The share price performances of COSCO Corp (Singapore) and Yangzijiang Shipbuilding (YZJ) have been uninspiring in recent history. COSCO’s share price has fallen by about 21% in the past one year, while YZJ’s has decreased by about 25%. We believe this is mainly due to a lack of positive catalysts amidst the difficult operating environment in China. In terms of offshore projects, Chinese yards still lack the established track records of their Asian competitors, but their organization, efficiency and sophistication are on the rise. To compete, the Chinese yards are going after orders at lower margins and back-end loaded payment terms. This inevitably leads to lower profitability and higher working capital requirements. Over the near- to medium- term horizon, we believe that the industry dynamics is unlikely to change significantly. Maintain HOLD ratings for both COSCO (FV: S$0.90) and YZJ (FV: S$0.95).
Uninspiring price performance
The share price performances of COSCO Corp (Singapore) and Yangzijiang Shipbuilding (YZJ) have been uninspiring in recent history. COSCO’s share price has fallen by about 21% in the past one year, while YZJ’s has decreased by about 25%. We believe this is mainly due to a lack of positive catalysts amidst the difficult operating environment in China. The shipbuilding industry still faces an oversupply of vessels and excess yard capacity in the country. In terms of offshore projects, Chinese yards still lack the established track records of their Asian competitors, but their organization, efficiency and sophistication are on the rise.
Climbing the offshore learning curve…
According to a recent report from Upstream (“Much further along the learning curve”, 29/3/2013), major Chinese offshore yards have demonstrated some improvements since three years ago. Then, the yards were notorious for delays when they tried to deliver orders many considered too ambitious. With the consolidation of their procurement and outsourcing schemes, the yards are now more efficient and timely in their vessel deliveries. While there is still a learning curve, Chinese yards have made some inroads into building sophisticated offshore units, including winter-class deepwater semi-submersibles for Arctic operations. The Chinese government has also made offshore engineering a priority industry for development until 2020. Local offshore yards are known to have easier excess to bank loans compared to other borrowers.
But at the expense of profitability
However, the big push by Chinese yards into the offshore industry is at the expense of profitability. Without an established track record, the yards are going after orders at lower margins and back-end loaded payment terms. This inevitably leads to lower profitability and higher working capital requirements. Over the near- to medium- term horizon, we believe that the industry dynamics is unlikely to change significantly as the established Singaporean and Korean offshore yards both have their own niches. Maintain HOLD for both COSCO (FV: S$0.90) and YZJ (FV: S$0.95).
The share price performances of COSCO Corp (Singapore) and Yangzijiang Shipbuilding (YZJ) have been uninspiring in recent history. COSCO’s share price has fallen by about 21% in the past one year, while YZJ’s has decreased by about 25%. We believe this is mainly due to a lack of positive catalysts amidst the difficult operating environment in China. The shipbuilding industry still faces an oversupply of vessels and excess yard capacity in the country. In terms of offshore projects, Chinese yards still lack the established track records of their Asian competitors, but their organization, efficiency and sophistication are on the rise.
Climbing the offshore learning curve…
According to a recent report from Upstream (“Much further along the learning curve”, 29/3/2013), major Chinese offshore yards have demonstrated some improvements since three years ago. Then, the yards were notorious for delays when they tried to deliver orders many considered too ambitious. With the consolidation of their procurement and outsourcing schemes, the yards are now more efficient and timely in their vessel deliveries. While there is still a learning curve, Chinese yards have made some inroads into building sophisticated offshore units, including winter-class deepwater semi-submersibles for Arctic operations. The Chinese government has also made offshore engineering a priority industry for development until 2020. Local offshore yards are known to have easier excess to bank loans compared to other borrowers.
But at the expense of profitability
However, the big push by Chinese yards into the offshore industry is at the expense of profitability. Without an established track record, the yards are going after orders at lower margins and back-end loaded payment terms. This inevitably leads to lower profitability and higher working capital requirements. Over the near- to medium- term horizon, we believe that the industry dynamics is unlikely to change significantly as the established Singaporean and Korean offshore yards both have their own niches. Maintain HOLD for both COSCO (FV: S$0.90) and YZJ (FV: S$0.95).
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