Chinese Shipyards - a real recovery in ship orders is still far away

JES and YZJ are still getting enquiries for bulk carriers, containerships and tankers. Global new ship orders rebounded from zero in May to 1.83m dwt in June. That said, ytd order level is significantly lower than historical levels.

New YZJ shipyard in Jiangsu.

• The yard has a 1.9-km deepwater coastline, a 1,508,857 sqm production area, and a dry dock that can accommodate up to two 100,000 dwt and two 50,000 dwt vessels at any one time. The shipyard employs about 15,000 workers, of which 15-20% are contract workers.

• We attended the launching ceremony of a 92,500 dwt dry bulk carrier - Chanchal Prem. The ship is one of the 16 bulkers ordered from YZJ’s shipyard by Liberty Maritime International. Shipyard management has guided gross margin of these ships at 20%.

• Shipbuilding enquiries are mainly on tankers, dry bulk carriers and containerships, particularly reefers (for transporting refrigerated containers).

• While YZJ has no order cancellation to date, it recently acceded to the requests of its clients to change four containerships into dry bulk carriers.

• China’s taxation laws require local shipowners to pay an additional 20% on ship purchases while foreign shipowners are exempted. Thus, local shipowners would form JVs with foreign partners or use their overseas units to buy ships.

• Two Panamax dry bulk carriers costing US$70m each were delivered to Guangdong Yuedian in Apr 09 and early July. These high-value ships have a gross margin of 40-50%.

JES’ shipyard.

• The shipyard has a gross land area of 167,000 sqm and a coastline 720m long. The yard has two slipways to accommodate one 100,000 dwt vessel each.

• The new dry dock, which is under construction, can accommodate up to three Capesize dry bulk carriers or two Very Large Crude Carriers (VLCCs) when it becomes operational by end-09.

• Recently, JES’ clients cancelled orders for three dry bulk carriers with a total value of US$127.0m.

• Shipbuilding enquiries are mainly on dry bulk carriers and reefers.

• Net orderbook as at 31 Mar 09 stood at US$1.03m for 34 vessels to be delivered in 2009-12.

According to Clarksons, global new ship orders rebounded to 1.83 mdwt in Jun 09 from zero in May 09, of which 87%, or 1.6m dwt, are contracted to Chinese shipbuilders. Ytd, most of the global newbuild orders are mainly for tankers and Very Large Ore Carriers (VLOC).

Low order wins ytd. While the strong orderbooks for some shipyards can keep them busy until 2012, the global contract wins ytd of 3.4 mdwt are significantly low compared with a year ago (Jun 08: 19.0 mdwt). Ytd, COSCO (S), JES and YZJ have not secured any newbuild orders.

Slippage remains an issue. Tight global liquidity remains an issue although it has eased somewhat. Some shipowners are still facing difficulties in securing credit to finance newbuilds. Recently, JES’ clients cancelled orders for three dry bulk carriers and COSCO (S) announced last week that it has acceded to the requests of two European clients on delayed deliveries of eight dry bulk carriers by some 3-9 months. Shipyards are still facing a high risk of order cancellations and delays.

We believe a real recovery in ship orders is still far away. The massive 547.3m dwt (9,277 ships) contracted over the past three years will lead to an oversupply of ships, with some of these starting to hit the waters. The Singapore-listed Chinese shipyards are trading at average PEs of 14x for 2009 and 16x for 2010. In view of the low contract wins globally ytd and the risk of order cancellations or delays, we remain UNDERWEIGHT on Chinese shipyards and maintain SELL on COSCO (S) with a fair price of S$0.95 based on sum-of-the-parts valuation.

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