HD Hyundai Heavy Industries: Record Margins Signal a New Earnings Cycle

DS Investment Securities reiterated a "Buy" rating and a target price of 900,000 won on HD Hyundai Heavy Industries (KOSPI: 329180) on 30th July, implying upside of 107.4% from the closing price of 434,000 won on 29th July.

The recommendation was prompted by the company's preliminary results for the second quarter of 2026 (April–June), released on 30th July. Revenue came in at 6.33 trillion won, up 65.7% year on year. Operating profit surged 139.8% to 1.04 trillion won, pushing the operating margin to 16.4% — a 1.1 percentage-point improvement on the previous quarter and 5.0% above the market consensus of 990 billion won.

Shipbuilding and engines lead the way

The commercial shipbuilding and engine divisions were the standout performers. The commercial vessel division achieved an operating margin of 17.8%, driven by a higher number of working days, an increased share of vessels ordered at elevated prices since 2024 (accounting for roughly 39% of the order mix), and a favourable won-dollar exchange rate effect that contributed approximately 30 billion won to profit. By vessel type, liquefied natural gas carriers (LNGCs) represented 45% of divisional revenue, very large gas/ammonia/ethylene carriers (VLGC/VLAC/VLEC) 29%, container ships 19%, and tankers 6%. The engine division posted an even stronger margin of 24.8%, helped by a growing share of land-based medium-sized HIMSEN engines in the revenue mix. The naval and special-purpose vessel division saw its margin slip quarter on quarter owing to a less favourable contract mix.

More than a quarterly beat

The second-quarter results carry significance beyond a single earnings period. HD Hyundai Heavy Industries' operating margin has risen sharply from just 1.5% for the full year 2023 to 4.9% in 2024 and 11.6% in 2025. The 16.4% recorded in the second quarter of 2026 signals that vessels ordered at peak prices are now flowing through into recognised revenue in earnest. Shipbuilding is a long-cycle industry: from order to delivery typically takes two to three years, meaning contracts secured during the 2024 boom are only now converting into profits. By comparison, Samsung Heavy Industries — a direct domestic rival — posted an operating margin in the low double digits in the first quarter of 2026, suggesting HD Hyundai Heavy Industries is pulling ahead on profitability within the sector.

Second-half outlook remains positive

DS Investment Securities maintained an upbeat view on the remainder of the year. Although the share of LNGC revenue is expected to decline gradually from the fourth quarter onwards, container ships ordered at peak 2024 prices are due to enter the revenue mix in the second half, providing an offsetting boost. The engine division is forecast to see further margin improvement as dual-fuel (DF) engines and medium-sized HIMSEN units account for a larger proportion of output. The brokerage also flagged 2028 as a potential inflection point, when engines destined for data centres are expected to make a meaningful contribution to revenues.

Medium- to long-term growth drivers

DS Investment Securities identified small modular reactors (SMRs), floating data centres (FDCs), and naval vessels as the company's key longer-term growth levers. In SMRs, production of reactor pressure vessels under a contract with US-based TerraPower is scheduled to begin before year-end. FDCs, designed in both floating and fixed configurations, are under active discussion with prospective clients. Current production capacity for HIMSEN engines stands at approximately 3 gigawatts; given the level of customer enquiries, the brokerage expects an expansion announcement before the end of this year. On the naval side, follow-on frigate contracts with the Philippines and a submarine order from Peru are cited as high-visibility prospects for the second half.

Earnings estimates revised upward

DS Investment Securities raised its full-year 2026 operating profit estimate by 6.4%, from 3.86 trillion won to 4.11 trillion won, and its 2027 estimate by 5.9%, from 4.36 trillion won to 4.62 trillion won. Net profit attributable to controlling shareholders was revised up by 18.7% to 3.06 trillion won for 2026 and by 15.2% to 3.45 trillion won for 2027.

Risks worth noting

Investors should weigh several cautionary factors. The current share price of 434,000 won sits roughly 43% below the 52-week high of 765,000 won, and the stock has underperformed the KOSPI by 21.7% over the past three months. A 107% gap between the current price and the 900,000-won target demands sober scrutiny of the assumptions underpinning that valuation. External risks — slowing global trade, delays in vessel orders by key importing nations, sharp moves in raw material costs, and exchange-rate volatility — could all erode shipbuilding margins. New businesses such as SMRs and FDCs remain in development; their contribution to revenues is still years away.

Valuation

On current prices, HD Hyundai Heavy Industries trades at a 2026 forecast price-to-earnings ratio of 14.9 times and a price-to-book ratio of 4.0 times. Its EV/EBITDA multiple has compressed to 9.4 times from 21.7 times a year earlier. While DS Investment Securities is not alone in maintaining a "Buy" recommendation, the wide divergence between the target price and the current share price suggests the market is pricing in meaningful uncertainty about the durability of the cycle and the timeline for new businesses to deliver.