Block Deal Sale of 3% Stake in HD Hyundai Heavy Industries

• After the market close on 16 May, it was reported that HD Korea Shipbuilding & Offshore Engineering (009540 KS) plans to sell 2.66 million shares (3% of outstanding shares) of HD Hyundai Heavy Industries (329180 KS) in a block deal sale.

Conclusion First

We would avoid participating in this block deal sale and we have a Negative view of HD Hyundai Heavy Industries (329180 KS) over the next one year.Three major reasons why we are negative are as follows:

• Overhang Concerns - After this block deal sale, we believe there could be concerns about HD Korea Shipbuilding & Offshore Engineering potentially selling additional shares of HD HHI in the next 2-3 years.

• Unattractive Valuations (Lack of Margin of Safety) - HD HHI's valuations are not attractive at current levels. HD HHI is currently trading at EV/EBITDA of 23.2x, P/B of 2.3x, and P/E of 48.2x based on the 2024 consensus earnings estimates. HD HHI also posted worse than expected results in 1Q 2024 which could further put negative pressure on the company's valuations.

• Increasing Deflationary Pressures in China (Inflation vs Deflation) - Despite efforts of the Beijing government to boost the domestic economy, there are clear deflationary pressures impacting China. In on ongoing deflationary environment in China (especially real estate), there may be many investors that shy away from making long-term investments in HD HHI due to the cyclicality of the shipbuilding industry that is impacted by the global commodity cycle/China's economy.