---
endpoint: analytics
pattern: Capital Goods
status: done
latency_ms: 175313
conversation_id: 2a004a4a-6c8e-4f1a-8df2-00efa8f021ab
citations: 9
created: 2026-05-31 21:30:57Z
---

# What is HD Hyundai Heavy’s core business franchise and the key components of its operating model?

# HD Hyundai Heavy Industries (329180 KS) — Core Business Franchise & Operating Model

## 1. Corporate Identity & Franchise Positioning

HD Hyundai Heavy Industries (HD HHI) is the world's largest shipbuilder and the flagship operating subsidiary of HD Korea Shipbuilding & Offshore Engineering (HD KSOE, 009540 KS), which holds ~75% of HD HHI's equity. Its franchise is anchored by three structural attributes that differentiate it from all global peers [1]:

- **World's largest shipbuilder** by capacity, with the broadest commercial-naval-engine portfolio in the industry [1][2].
- **Leading producer of LNG carriers, very large ammonia carriers (VLACs), and dual-fuel marine engines** — with a ~35% market share in dual-fuel engines [1][4].
- **One of only two Korean shipyards** (alongside Hanwha Ocean) eligible for US naval vessel and MRO contracts, and the only Korean builder with the longest LNGC supply track record [1][4].

CLSA frames the franchise as a "one-stop shop" — HD HHI manufactures commercial vessels, naval vessels, and marine engines under one roof, operating "at the leading edge of global industry trends" in both scale-up of vessel sizes and environmentally-friendly propulsion [2].

## 2. Core Operating Segments — The Three-Engine Model

HD HHI consolidates results under three reportable business segments. Based on 2Q 2025 disclosure (K-IFRS basis) [5]:

| Segment | 2Q25 Sales (bn KRW) | 2Q25 OP (bn KRW) | OPM | Role in Franchise |
|---|---|---|---|---|
| **Shipbuilding — Commercial** | 2,622.8 | 310.4 | 11.8% | LNGC, LPGC, tanker, container, VLAC newbuilds |
| **Shipbuilding — Naval** | 226.8 | 26.9 | 11.9% | Korean surface combatants + export (Philippines, Peru) |
| **Offshore Plant** | 246.1 | 36.8 | 15.0% | FPU, FPSO and offshore engineering (Trion, Ruya projects) |
| **Engine & Machinery (EMD)** | 1,028.9 | 184.0 | 17.9% | Two-stroke / four-stroke marine engines, dual-fuel |
| Others | 22.5 | (86.6) | n/m | Corporate / other |
| **Total** | **4,147.1** | **471.5** | **11.4%** | |

Source: HD HHI 2Q25 Consolidated Earnings Release [5].

### 2.1 Shipbuilding (Commercial + Naval) — the dominant franchise

**Commercial shipbuilding** is the largest revenue pillar (~63% of 2Q25 group sales) and the most levered to the current upcycle. HD HHI's portfolio is unusually diversified across LNGC, LPGC, tankers, naval (surface) vessels, and offshore units — a breadth CLSA cites as the "primary differentiator" between Korean yards, vs. Hanwha Ocean's LNGC/submarine/offshore tilt or Samsung Heavy's pure-play LNG focus [3].

The current backlog mix (as disclosed by the company in Q4 2025 earnings) is gas-carrier heavy: at the HHI yard, LNGCs are ~48.4% of backlog, LPGC + VLAC ~32.2%, containers ~12.3%, and tankers ~5.4% [8]. This mix is the operational expression of the franchise's leverage to (i) global LNG capacity build-out and (ii) the IMO-driven shift to ammonia/LPG-capable tonnage.

**Naval shipbuilding** is smaller in revenue (~5–7% of group sales in 2Q25) but strategically critical and structurally higher-margin (15.2% OPM in 1Q25) [5]. The franchise is built on:
- Korean Navy surface combatants (frigates, destroyers, auxiliary), where HD HHI dominates relative to Hanwha Ocean's submarine specialization.
- Export pipeline: Philippine Navy frigates (delivered + follow-on bidding) and Peru.
- US Navy positioning: HD HHI is partnering with Huntington Ingalls Industries on a joint proposal for next-generation logistics vessels for the U.S. Navy under the Maritime Statecraft initiative [9].

### 2.2 Engine & Machinery Division (EMD) — the differentiated profit pool

EMD is the highest-margin segment (17.9% OPM in 2Q25) and the most distinctive structural component of HD HHI vs. peers [5]. The franchise rests on:

- ~35% global market share in dual-fuel (D/F) marine engines, the highest in the industry [4].
- Captive + merchant model: EMD supplies engines to HD HHI's own yards (intercompany) AND to external shipbuilders. External revenue share rises during industry upcycles (currently ~67%, having reached up to 77% in prior peaks), driving operating leverage as utilization climbs.
- Multi-fuel R&D pipeline (LNG, methanol, ammonia, hydrogen) aligned with IMO 2030/2050 decarbonisation rules [4].

EMD effectively gives HD HHI a second business franchise — a "pick-and-shovel" play on the entire global shipbuilding cycle, not just its own yards.

### 2.3 Offshore Plant — the project-driven swing segment

Offshore Plant builds FPUs, FPSOs and topside modules on a project-by-project basis. Revenue is lumpy and tied to specific contract execution windows — 2Q25 sales jumped 54.8% QoQ on "expanded revenue recognition from the Trion FPU and Ruya projects" [6]. The segment has historically been the weakest performer (loss-making in 2024) but turned profitable in 2025 on better project mix and change-order (C/O) recognition [5].

## 3. Key Components of the Operating Model

### 3.1 Backlog-driven revenue recognition

HD HHI books revenue on shipbuilding contracts via percentage-of-completion accounting. The economic engine of the business is therefore the **backlog**, not current orders. HD HHI's backlog has expanded above prior-cycle highs since 2021 on the back of LNGC, container, and VLAC ordering waves — meaning the next 3 years of revenue and margin are already largely contracted [1]. The segment-level OP margins shown above (11–18%) reflect contracts priced during the 2022–2024 high-vessel-price environment now flowing through the P&L.

### 3.2 Margin drivers — vessel mix and price

Margin uplift in 2025 has come primarily from:
- **Mix shift toward gas carriers** (LNG up from 39.5% to 42.2% of backlog QoQ in Q4 2024, container down from 47.9% to 41.9%) — gas carriers carry meaningfully higher unit prices and margins than tankers/containers [5].
- **Vessel price escalation** — higher-priced ships are flowing into revenue recognition as 2022-vintage low-price contracts roll off [5].
- **Engine ASP and dual-fuel mix** — EMD margins benefit as dual-fuel engines (78% of four-stroke, 72% of two-stroke deliveries) carry premium pricing vs. conventional engines.

### 3.3 Decarbonisation + naval rearmament — the two thematic tailwinds

CLSA frames the franchise's earnings power around two converging structural themes [4]:

1. **Marine decarbonisation** — IMO regulations are driving fleet replacement toward dual-fuel and alt-fuel-capable vessels. HD HHI's combined leadership in LNGC newbuilds, VLAC newbuilds, and dual-fuel engines gives it triple exposure to this transition.
2. **US naval & LNG asset expansion** — Trump-era policy is accelerating both (a) US LNG export terminal FIDs (>70 MTPA approved in 2025 alone, with >200 MTPA expected by 2030 globally [7]) driving LNGC demand, and (b) US Navy fleet expansion (297 → 390 ship target) opening foreign-build access to Korean yards. HD HHI is one of the few names eligible to participate.

### 3.4 Capital structure and ownership

- **Parent**: HD KSOE owns 75% of HD HHI; National Pension Service holds ~6.6%–7%; free float ~18% [1].
- **Balance sheet**: HD HHI carries ~₩2.2tn of cash/short-term financial assets vs. only ~₩500bn of gross debt, with CLSA forecasting a flip to net cash within the next few years.
- **Governance**: Moved to a co-CEO structure in March 2024 (Sangkyun Lee & Jinyul Noh).

## 4. Synthesis — What Makes the Franchise Unique

HD HHI is best understood as **three vertically-linked franchises operating on one balance sheet**:

1. A scale-leader **commercial shipbuilder** with the broadest portfolio (LNGC + LPGC + VLAC + tanker + container) [3].
2. A **naval shipbuilder** with surface-vessel dominance domestically and exposure to the highest-value defence market globally (US Navy) [1][9].
3. A **marine engine manufacturer (EMD)** with ~35% global D/F engine share that earns higher and more stable margins than the yards themselves [4].

The cross-segment integration — yards consuming captive engines, and EMD selling externally during upcycles — produces operating leverage that pure-play peers (Samsung Heavy on LNGC, Hanwha Ocean on naval/submarine) structurally cannot match. CLSA's investment case rests on this diversified leadership: HD HHI is positioned to capture every major narrative in the current upcycle (decarbonisation, naval rearmament, US LNG terminals) simultaneously, rather than relying on a single thesis [1][4].

---

**Sources**
[1] HD Hyundai Heavy – HC O-PF Initiation; Korea Shipbuilding (Anchors aweigh) — CLSA (11 May 2025) — 607949990LinqAlpha.PDF
[2] Korea Shipbuilding (Anchors aweigh) — CLSA (11 May 2025) — 607949990LinqAlpha.PDF (One-stop shop section)
[3] Korea Shipbuilding (Anchors aweigh) — CLSA (11 May 2025) — 607949990LinqAlpha.PDF (Order of preference section)
[4] Korea Shipbuilding (Anchors aweigh) — CLSA (11 May 2025) — 607949990LinqAlpha.PDF (Two themes section)
[5] HD Hyundai Heavy Industries 2Q25 Consolidated Earnings Release — Segment Financials
[6] HD Hyundai Heavy Industries 2Q25 Consolidated Earnings Release — Sales Analysis by Segments
[7] HD Hyundai Heavy Industries Q4 2025 Earnings Call — LNG outlook commentary
[8] HD Hyundai Heavy Industries Q4 2025 Earnings Call — Backlog mix breakdown
[9] HD Hyundai Heavy Industries Q3 2025 Earnings Call — US Navy / Huntington Ingalls partnership

## Citations

- [1] **607949990LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607949990LinqAlpha.PDF>
- [2] **607949990LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607949990LinqAlpha.PDF>
- [3] **607949990LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607949990LinqAlpha.PDF>
- [4] **607949990LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607949990LinqAlpha.PDF>
- [5] **25.2Q HHI Consolidated Earnings Release_fn.pdf** · external
- [6] **25.2Q HHI Consolidated Earnings Release_fn.pdf** · external
- [7] **HD Hyundai Heavy Industries Co.,Ltd., Q4 2025** · external
- [8] **HD Hyundai Heavy Industries Co.,Ltd., Q4 2025** · external
- [9] **HD Hyundai Heavy Industries Co., Ltd., Q3 2025** · external

