China Shipbuilding - Valuation No Longer Cheap

Valuation no Longer cheap; current premium unsustainable: Although global shipbuilding industry experienced zero new orders in May, shipbuilding stocks delivered a mixed performance. From May 6 to June 11, Japanese shipbuilding stocks gained 39%, followed by Chinese names’ 26% advance while Koreanpeers lost 11%. Such performance is contrary to the fundamentals, given Japan is continuously losing market share to China and Korea. We understood the market might play a sector rotation strategy and temporarily prefer laggard performers with weak fundamentals but cheap valuations. However, after the strong gain in May, Chinese shipbuilding stocks are now trading at 2.4x 09e P/B and 1.8x 10e P/B, which is no longer cheap and even higher than Hyundai Heavy and Samsung Heavy. We see such a valuation premium as unsustainable and expect downside risk at current level.
Stimulus cannot heal all wounds: On June 4, China released the detailed shipbuilding stimulus plan. Without incremental positive measures, the detailed plan reiterate government’s stance to protect order book via offering buy-side financing or purchasing aborted vessel. However, we don’t think the stimulus package can heal all wounds as the total contract value of China’s backlog exceeded US$140bn, or 20% of China’s incremental loan in 2008. Even considering that an aborted vessel can be purchased at a 40% discount to the contract price, it is still difficult to find sufficient capital to protect all the backlog. Our backlog allocation analysis on page 2 suggests that nearly 50% of the orders are placed in state-owned shipyards, which should be the priority during government rescue.

Containership price underperformed again in May: New-building price of containership experienced bigger correction than any other vessel segment in May (Exhibit 7 on page 4). We recommend investors take profits on Yangzijiang, as in comparison to the other shipyards, it is more likely to face negative headwinds with a larger new-building price correction.

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