There have been recent reports on Chinese yards surpassing Singapore yards in terms of jack-up rig orders YTD. Indeed, we find that jack-up orders for the former have totaled ~US$2.3b so far, compared to ~US$2.1b for the latter. However, we note that many of the contracts that Chinese yards have won so far are mostly from newcomers in the offshore industry, including speculators who sell the rigs later for a profit. Meanwhile, Keppel Corp (KEP) and Sembcorp Marine (SMM) have been diversifying their product range and innovating to stay ahead in certain niche areas. Maintain BUY on both KEP [FV: S$12.68] and SMM [FV: S$5.64]; we note that markets may be increasingly volatile ahead, providing an opportune time to enter such quality stocks.
Chinese yards’ jack-up orders YTD surpass Singapore’s…
There have been recent reports on Chinese yards surpassing Singapore yards in terms of jack-up rig orders YTD. Indeed, we find that jack-up orders for the former have totaled ~US$2.3b so far, compared to ~US$2.1b for the latter. Should this pace keep up till the end of the year, it will be a significant milestone in the history of Chinese rigbuilding.
… but most orders from newcomers in the industry
However, we note that many of the contracts that Chinese yards have won so far are mostly from newcomers in the offshore industry, including speculators who sell the rigs later for a profit. Very favourable payment terms have been extended to these customers e.g. Prospector Offshore’s downpayment was only 6.5% with Shanghai Waigaoqiao Shipbuilding (SWS).
Prudent strategy has its merits
As Exhibit 1 shows, for contracts secured this year, most of the customers of Chinese yards are not leading players in the industry, with the exception of Seadrill. In comparison, Keppel's and Sembmarine's customers are generally more established players. This has proven to be a prudent strategy – recently there has been news of Prospector Offshore facing financing challenges on its rig newbuilds. The company currently also risks losing some of its cash at a Cyprus bank. According to Upstream , Prospector has six jack-ups under order at SWS and Dalian Shipbuilding.
Product innovation and diversification
In our view, the Chinese yards do present a challenge to the incumbents, and we expect stiff competition as they scale the learning curve over time. Meanwhile, Keppel Corp (KEP) and Sembcorp Marine (SMM) have been diversifying their product range and innovating to stay ahead in certain niche areas. YTD, KEP has secured orders worth S$2.2b, while SMM has won S$1.6b, accounting for 43% and 39% of our full year estimates, respectively. Maintain BUY on both KEP [FV: S$12.68] and SMM [FV: S$5.64]; we note that markets may be increasingly volatile ahead, providing an opportune time to enter such quality stocks.
There have been recent reports on Chinese yards surpassing Singapore yards in terms of jack-up rig orders YTD. Indeed, we find that jack-up orders for the former have totaled ~US$2.3b so far, compared to ~US$2.1b for the latter. Should this pace keep up till the end of the year, it will be a significant milestone in the history of Chinese rigbuilding.
… but most orders from newcomers in the industry
However, we note that many of the contracts that Chinese yards have won so far are mostly from newcomers in the offshore industry, including speculators who sell the rigs later for a profit. Very favourable payment terms have been extended to these customers e.g. Prospector Offshore’s downpayment was only 6.5% with Shanghai Waigaoqiao Shipbuilding (SWS).
Prudent strategy has its merits
As Exhibit 1 shows, for contracts secured this year, most of the customers of Chinese yards are not leading players in the industry, with the exception of Seadrill. In comparison, Keppel's and Sembmarine's customers are generally more established players. This has proven to be a prudent strategy – recently there has been news of Prospector Offshore facing financing challenges on its rig newbuilds. The company currently also risks losing some of its cash at a Cyprus bank. According to Upstream , Prospector has six jack-ups under order at SWS and Dalian Shipbuilding.
Product innovation and diversification
In our view, the Chinese yards do present a challenge to the incumbents, and we expect stiff competition as they scale the learning curve over time. Meanwhile, Keppel Corp (KEP) and Sembcorp Marine (SMM) have been diversifying their product range and innovating to stay ahead in certain niche areas. YTD, KEP has secured orders worth S$2.2b, while SMM has won S$1.6b, accounting for 43% and 39% of our full year estimates, respectively. Maintain BUY on both KEP [FV: S$12.68] and SMM [FV: S$5.64]; we note that markets may be increasingly volatile ahead, providing an opportune time to enter such quality stocks.
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