Industry remains challenging; order
books rapidly drying up
Tough shipbuilding conditions should continue
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
Kevin Chong
Research Analyst
(+65) 6423 5549
kevin.chong@db.com
Companies Featured
China Rongsheng (1101.HK),HKD1.60 Sell
2011A 2012E 2013E
P/E (x) 15.8 199.8 –
EV/EBITDA (x) 19.8 74.2 49.1
Price/book (x) 0.8 0.6 0.6
Cosco Corporation (COSC.SI),SGD1.00 Hold
2011A 2012E 2013E
P/E (x) 25.8 19.0 14.3
EV/EBITDA (x) 10.4 9.0 7.8
Price/book (x) 1.5 1.7 1.6
Yangzijiang Shipbldg (YAZG.SI),SGD1.10 Hold
2011A 2012E 2013E
P/E (x) 7.0 6.0 8.6
EV/EBITDA (x) 6.2 5.1 10.2
Price/book (x) 1.4 1.3 1.2
Conditions in the Chinese shipbuilding industry remain dire. Weak sector
fundamentals have led to sharp declines in new orders and low vessel prices.
As yards in China deliver the remaining orders they have in 2013, the worry
should be about 2014 and beyond as Clarkson data suggest a 74% and 50%
plunge in deliveries for bulkers and containerships, respectively, from 2013 to
2014. Valuations remain unattractive in light of the weak industry outlook. We
maintain a Sell on China Rongsheng and have Hold ratings on COS and YZJ.
Vessel prices appear to be bottoming, but risks remain
In 2012, industry oversupply of vessels and shipyards, together with tight
credit conditions and weak freight rates, placed downside pressure on overall
new orders (down 33% yoy in units) and ship prices (down 9.4% yoy). While
recent vessel price movements suggest the decline may be bottoming (only
down 1.2% in the past three months), we feel risks remain for continued
pressure on prices in light of the rapidly declining industry order book post-
2013 and the struggle for yards in China to remain viable and in operation.
Credit markets still tight in shipbuilding and may remain so
Shipping loans remain tight as banks reduce exposure to this space and raise
provisions for potential defaults. According to recent Reuters reports, German
regulator BaFin has written to auditors and banks requesting them to scrutinize
their exposure to shipping loans as they prepare 2012 earnings reports. HSH
Nordbank indicated it would raise loan loss provisions to match increased
levels of default on shipping loans. Lloyds sold a US$750m shipping loan
portfolio in 4Q12 at a c.50% loss and banks across Europe are increasingly
anxious to extricate themselves from this space.
Move into Offshore sector may see yards struggling to turn profitable
In light of weak shipbuilding fundamentals, yards in China are focusing on the
Offshore sector. As survival is paramount, we believe profitability has taken a
back seat with low prices and attractive financing terms being offered. We see
new Chinese entrants into Offshore facing execution challenges due to project
complexity and inexperience, and as such, may struggle to turn profitable. Of
the Chinese yards we cover, COS, appears best positioned to benefit from
exposure to Offshore, having operated in this business since 2005. While its
recent reversal of expected losses on construction contracts is positive, the
Group has warned that margins may still come under pressure due to the new
and different types of Offshore products under construction.
Recent market interest is premature; Sell 1101 HK, Hold YZJ and Cosco
In light of the challenging industry conditions which may further deteriorate,
we believe it is too early to turn positive on the sector. We believe recent
market interest in these Chinese shipyards is premature, as sector prospects
are weak, shipbuilding orders are rapidly drying up, and moves into Offshore
may raise execution risks. We have a target price of HK$0.70 for RHI, S$1.10
for YZJ and S$0.95 for COS. Upside risks include steel price declines, RMB
depreciation, unexpected strength in new orders and easing credit markets.
Downside risks include a sustained fall in the BDI, a slowdown in offshore
orders, execution issues and tighter credit markets (see page 12).