2004 Business Targets & Strategies by Division

This year the global business environment is expected to confront a number of serious challenges posed by the falling US dollar, rising raw materials prices and high oil prices. Despite these concerns, HHI aims to secure a competitive edge and maintain its commanding position in heavy industry through continuous growth and development.

1. Shipbuilding
Having already secured 30 months¡¯ worth of backlog, the Shipbuilding Division set this year¡¯s order target at a figure 30% lower than last year. Putting top priority on securing a technologically competitive edge, the division will focus on the development of new types of market-leading vessels, in addition to enhancing its design capability and production technology for specialpurpose vessels such as FPSOs, membrane- type LNG carriers, Ice Class Tankers and Pure Car Carriers.

2. Offshore & Engineering
Offshore & Engineering suffered its share of difficulties in 2003, both in winning new orders and carrying out existing overseas projects. In 2004, the division will focus on upgrading its design capabilities in offshore facilities, securing higher profits through efficient project management and ensuring successful completion of installation work.

3. Industrial Plant & Engineering
Last year, the Industrial Plant & Engineering Division experienced various trials and errors in carrying out overseas offshore projects. This year the division aims to normalize operations by working to improve project profitability and implement effective risk management. With its vast experience in carrying out largescale overseas projects, the division will focus on bolstering capabilities in professional project management and engineering required for EPC (Engineering, Procurement, Commissioning) design work.

4. Engine & Machinery
In 2003, the Engine & Machinery Division set a new world record for reaching the 40-million-bhp milestone in marine diesel engine output in the shortest period of time. This year, it aims to remain the world¡¯s top engine builder, fending off rivals both at home and abroad, and particularly competitors in China, by upgrading quality assurance and maximizing the efficiency of production systems and facilities through information-based operations.

5. Electro Electric Systems
This year is expected to see another round of fierce competition amidst the glut of supply in the industry both in and outside Korea. To remain competitive, the Electro Electric Systems Division plans to foster a joint-venture factory in China (scheduled to be completed in April 2004) as a second production base, establish a sales office in the US, and a production base in Vietnam to expand business in those regions.

6. Construction Equipment
In 2003, the Construction Equipment Division garnered remarkable sales growth. It expects to see another brisk year in sales in 2004, setting its sales target at 1.08 trillion won, a 28% year-on-year increase. Accordingly, it aims to expand its supply capacity by fully utilizing its joint-venture production factories in Changzhou, Beijing and Jiangsu to meet rapidly growing demand in China. Efforts will also be made to shore up overall competitiveness through improvements in the operational system.

Comments

In the first two months of 2004, the company¡¯s stock price appeared to be hovering in the correction period. According to analysts, this was due to a general concern that Korean shipbuilder¡¯s profitability would be adversely affected by recent sharp rises in raw material prices and appreciation of the Korean won. However, shipbuilding stocks¡¯ fundamentals are projected to gradually improve thanks to current favorable market conditions, including higher shipbuilding prices, increased demand for high value-added vessels, and selective order-taking focused on profitability amid sufficient backlog.

HHI's Stock Price

The four determinants of share price for the shipbuilding sector are: 1) newbuilding order trend; 2) newbuilding prices; 3) won/dollar exchange rate; and 4) profitability of individual shipbuilding companies. Among these determinants, investors tend to closely follow the newbuilding order trend and prices, rather than the current earnings results, as those are the indicators of future profitability.

Better shipbuilding environment
Backed by strong shipbuilding orders and price growth, the shipbuilding sector outperformed the KOSPI until the first half of 2003. Since then, the sector has undergone a correction due to concerns over earnings deterioration as a result of sluggish newbuilding orders, the strengthening won and rising raw material prices, particularly for heavy plate. But in early 2004, the sector enjoyed strong newbuilding volume and higher prices, reduced debt reflective of sizable prepayments, and lightened affiliate-related burden. All factors currently depressing HHI¡¯s share price are expected to diminish and, accordingly, the company should see enhanced earnings and benefit from improving shipbuilding conditions.

Top pick in the sector
HHI and affiliate Hyundai Mipo Dockyard are the only Korean shipbuilding companies with anticipated earnings improvement in 2004 and should post the highest profit growth from 2005. HHI will likely see its earnings rise, despite the sector¡¯s overall slowdown this year, aided by improved results from its non-shipbuilding divisions. The Construction Equipment Division, for example, has seen its excavator sales in China soar in recent years, which will help boost the company¡¯s share price in 2004.

World¡¯s No. 1 shipbuilder
In 2003, HHI posted the highest growth in ship orders and a hefty surge in unit vessel prices. Those improvements should be reflected from the second half of 2005 and continue to support earnings growth at least until 2007. In contrast to its peers, HHI¡¯s earnings will rise in 2004, in our view, because of the contribution from non-shipbuilding divisions.

Dissipating share price deterrents
We anticipate sizable prepayments, an aggressive debt repayment schedule and substantial equity- method gains from affiliate Hyundai Samho Heavy Industries. As such, we project non-operating income and recurring profit to increase in 2004. Based on improved earnings, we expect HHI, as the industry leader, to benefit the most after 2004.

By Kwonoh Nam, Goodmorning Shinhan Securities Analyst

For more information, please contact HHI¡¯s IR Department
Seoul Office Tel: (+82 2) 746-4570, 4555, 4541, 4728, 7454
Director Moon Jong-bak jbmoon7@hhi.co.kr                               Senior Manager Cho Young-cheul choyc@hhi.co.kr
Son Sung-min smson@hhi.co.kr                                                  Kang Min-kyung kmimk@hhi.co.kr