Taewoong Gets a Heavy Metal Boost

Thanks to growth in China and sky-high oil prices, the Korean parts maker is winning big contracts and expecting more

South Korea is home for industries benefiting from high oil prices and China's sizzling growth. And few parts suppliers are profiting more than Taewoong (TAEWF) from the booming shipbuilding and factory construction businesses. The Korean maker of forged metal parts for ship engines, petrochemical factories, and power plants saw its operating profits jump 67%, to $48.2 million, in the first nine months of this year on sales of $283.9 million, up 33% from the same period last year.

The nine-month earnings surpassed the full 2006 profits of $40.6 million. Thanks to growing revenues, which have increased by an annual average of some 40% in the past three years, and to improving productivity, the company expects its profit margin to top 17% this year, up from 13.3% last year. "Rosy prospects await Taewoong for years to come," says corporate analyst Han Byung Hwa at Seoul-based brokerage Hyundai Securities.

That's because the company is poised to win big contracts from makers of wind power generators. Already this year, Taewoong won a $400 million order to supply tower flanges to Denmark's Vestas Wind Systems (VWS) and a $185 million contract to provide GE Energy (GE) with main shafts. "Contracts have been switching to Korea from Europe recently as we have steadily expanded and upgraded our production facilities," says Choi Young Jo, Taewoong's chief financial officer.

Aggressive investment in capacity buildup is due largely to Korea's flourishing shipbuilders (BusinessWeek.com, 5/18/07) and their voracious appetite for forged metal. The Koreans are the unquestioned leader in the industry, building 41% of all ships delivered last year. The country is also home to the three biggest industry players: Hyundai Heavy Industries (HYHZF), Samsung Heavy Industries (SMSHF), and Daewoo Shipbuilding & Marine Engineering (DWOSF.PK), which all have nearly four years of order backlogs as shippers cater to ballooning trade between China and the rest of the world.

Taewoong's strategy has been equipping itself with the world's largest ring-rolling mill and the press to cater to shipping's demand for ever-bigger vessels. Luckily for the company, a number of Korean engineering and construction businesses have been hired in the past three years to build refineries, petrochemical plants, and infrastructure in the Middle East, where nations began spending heavily to create their own industrial sectors with the money they earned from high oil prices. The Korean engineering companies naturally have become Taewoong's clients.

With oil prices in the stratosphere, wind power has loomed as the most rapidly growing means of alternative electricity generation. Hyundai Securities figures global wind power generation will grow by an average of 20% a year between 2006 and 2011 and that demand for forged metal parts for the sector will rise by an annual average of 37% during the period. "We are now building a massive press which will help us meet rapidly growing forged metal needs from the wind energy sector," says CFO Choi.

Such optimism explains a dramatic rise in Taewoong's share prices. The stock has quadrupled so far this year and has jumped 23-fold in the past three years. Nevertheless, Hyundai Securities expects a further rise in the stock as it forecasts earnings to nearly triple to $116.7 million in 2009 from $40.6 million in 2006 after more than doubling from $15.4 million in 2004. At such a pace, look for Taewoong on Asia's Hot Growth list for years to come.

Moon is Seoul bureau chief

    Before it's here, it's on the Bloomberg Terminal.