Offshore and Marine

CIMB Research on 5 April 2013

WE believe Singapore yards are still attractive for their better margins; higher dividend yields and ROEs; nimbleness in diversification; global yard presence; and corporate transparency.

We see sector catalysts from stronger-than-expected orders, margins and non-Petrobras drillship orders. Our top pick is Keppel Corp.

We visited Korea Hyundai Heavy Industries' yard in Ulsan recently, met executives from Samsung Heavy Industries and spoke to some Korean investors, comparing Singapore and Korean yards.

The Koreans were generally curious about Singapore's capabilities in conversion and the outlook for jack-up rigs - in the event they decide to venture down the value chain.

Very little apprehension was expressed over Singapore yards' intention to break into the drillship segment as the Koreans' market share appears to be protected by more advanced technologies and shorter construction time (of 12-15 months versus over 24 months for Singapore yards).

Although we were awed by the Koreans' yard space, we believe Singapore still has the upper hand in costs, margins, business flexibility and global yard presence.

Firstly, a reliance on cheaper foreign labour is almost non-existent in Korea. The Koreans' average low-end pay is US$40,000 a year, triple that of Singapore.

Secondly, profitability remains the top priority of Singapore yards, with operating margins of 12 per cent against the Koreans' 8 per cent.

Thirdly, Singapore yards are able to diversify from rig-building to building semi-sub accommodation and floating production, storage and offloading vessel (FPSO) conversion, while the Koreans remain fixated on high-steel content structures (newbuild FPSOs), ship-shape vessels (drillships, LNG carriers) and mass-produced containers in bulk orders.

Finally, Singapore builders leverage their global yard presence, including Brazil, to beef up their capacity.

Singapore still has its competitive advantages over the Koreans and Chinese in costs and efficiency. That said, there is no time for chill-out as there could be a big shake-up if the Koreans do decide to encroach into shallow-water jack-ups and conversions or if the Chinese catch up in their execution.

Sector - OVERWEIGHT