HD Korea Shipbuilding & Offshore Engineering (KSOE) stands out among its peers. The firm’s balance sheet has proved capable of withstanding lengthy downturns, and its focus on research and development is putting it at the forefront of major industry changes.

Our stock research, with a particular focus on cashflow and strong fundamentals, targets companies capable of contributing to income-driven portfolios. We believe healthy levels of cashflow mean KSOE has the potential to offer shareholders an attractive and growing dividend in the years to come.

Weathering the storm

Economic cycles in the shipbuilding industry are lengthy – lasting around 15 to 20 years – and they tend to lurch from feast to famine. The most recent downturn saw companies contending with Covid and its knock-on effect on the global supply chain.


But, while most firms have faced a scrap for survival in recent times, KSOE is emerging relatively unscathed amid increasingly squeezed profit margins. One of Korea’s big three (alongside Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries), KSOE has used its scale advantage to ensure its balance sheet remains in a healthy position. Orders continued to flow in over the course of 2023. The value of KSOE’s current order book is now more than three times that of completed sales and looks extremely robust. During 2023, the firm received $21.8 billion of new orders, representing 150% of its annual target. And, with an order backlog equivalent to more than three years’ current revenues, the company will be kept busy in production for some time (1).

Steering towards sustainability 

With the increasing importance of sustainability and ESG factors on market pricing, many investors shun shipping entirely, wanting to avoid high carbon industries. Shipping accounts for 2% of global carbon emissions and historically, more than 99% of the industry’s total energy requirements have been met by oil (2).

As the world moves to a greener global economy, we think it is important to play a part in the transition - in fact, this is one of abrdn's key sustainability objectives. It's also our fiduciary duty, and it helps us identify the next generation of profitable investments.

KSOE is an example of the kind of investment we are looking for. While decarbonising shipping is complex, we would argue the industry has a better chance than many of making the transition as carriers move away from carbon-heavy fuels.

Tougher regulation is a key transition driver, given a target of cutting emissions by 20% by 2030 and reaching net zero by 2050. And enforcing this is a global regulator with real teeth. The International Maritime Organisation (IMO) has set realistic timeframes, matched with suitable penalties and incentives, for carriers to introduce greener technology. This means goals aren’t just laudable – they are achievable.

Low carbon cargo

KSOE is undoubtedly playing a lead role in this green transition. During the downturn, it invested heavily in research and development in new lower-emission ships. This investment has already started to show results: the firm recently successfully commercialised its first ammonia-powered vehicle, securing a contract with a European shipping company for four mega-sized carriers worth 557 billion South Korean won ($432.4 million) (3). These carriers reduce CO2 emissions by up to 95%.

Based on current valuations, investors don’t appear to be taking this green replacement cycle into account. But with the credible support of the IMO, we believe orders for new eco-friendly ships will increase further over the next few years.

Income on the horizon?

So, KSOE shares are attractively valued right now. But is the company a potential source of income for investors?

The firm doesn’t currently pay a dividend, preferring in recent years to reinvest in growing the business. That said, we have carefully considered two aspects when looking at KSOE’s income credentials. The company's ability to pay out a sustainable dividend, and its willingness to do so. We believe KSOE qualifies on both counts.

Firstly, the firm's healthy balance sheet and order book should lead to a strong cashflow over the coming years. Based on current orders, we believe KSOE should have a positive net cash balance sheet by 2024, leading to a 25% free cashflow yield in 2025.

Secondly, while it’s true the company has not set a timeframe to reinstate its dividend, it has made commitments to do so, and we believe this will happen as profitability improves.

It’s clear to us that KSOE is a business going through a transition. According to our research, its cashflow stream and balance-sheet health are changing dramatically. Improvements could happen quickly from this point on.

Shipping forecast

KSOE’s potential isn’t limited to its leading role in the transition to lower-emission merchant vessels. The push for transport cargo to decarbonise comes as other industries such as defence and oil & gas exploration look to replace their fleets.

There is also evidence that Korean shipbuilders have started to take Western customers from Chinese competitors. This trend could continue amid geopolitical tensions. Thanks to all the above factors, we believe KSOE is well-placed to deliver sustainable growth while offering future income potential for investors.

Visit our Investing for Income campaign page where you can read our other case studies and find out more about our total return mindset.

Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results. 

  1. Source: HD Korea Shipbuilding & Offshore Engineering (KSOE), December 2023
  2. Source: IEA International shipping web pages 
  3. Source: Korea JoongAng Daily December 2023