502,026,4692018/01/1519,10010.40%1,839,22434,190,721,5502,037,1352018/01/1217,3008.81%905,95715,390,516,3001,845,1542018/01/1115,9000.00%325,2265,199,480,8501,695,8352018/01/1015,9003.25%426,6556,809,135,7501,695,8352018/01/0915,400-3.14%264,0534,092,737,8001,642,5072018/01/0815,900-3.93%284,6414,550,992,8001,669,9582018/01/0516,5500.30%244,2824,036,460,9501,738,2272018/01/0416,500-4.07%526,4589,002,148,7001,732,9752018/01/0317,20012.05%819,97313,694,498,4001,806,4962018/01/0215,35010.43%382,0635,619,200,4001,612,192Source: KRXWhat's really going on here?Simple. DSME is getting really a lot of support from the government through the KDB which owns a 55.72% stake in DSME.DSME shareholding structureKDB59,738,21155.72%KEB Hana Bank9,015,5638.41%Woori Bank1,983,8411.85%KB Bank1,982,6511.85%Hana Financial Investment371,7470.35%Jeong Seong-rib7,4560.01%KB Securities7,4100.01%Total73,106,87968.19%Source: FnGuideWhat's the story here? Last year, Hyundai Merchant Marine (011200 KS) needed 10 300Kt grade VLCCs (very large crude oil carrier) worth about ₩1tril. It was arranged that HMM would get 5 VLCCs in the first round and another 5 in the second round later. With the carefully executed coordination of the KDB, all of the 5 VLCCs ordered by HMM for the first round went to DSME. No wonder huh? The KDB is the major shareholder of both HMM and DSME, and the KDB needed to maximize the valuation of both companies in order to make an exit. Then where did this ₩1tril come from? This was the money from the ₩2.6tril worth of the shipbuilding support program fund set up by the government soon after the collapse of Hanjin Shipping.DMSE's expected annual sales size for this year (2018) is about ₩8.4tril (FnGuide consensus compiled by the 5 local brokerages). So, this'd be only about 6% of its total annual sales. But what's important is how significant this would be to DSME's profitability. It is generally thought and believed that HMM's 5 ship orders are the main contributor to DSME's dramatic turnaround this year.FnGuide market consensus for DSME (₩ bil)2018E2019ESales8,469.37,311.7OP275.5312.3NP attributable to controlling stake276.2315.7Assets11,982.311,220.2Liabilities8,519.47,483.7Equity attributable to controlling stake3,888.24,159.6EPS (₩)2,5792,945BPS (₩)36,26838,800PER (x)9.818.59PBR (x)0.700.65Source: FnGuideHMM's first round of order (5 VLCCs) was worth ₩475.7bil. The original plan was HMM would place another 5 VLCCs order to DSME early this year. But HMM opted not to do it. Instead, it is being said that HMM will focus on container ship building. The current plan is building a total of 20 large container ships (12 22K TEU grade container ships and 8 14K TEU grade container ships) as a part of its grand plan to become a 1M TEU shipping company (HMM's current size is 330K TEU. No worry for DSME though because it is widely expected that most of these container ship building orders will again go to DSME.Thanks to the government (the KDB)'s huge help, DSME is really shining compared with its local peers valuation wise. It is the only one to turn a serious profit this year among Korea's Big Three shipbuilders. It will generate more sales than Samsung Heavy and way more profits than even Hyundai Heavy. But its market cap is still only about half of Samsung Heavy. On a PBR, DSME may not look terribly undervalued compared with Samsung Heavy. But considering that a large part of Samsung Heavy's assets are stuck with the struggling offshore plant business, we really come down to this point that DSME is seriously undervalued compared with Samsung Heavy. Yes, this means that DSME shares still seem to have more upside potential.FnGuide market consensus for DSME (₩ bil)DSMEHyundai HeavySamsung Heavy2018E2019E2018E2019E2018E2019ESales8,469.37,311.713,609.015,024.06,843.17,719.2OP275.5312.3-116.7206.179.738.9NP to controlling stake276.2315.7-90.2127.373.638.3Assets11,982.311,220.231,425.631,527.413,700.413,862.4Liabilities8,519.47,483.717,482.417,428.27,094.47,693.6Equity to controlling stake3,888.24,159.613,943.214,099.36,606.06,168.8EPS (₩)2,5792,945-1,3541,84118998BPS (₩)36,26838,800197,099198,67020,01618,521PER (x)9.818.59N/A76.8743.3883.25PBR (x)0.700.650.720.710.410.44Market cap (as of Mar 20)2,698.49,786.95,157.6Source: FnGuide

DSME, HMM & KDB - Understanding Relationship Dynamics

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Japanese and Asian equity long/short strategies

Uzabase

Specialising in Japanese and Asian equity long/short strategies with a focus on rigorous, but targeted quantitative analysis to temper evaluations of company strategy, potential and vision. At Uzabase, our team of analysts provides coverage of industry dynamics with a local Asian flavour on Speeda, our financial information platform. Going forward we are aiming to channel our focus toward thematic research on emerging industries and company research.

Equity Bottom-Up

We wrote on <a href="https://www.smartkarma.com/entities/2402" target="_blank" data-smartkarma-citation="entities:2402:1">Mitsui Engineering &amp; Shipbuilding (7003 JP)</a> on 14 Feb noting the very high level of its holding company discount, likely due to losses in both its shipbuilding and engineering segments. Since then the stock is down 13%, in line with peers such as <a href="https://www.smartkarma.com/entities/8790" target="_blank" data-smartkarma-citation="entities:8790:1">Kawasaki Heavy Industries (7012 JP)</a> (-12%), <a href="https://www.smartkarma.com/entities/2626" target="_blank" data-smartkarma-citation="entities:2626:1">Sumitomo Heavy Industries (6302 JP)</a> (-14%) and <a href="https://www.smartkarma.com/entities/14969" target="_blank" data-smartkarma-citation="entities:14969:1">Hitachi Zosen Corp (7004 JP)</a> (-16%), though <a href="https://www.smartkarma.com/entities/13613" target="_blank" data-smartkarma-citation="entities:13613:1">Mitsubishi Heavy Industries (7011 JP)</a> (-4%) and especially <a href="https://www.smartkarma.com/entities/4819" target="_blank" data-smartkarma-citation="entities:4819:1">Ihi Corp (7013 JP)</a> (+19%) have outperformed MES. As a result, the holding company discounted has deteriorated a little further. With steady news flow on consolidation and restructuring within the Japanese shipbuilding industry, we revisit MES and find company forecasts for JPY16bn in OP to be conservative. We believe JPY20bn is a more likely result and consider the bad news on its shipbuilding and engineering segments to be priced in.Looking forward we expect the following to be positive for the stock:<ul><li>A return close to breakeven in the Engineering segment</li><li>Restructuring related news for the shipbuilding segment</li><li>New orders for MODEC from a recovery in oil and gas investment</li><li>Continued strength in the machinery segment due to diesel engines and perhaps cranes (where some consolidation is taking place with MHI transferring its industrial cranes business to SHI)</li><li>Improving cash flow and declining debt due to more stringent receivables management</li></ul>

We wrote on Mitsui Engineering &amp; Shipbuilding (7003 JP) on 14 Feb noting the very high level of its holding company discount, likely due to losses in both its shipbuilding and engineering segments. Since then the stock is down 13%, in line with peers such as Kawasaki Heavy Industries (7012 JP) (-12%), Sumitomo Heavy Industries (6302 JP) (-14%) and Hitachi Zosen Corp (7004 JP) (-16%), though Mitsubishi Heavy Industries (7011 JP) (-4%) and especially Ihi Corp (7013 JP) (+19%) have outperformed MES. As a result, the holding company discounted has deteriorated a little further. With steady news flow on consolidation and restructuring within the Japanese shipbuilding industry, we revisit MES and find company forecasts for JPY16bn in OP to be conservative. We believe JPY20bn is a more likely result and consider the bad news on its shipbuilding and engineering segments to be priced in.Looking forward we expect the following to be positive for the stock:A return close to breakeven in the Engineering segmentRestructuring related news for the shipbuilding segmentNew orders for MODEC from a recovery in oil and gas investmentContinued strength in the machinery segment due to diesel engines and perhaps cranes (where some consolidation is taking place with MHI transferring its industrial cranes business to SHI)Improving cash flow and declining debt due to more stringent receivables management

Mitsui Engineering Targets Natural Gas Hydrate as Japanese Shipbuilders Restructure

<a href="https://www.smartkarma.com/entities/504" target="_blank" data-smartkarma-citation="entities:504:1">Hanwha Techwin Co Ltd (012450 KS)</a> broke up itself into four different entities through physical division. The split will take effect on July 1. Hanwha Techwin will now have three new wholly-owned subsidiaries, Hanwha Dynamics, Hanwha Power System and Hanwha Machinery, each of which will be responsible for defense equipment, energy equipment and industrial equipment, respectively. Hanwha Techwin as the surviving entity will continue to be responsible for aircraft engines and security devices. Lastly, Hanwha Defense will now become Hanwha Dynamics' wholly-owned subsidiary.This is physical division. Theoretically, there shouldn't be any change in the company's intrinsic valuation. Merger ratio shouldn't be relevant here. Nonetheless, "recapitalization effect" for Techwin as the surviving entity through this division shouldn't be taken lightly. Techwin needs to make a series of huge investments on its aircraft engine business, and this physical division immediately reduces its debt ratio to 79.6% from 114.6%, thereby making it easier to raise additional capitals on its own for aircraft engine business. In the medium term, one or more of its four wholly-owned subsidiaries will likely attempt an IPO, which would be another critical opportunity to raise capitals for Techwin's aircraft engine business. So, I'd say that recapitalization effect alone would be a positive factor for Techwin's price. Of course, this assumption holds true only if we believe in the promising future of Techwin's aircraft engine business. But considering Techwin's involvement in the KF-X project, I'd continue to stick with my positive views on Techwin's future with aircraft engine business.

Hanwha Techwin Co Ltd (012450 KS) broke up itself into four different entities through physical division. The split will take effect on July 1. Hanwha Techwin will now have three new wholly-owned subsidiaries, Hanwha Dynamics, Hanwha Power System and Hanwha Machinery, each of which will be responsible for defense equipment, energy equipment and industrial equipment, respectively. Hanwha Techwin as the surviving entity will continue to be responsible for aircraft engines and security devices. Lastly, Hanwha Defense will now become Hanwha Dynamics' wholly-owned subsidiary.This is physical division. Theoretically, there shouldn't be any change in the company's intrinsic valuation. Merger ratio shouldn't be relevant here. Nonetheless, "recapitalization effect" for Techwin as the surviving entity through this division shouldn't be taken lightly. Techwin needs to make a series of huge investments on its aircraft engine business, and this physical division immediately reduces its debt ratio to 79.6% from 114.6%, thereby making it easier to raise additional capitals on its own for aircraft engine business. In the medium term, one or more of its four wholly-owned subsidiaries will likely attempt an IPO, which would be another critical opportunity to raise capitals for Techwin's aircraft engine business. So, I'd say that recapitalization effect alone would be a positive factor for Techwin's price. Of course, this assumption holds true only if we believe in the promising future of Techwin's aircraft engine business. But considering Techwin's involvement in the KF-X project, I'd continue to stick with my positive views on Techwin's future with aircraft engine business.

Hanwha Techwin Divestiture - Details & Follow-Up Actions

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

We are introducing a new idea for our regular Korean monthly, which is the "PICK OF THE MONTH" - ONE investment idea which we believe strongly that it will outperform in the following month. <ul>
<li>
Our TOP STOCK PICK IN MAY is <a href="https://www.smartkarma.com/entities/24075" target="_blank" data-smartkarma-citation="entities:24075:1">Hyundai Robotics (267250 KS)</a>, which is one of four companies being split from <a href="https://www.smartkarma.com/entities/10155" target="_blank" data-smartkarma-citation="entities:10155:1">Hyundai Heavy Industries (009540 KS)</a>.</li>
<ul><li>
Rebalance in KOSPI 200 Index - Starting May 10th, Hyundai Robotics will replace <a href="https://www.smartkarma.com/entities/12531" target="_blank" data-smartkarma-citation="entities:12531:1">Daewoo Shipbuilding &amp; Marine Engineering (042660 KS)</a>. This will also have a positive…</li></ul>
</ul>

We are introducing a new idea for our regular Korean monthly, which is the "PICK OF THE MONTH" - ONE investment idea which we believe strongly that it will outperform in the following month. 

Our TOP STOCK PICK IN MAY is Hyundai Robotics (267250 KS), which is one of four companies being split from Hyundai Heavy Industries (009540 KS).

Rebalance in KOSPI 200 Index - Starting May 10th, Hyundai Robotics will replace Daewoo Shipbuilding &amp; Marine Engineering (042660 KS). This will also have a positive…


Korea Stock Market Monthy Recap #13 - (April 2017)

South Korea

Hanwha Ocean Co., Ltd. operates as a shipbuilding and offshore company. The Company provides floating structure construction, steel wire drying, commercial vessels, specialty vessels, gas carrier, tanker, containership, ro ro, bulk carrier, submarine, warship, auxiliaries, cruise ships, and ferries manufacturing services. Hanwha Ocean also offers onshore plants services.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Hanwha Ocean (042660 KS)

The Yara Birkeland: The World's First Autonomous Ship - Kongsberg's Answer to Tesla?

The Yara Birkeland will be the world's first unmanned container vessel running on electric power that was developed by Kongsberg of Norway for the...

Henry Kwon

DSME, HMM & KDB - Understanding Relationship Dynamics

Currently, Daewoo Shipbuilding & Marine Engineering (042660 KS) is one of the Korea's hottest stocks that are making many investors quite...

Sanghyun Park

Mitsui Engineering Targets Natural Gas Hydrate as Japanese Shipbuilders Restructure

We wrote on Mitsui Engineering & Shipbuilding (7003 JP) on 14 Feb noting the very high level of its holding company discount, likely due to...

Mio Kato

Hanwha Techwin Divestiture - Details & Follow-Up Actions

Hanwha Techwin Co Ltd (012450 KS) broke up itself into four different entities through physical division. The split will take effect on July 1....

Sanghyun Park

Korea Stock Market Monthy Recap #13 - (April 2017)

We are introducing a new idea for our regular Korean monthly, which is the "PICK OF THE MONTH" - ONE investment idea which we believe strongly that...

Douglas Kim

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)