Hd Hyundai Mipo Co.,Ltd. (A329180) Earnings Call Transcript & Summary

[Interpreted] Good afternoon, ladies and gentlemen. Let us begin the conference call. I am [ Song Yoo-jung ], Executive Vice President of IR. Thank you very much for joining us today. It's quite late in the afternoon. As confirmed through the disclosure this afternoon, there was a Board of Directors' decision about the merger between Hyundai Heavy Industries and Hyundai Mipo as well as business restructuring. To facilitate communication with participants, we will be having and hosting this conference call, and we will be elaborating on the merger between the two companies and business restructuring. First of all, our CEO will deliver a presentation followed by a Q&A session. And today, we're joined by the CFO of Hyundai Heavy Industries as well as the executives responsible for planning. And we will make sure that your questions are addressed in the most sincere and faithful manner possible. Now we would like to have our CEO, Mr. Lee, Sang Kyun, who will be presenting about this merger between the two companies.

[Interpreted] Thank you for joining us today. Dear valued investors in Korea and overseas, I am Lee, Sang Kyun, CEO of HD Hyundai Heavy Industries. I'd like to express my sincere gratitude for your continued interest and support. And today, our announced the merger between HD Hyundai Heavy Industries and HD Hyundai Mipo, a decision made after extensive deliberations over a long period of time. Today, HD Hyundai Heavy Industries and HD Hyundai Mipo approved the merger, approved proposal at their Board of Directors meeting. This strategic restructuring is being pursued to effectively respond to the rapidly evolving global shipbuilding landscape, seize new growth opportunities and strengthen our fundamental competitive edge to maintain a leading position in the global market. So that's the background behind this decision to pursue the merger between the two companies. Now I will walk you through the overview, background and objectives of this restructuring, followed by our vision for the post-merger future. For further details, please refer to the presentation materials available on our official website. Let me begin by outlining the overview of this business restructuring. Currently, HD Korea Shipbuilding and Offshore Engineering holds a 74.18% stake in HD Hyundai Heavy Industries and a 42.4% stake in HD Hyundai Mipo. Both companies possess global competitiveness in constructing ultra-large vessels, offshore plants and medium-sized ships. Additionally, we operate overseas subsidiaries, including HVS in Vietnam, HHIP in the Philippines. On August 20, HD KSOE resolved to acquire Doosan Vina, further expanding our overseas production capabilities for small- and medium-sized vessels, ship blocks and equipment. However, intensifying global competition has made it imperative to actively pursue new business opportunities, including entry into new markets and the launch of the MASGA project. Through the merger of HD Hyundai Heavy Industries and HD Hyundai Mipo, we aim to achieve both quantitative and qualitative growth, thereby enhancing competitiveness and efficiency, not only in commercial vessels, but also in specialized ships. In line with this merger, we also plan to consolidate our overseas business operations under the newly established Singapore Investment entity to enhance focus on global investment initiatives. And next, Page 5, please. I will explain the merger time line and key details. Following today's merger resolution, the surviving entity, HD Hyundai Heavy Industries, will proceed with subsequent steps, including an extraordinary shareholders' meeting scheduled for October 23, 2025, and a merger review by pertinent authorities. The newly merged entity, Hyundai Heavy Industries is set to officially launch on December 1, 2025. The merger will be executed through an absorption-type merger, whereby HD Hyundai Heavy Industries will absorb HD Hyundai Mipo and HD Hyundai Heavy Industries will remain as the surviving entity, while HD Hyundai Mipo will be dissolved. New shares of HD Hyundai Heavy Industries will be issued to shareholders of Hyundai Mipo. The merger ratio is set at 0.406 shares of the surviving entity for each common share of HD Hyundai Mipo. The reference share price for the merger ratio was calculated as the arithmetic average of the weighted average closing prices for the past one month, for the past one week and the most recent closing price as of August 26 prior to the Board resolution date. In accordance with the Commercial Act and the Capital Markets Act of Korea, shareholders who oppose the merger may exercise their appraisal rights from October 23, 2025, the date of the shareholders' meeting until November 12, 2025. The appraisal prices are KRW 462,626 for HD Hyundai Heavy Industries and KRW 192,695 for HD Hyundai Mipo. Page 7. Now let me explain the background and objectives of this business restructuring. Recently, there has been the global trend of strengthening naval capabilities and increasing demand in the defense industry. In particular, following the confirmation of the MASGA project in the U.S., opportunities for Korea's defense exports have been expanding across global markets, including the U.S. With the tightening of various environmental regulations led by organizations such as the IMO, the adoption of new technologies has become essential, signaling a rapid shift in the shipbuilding paradigm. However, in the conventional commercial vessel market, traditionally the core of Korea's shipbuilding industry, Chinese shipbuilders have significantly expanded their market share in recent years, weakening our position. To respond to the rapidly changing global shipbuilding environment, Hyundai Heavy Industries and Hyundai Mipo aim to achieve the following three objectives through this restructuring. First, to leap toward a global leader in defense shipbuilding by unifying technological capabilities, track records and production capabilities, thereby leading the MASGA project and K-Defense initiatives; second, to pursue both quantitative and qualitative expansion through synergy created by the integration of the two companies; and third, to significantly enhance operational efficiency and accelerate the development of overseas yards, enabling us to reclaim lost market share and improve profitability. Let me now elaborate on each of the three objectives mentioned above. And first, through this restructuring, we aim to leap towards a global leader in K-Defense. Amid deteriorating global security conditions, defense budgets for naval forces are rapidly increasing. And the global warship market is showing strong growth potential. In particular, demand for new warships is rising sharply with countries such as the U.S., Canada, the Philippines and Peru actively seeking cooperation with Korea's defense industry. And this presents a significant opportunity for expanding our presence in the global defense market. Page 9, please. Furthermore, the confirmation of the MASGA project with a budget allocation of USD 150 billion has laid the foundation for a new growth trajectory in the shipbuilding industry. The merged entity plans to actively contribute to the MASGA project through expansion of its defense business, joint construction and technological collaboration with U.S. shipyards, local market entry and supply chain restructuring. Page 10, please. In addition, due to the limited shipbuilding capacity of the United States and the full-scale implementation of the MASGA project, requests for cooperation with Korean shipbuilders are expected to surge. We also intend to proactively respond to emerging opportunities in new related businesses, including the strategic commercial fleet of the U.S. In fact, the U.S. domestic shipbuilding capacity remains insufficient to meet accelerating demand driven by legislative initiatives. As a result, vessels for the strategic commercial fleet are permitted to be registered as foreign built ships until 2030, while those for the national security fleet and reserve fleet may be registered without time restrictions. Moreover, with the expansion of MRO demand from the U.S. Navy in the Asia Pacific region, Korean shipyards offering both cost competitiveness and geopolitical advantages expected to benefit from increased business opportunities. In this environment, the merger between HD Hyundai Heavy Industries, which possesses defense licenses and unmatched technological capabilities and track records and HD Hyundai Mipo, which is equipped with docks and facilities suitable for naval vessel construction will enable us to accelerate the expansion of our defense business opportunities. Accordingly, HD Hyundai Heavy Industries has established a mid- to long-term vision for expanding its defense business, covering not only advanced economies such as the U.S. and Canada, but also emerging markets, including the Philippines and Peru. Through this restructuring, we aim to consolidate our defense capabilities and facilities and grow our current revenue of KRW 1.1 trillion to KRW 7 trillion by 2030 through the export of high-spec surface vessels and submarines and as well as domestic construction of U.S. war ships. By 2035, we also target revenue exceeding KRW 10 trillion, driven by new full-scale construction of U.S. war ships and leadership in the unmanned vessel market. Page 13, please. The second objective is to achieve both quantitative and qualitative growth through integration synergy. In the rapidly growing special purpose vessel market such as icebreakers, shipyards are evaluated primarily based on their construction track record. By integrating the special purpose vessel portfolios of the two companies, we aim to expand our entry into fast-growing segments such as icebreakers and future offshore wind-related vessels, thereby maximizing our market share in the process. Page 14. In line with the shift towards eco-friendly paradigms, securing leadership in various green fuel technologies and emerging innovations has become increasingly vital. We plan to first supply new technologies such as liquefied CO2 carriers, electric propulsion, autonomous navigation systems and wind-assisted propulsion systems to medium-sized vessels and then rapidly expand them to large vessels, enabling us to establish a technological edge and accelerate qualitative growth. The third objective is to accelerate the development of overseas yards to reclaim market share and enhance profitability. As leading shipbuilders in China and Japan undergo consolidation, global competition continues to intensify. And in response, we plan to develop competitive overseas yards to recover market share loss to China and improve our overall profitability. Page 16, please. Furthermore, to efficiently manage our numerous overseas subsidiaries, we plan to establish an investment entity under the merged company in Singapore. This new investment entity will oversee our operations in Southeast Asian countries in Vietnam, the Philippines and other regions and will serve as the main vehicle for future overseas yard investments. The establishment of the Singapore investment entity will streamline our decision-making processes, enhance reinvestment efficiency and create a stable structure for profit distribution. Now let me share our vision following the business restructuring. Through this restructuring, HD Hyundai Heavy Industries will establish itself as a leading player in Korea's defense industry. Furthermore, by leveraging integration synergies, we will drive large-scale growth and lead the future market for next-generation vessels. With the development of competitive overseas yards, we aim to become a global market leader, shaping the future shipbuilding industry. Page 19, please. Lastly, through this merger, we will lay the foundation for long-term sustainable growth and aim to achieve revenue of over KRW 37 trillion by 2035. This concludes our presentation regarding the merger between HD Hyundai Heavy Industries and HD Hyundai Mipo. Should you have any further questions, we are more than happy to address them during the Q&A session.

[Foreign Language] [Interpreted] Now Q&A session will begin. [Foreign Language] [Interpreted] The first question will be provided by Lee, DongHeon from Shinhan Securities.

[Foreign Language] [Interpreted] So the question is, I'm sure that this is not an easy decision. And I wonder whether how much consultation has been happening both in Korea and the U.S. So out of $150 billion under the MASGA project, how much is this decision be related? So can we consider this as a part of -- as a sort of business investment? And I also wonder how much you have progressed in terms of talking with relevant government bodies.

[Foreign Language] [Interpreted] I am [indiscernible], and I'm responsible for planning. So after the summit between the two countries, Korea and the U.S., we have signed the first MOU under the MASGA project. So consultations have not been taking in any concrete form yet with governments, but we are gradually responding to what's happening while consulting with government organizations. So you can view this as sort of preparation that we're making to promote the K defense initiative.

[Foreign Language] [Interpreted] The following question will be presented by Choi, Kwang-Sik from DAOL Securities.

[Foreign Language] [Interpreted] Two questions basically. The first question is on Page 12, we see the number KRW 7 trillion by 2030. So it solely about your defense business. And according to what I know, with domestic yard capacity, that's going to be only meeting domestic demand with the domestic yard capacity as far as I know. Then the increase of KRW 6 trillion, does it mean that Mipo shipyard would be used more extensively to achieve KRW 7 trillion by 2030? Is that the right way to understand the whole context? And also, does it mean that commercial vessel construction will be declining at Mipo's shipyard? And the second question is, is it really possible to build U.S. warship here in Korea?

[Foreign Language] [Interpreted] So let me give you my answer to -- the CEO. So first of all, it doesn't mean that volumes will be declining at Mipo. Mipo is able to build 70 ships per year, its full capacity. But currently, Mipo is building only about 45 ships per year, which means there is available capability that can be -- that we can use. So by using Mipo, we can land orders for specialized ships, and that will eventually lead us to KRW 7 trillion by our target year. And then about your second question about upcoming U.S. projects. When we consider the time taken for design work, it will be after two years, I think, that we actually can build ships. And in the meantime, we can make necessary preparations. And if we can coordinate our portfolio well, I think it's capable that we build U.S. warship here in Korea. And also, it will allow us to both address Mipo's capacity and as well as successfully to achieve our target revenue.

[Foreign Language] [Interpreted] The following question will be presented by [indiscernible] from Mirae Asset.

[Foreign Language] [Interpreted] So I have two questions. The first question is an extension of the ones that have been already asked. About KRW 7 trillion by 2030, does it include Mipo volume? Then I also wonder whether Hyundai Heavy Industries would be using its Dock #4 and Dock #5. So I wonder whether this number, KRW 7 trillion includes Hyundai Heavy Industries Dock #4 and 5 fully operational. And in relation to this, I wonder whether you can give us any guidance looking towards 2030 and 2035. My second question is about the establishment of an investment entity in Singapore. So after the merger, we have Hyundai Heavy Industries, the surviving entity as well as KSOE, then in terms of both companies, how much investment would they be making in this new Singapore investment entity? And any plans for capital investment or execution?

[Foreign Language] [Interpreted] To answer your first question, the number that we have presented today considers the reoperation of our dock #5. So making dock #5 operational again, that's considered as part of the number that we're presenting today. Currently, Mipo has four docks, and we're considering whether to convert two of them for specialized ships or defense applications. So that is why overall shipbuilding revenue would probably stay the same, so not decrease that much. And we are also considering whether to use Mipo. [indiscernible] of Mipo for specialized ships such as icebreakers. So that's also accounted for in the numbers that we're presenting today. As to the new investment entity in Singapore, if you look at our overseas subsidiaries, we have HHIP in the Philippines, which is wholly-owned by KSOE. We have HVS in Vietnam, where KSOE has a 10% stake and Mipo has 55% stake in HVS. And if you consider the merged entity, then all the stakes that we have in overseas subsidiaries, they be quite consolidated under the new investment entity in Singapore, which means KSOE would have around 70% stake and the merged entity, 30% stake. But we also need to consider Doosan Vina, which is tentatively HD Vina. When we consider acquisition costs and as well as other necessary investments, I think eventually, KSOE will be having around 50% and the merged entity Hyundai Heavy Industries with 40% in the newly established investment entity in Singapore. As to the accurate and detailed size or details or time line, we will share relevant -- we will keep you updated through subsequent disclosures or IR events.

[Foreign Language] [Interpreted] The following question will be presented by Kim, Yongmin from Yuanta Securities.

[Foreign Language] [Interpreted] My question is about the newly established investment entity in Singapore. According to what you said, 6% KSOE and 40% the merged entity, Hyundai Heavy Industries, it seems like there is no separate cash contributions that are being made into this new investment entity. Then does it mean that all the contributions are coming from your overseas subsidiaries only? And if that's the case in making any subsequent cash contributions in the future, would that be following the 6:4 ratio?

[Foreign Language] [Interpreted] If I answer your question, I am [indiscernible] in-charge of planning. So currently, when we consider only the in-kind sort of contributions that will be made, the ratio will be 7:3 between the two companies. But when we consider any future cash contributions to be made, then the ratio will be 6:4. But these are not definitive because detailed numbers and the contribution ratio to be determined after a Board of Directors meeting.

[Foreign Language] [Interpreted] The following question will be presented by Hwang Eoyeon from Nomura.

[Foreign Language] [Interpreted] I have three questions, and they are all about the newly established investment entity in Singapore. First of all, I fully concur with the idea behind this merger and I support this merger as well. But I'm a bit confused because KSOE was established as an intermediate holding company and to make relevant investments. But now we have another investment entity in Singapore. So about the role of these two different investment entities, in the future, when making investment decisions, does it mean that KSOE and the newly established entity will be sharing investment decision-making responsibilities. And if that's the case, what change are we expecting in terms of investment dividend payout ratio and distributable income of Hyundai Heavy Industries? That's my first question. And my second question is, as a minority shareholder in KSOE, I believe that in the end, investment decisions when made by the Singapore entity, then it means that money would be flowing basically from KSOE and Singapore. But how the money will be spent will be determined basically by the Singapore investment entity. Then it may implicate that minority shareholders of KSOE would be excluded in the investment decision-making because in the end, investment decision will be made by the Singapore entity. So that's my second question. My third question is are you considering the consolidation of KSOE and the newly established entity in Singapore because these two different companies are basically fulfilling quite identical purpose as an investment entity.