Can't sell it if you don't sell it? The shipowner's privatization misses the best time to sell

When it makes money, it is reluctant to sell, and when it does not make money, it cannot be sold. HMM's privatization plan has been questioned and now it has become a worry for the Korean government.

Only a timetable without a roadmap? South Korean government plans to complete privatization of HMM by end of 2025

On October 11, a person from the Korea Ocean Promotion Corporation (KOBC) said when questioned by members of the Korean National Assembly: "The HMM shares held by government agencies will be reduced in stages, and the number of HMM management support groups will be reduced by the end of 2024. The timetable to complete the privatization of HMM by the end of 2025 will abolish its functions.” This also means that the South Korean government will not push forward the sale of HMM as hastily as Daewoo Shipbuilding, and it will take more than three years to gradually transfer the management rights to the private sector.

At the questioning meeting, the Korea Ocean Promotion Corporation submitted a report on the new government's public agency reform plan. After analyzing the report, Shin Jung-hoon, a member of the Korea National Assembly's Committee on Agriculture, Forestry, Livestock, Food, Marine and Fisheries and a member of the Democratic Party of the largest opposition party, said: "After the Park Geun-hye government made the decision to go bankrupt Hanjin Shipping in 2017, HMM is the only Korean shipowner leading the Korean shipping industry. "Instead of mechanically determining the speed of sale, we should look for the best conditions and time to comply with the principles of privatization by selling at a reasonable price and not selling overseas in order to maintain its Korean-registered shipowner status."

In response, a relevant person from the Korea Ocean Promotion Corporation replied: "The current plan is to reduce the HMM shares held by government agencies in stages, but no concrete roadmap has been formulated, which requires us to cooperate with the Ministry of Oceans and Fisheries of Korea and the Korea Development Bank ( KDB) and other further negotiations."

In addition, in the first parliamentary state audit under the Yoon Seok-hye administration, which began on October 4, Cho Seung-hwan, Minister of Oceans and Fisheries of South Korea, said when accepting the state audit: "Promoting the privatization of HMM will comprehensively consider the shipping industry that has entered the adjustment situation. factors such as market conditions and capital market conditions.”

It is reported that in response to the controversy over the sale of Daewoo Shipbuilding and HMM in the Korean industry, Cho Seung-hwan said on September 30: "HMM will not be sold immediately like Daewoo Shipbuilding." He emphasized: "The sale of HMM and Daewoo Shipbuilding cannot be confused. It should be Discuss different sales timing and sales forms according to the value of each company and the relevant industrial environment."

Cho Seung-hwan said: "If HMM is sold without consultation with the relevant departments, I will resign as the chief executive. Although the principle of privatization of HMM is clear, the timing will be carefully considered."

In response to the opinion that the current shipping market has turned sharply down and may miss the best time to sell HMM after next year, Zhao Chenghuan explained: "The sale should take into account factors such as cash holdings and stock price. It is not that HMM cannot be sold after next year."

Cho Seung-hwan also revealed the time and sales policy for HMM to normalize its operations. He stated:“The return to normalization cannot be judged purely on the basis of fleet capacity. It will take several years or so for HMM to fully return to normal. To be clear, HMM will not be sold to foreign companies or private equity investors.”

HMM's performance has improved beyond expectations, and the stock price has risen sharply or become a "stumbling block" for sales?

In fact, the South Korean government has started to privatize HMM in 2021 and has been looking for a buyer for HMM.

In February 2017, Hanjin Shipping, the largest shipping company in South Korea at that time, officially declared bankruptcy, and HMM also suffered huge losses for six consecutive years since 2011. In order to save the Korean shipping industry, the Korean government has successively invested 7.4 trillion won (about 5.7 billion U.S. dollars) of public funds to help HMM carry out structural adjustment, while promoting HMM’s acquisition of Hanjin Shipping’s excellent assets, it also provides key support.

According to the International Ship Network, in 2018, the South Korean government issued the "Five-Year Plan for Maritime Reconstruction". HMM ordered 12 24,000TEU container ships and 8 14,000TEU container ships from the three major Korean shipping companies, and they will ship all of them in 2020 and 2021 respectively. Delivery into operation. As a result, HMM's capacity has been expanded from 450,000 TEU to nearly 900,000 TEU, almost doubling, greatly enhancing its competitiveness.

In June 2021, with the financial support provided by the government, HMM signed a construction contract with Hyundai Heavy Industries and Daewoo Shipbuilding for a total of 12 13,000TEU-class neopanamax container ships, which are scheduled to be delivered before the end of June 2024. By then, HMM's fleet capacity will be further expanded to 1 million TEU, which is basically the same as the combined capacity of HMM and Hanjin Shipping in 2016.

In July this year, HMM released its medium and long-term strategic vision and investment plan for the next five years, announcing that it will invest more than 15 trillion won (about 11.5 billion U.S. dollars) between 2022 and 2026 for ordering new ships, port terminals, and logistics facilities. and other core assets to build the world's top shipping logistics enterprise. Among them, 4 trillion won (about 3.067 billion US dollars) will be invested in ordering new environmentally friendly ships including container ships and bulk carriers.

At the same time, with the continuous increase of international shipping freight, HMM's performance has also begun to take off. According to the International Ship Network, in the second quarter of 2020, HMM's operating profit and net profit turned from losses to profits at the same time, achieving a comprehensive profit for the first time in 21 quarters. In 2021, HMM completed an operating income of 13794.1 billion won (about 11.5 billion US dollars), an increase of 115.1% over 2020; achieved an operating profit of 7377.5 billion won (about 6.168 billion US dollars), an increase of 652.2% over 2020; achieved current net profit It is 5,326.2 billion won (about 4.45 billion U.S. dollars), a sharp increase of 4196.5% over 2020. By setting the highest performance in history, HMM has recovered the operating deficit that has occurred in the past nine years in one go.

Thanks to the high sea freight rates, HMM achieved the highest performance record in the first half of this year, achieving an operating income of 9,952.7 billion won (about 7.68 billion US dollars), and an operating profit of 6,085.8 billion won (about 4.7 billion US dollars), Year-on-year growth of 87% and 153%, respectively.

Korean industry insiders pointed out that HMM is the first successful case of the Korean government's restructuring of enterprises. Under such circumstances, there are voices in Korea that "the public shares of shipping companies should be adjusted." That is, since the government has achieved its goal of supporting poorly managed companies, privatization should be promoted as soon as possible.

Can't sell it if you don't sell it? HMM privatization may miss the best time to sell

However, until the first half of this year, the South Korean government still showed a cautious stance, believing that the high global oil price and the global port congestion and cargo backlog caused by the new crown pneumonia epidemic are still continuing, so it is still not enough to immediately consider the privatization of HMM. Too early. Cho Seung-hwan, Minister of Oceans and Fisheries of South Korea, said at his first press conference after taking office on May 25: "The government did not immediately consider matters such as the privatization of HMM. This is in the financial structure, and we must carefully observe economic conditions, situations, On August 10, Zhao Chenghuan also said: "In the case of HMM's continuous profitability, the government and public institutions cannot continue to assume the responsibilities that should be handed over to the market, so I believe that from a medium and long-term perspective, HMM should achieve privatized."

According to the International Ship Network, at present,Korea Development Bank is the largest shareholder of HMM, holding a 20.69% stake in HMM as of the end of last year, followed by the State Oceanic Promotion Corporation with 19.96%, SM Group with 5.52%, Korea Credit Guarantee Fund (KODIT) and Korea National Annuity Corporation (KNPS) holds 5.02%.While the government agency's stake is 45.67%, the ratio will rise to 74% if the two agencies' holdings of HMM's perpetual convertible corporate bonds (CBs) and warranted corporate bonds (WBs) are converted into shares.

In this regard, Zhao Chenghuan said:“Judging from the average price of HMM shares, even if they want to secure about 35% of private shares to secure management rights, private companies will invest nearly 10 trillion won (about 7.7 billion U.S. dollars). If this is the case, the privatization of HMM will change. quite difficult.”With HMM's better-than-expected turnaround last year and this year, corporate valuations have also risen sharply, making it a stumbling block for any company to easily acquire. As such, the South Korean government plans to sell HMM's public stake in a phased manner.

While the Korean government and the public are still arguing over the timing and method of HMM's sale and privatization, the global shipping market is experiencing a "cold snap" after a sustained rise in 2021, and the situation has reversed. Since the beginning of this year, the Shanghai Export Containerized Freight Index (SCFI) has continued to fall, falling below 2,000 points on September 30, more than half of the historical high of 5,109 points at the beginning of the year. Based on,The securities community has warned that “HMM could post a loss as early as the second half of 2023.”

At present, HMM's performance is still in an inertial upward channel. According to forecasts, HMM's operating income in the third quarter of 2022 will reach 5 trillion won (about 3.5 billion US dollars), a year-on-year increase of 25.7%, and operating profit will reach 2.8 trillion won (about 1.9 billion US dollars), a year-on-year increase of 22.4% %. A big reason for HMM's higher-than-expected results was the South Korean won's slump against the U.S. dollar.

However, according to the analysis of Japan's Nomura, due to the recent relief of port congestion on the West Coast of the United States, ship capacity has gradually been released and put into the market, thus increasing the supply of capacity in the market. Nomura has cut its SCFI index forecast for 2023 to 874 from 1679, given the faster-than-expected easing of port congestion.

Nomura Securities said HMM could post a loss in 2024 and could even post an operating loss from the second half of next year due to a sharp drop in container spot freight rates. Historically, between 2015 and 2016, Asian Container Lines had negative operating results due to the decline in container freight rates.

Nomura Securities said that if Korea Development Bank sells its stake in HMM to a private company, such a market outlook would be a potential risk for buyers.

Previously,South Korean financial circles have revealed that potential buyers of HMM include POSCO Group and Hyundai Glovis, a logistics company under Hyundai Group. However, neither of the two companies has clearly expressed their intention to acquire them. Nomura said a sale of HMM would not take shape in the short term.

In addition, the South Korean government has planned to expand the .1 billion public ship investment fund jointly operated by the Korea Development Bank and the Korea Ocean Promotion Corporation to .6 billion. In order to cope with the possible downturn in the shipping industry in the future, the Korean government will establish a leasing company specializing in the purchase and leasing of ships by 2026.