Offshore and Marine

Maybank Kim Eng Research, July 16

Recent industry developments reinforce our positive views on Singapore rigbuilders.

Central to our argument is that Chinese and Korean competition would not bring down average rig prices and lead to future margin decline. We see stable earnings outlook for the Singapore rigbuilders (Keppel Corp & Sembcorp Marine) ahead of the Q2 2013 results season, but flag possible downside risks for the Chinese shipbuilders (Cosco & Yangzijiang).

In our last sector update on June 10, 2013, we mentioned that loose financing terms offered by Chinese shipyards in order to secure shipbuilding or offshore jobs are not sustainable and could accelerate the fall of the yards.

China's largest private shipbuilder, China Rongsheng, recently sought financial aid from the government after facing difficulties paying suppliers and had to cut its workforce by 40 per cent. Rongsheng's woes reflect the difficult times Chinese shipbuilders are facing with a drought in shipbuilding orders.

For many, the aggressive move into the offshore sector was taken out of desperation. We see two possible repercussions if this exacerbates to other yards: (1) Customers may become less willing to award orders for fear that yards cannot deliver, (2) Rapid flushing out of excess capacities, accelerating sector recovery. Either way, this would ease competition for offshore orders.

Korean shipbuilder Hyundai Heavy indicated their intention to raise shipbuilding prices and expects orders this year to exceed its target. This is a stark contrast to the situation for Chinese shipyards. The more technologically advanced Korean yards could do so because the new demand trend is for larger and more fuel-efficient vessels, LNG vessels and drillships which most Chinese yards do not yet have the capabilities to build. We highlighted in our last sector update that competition would be less intense in the offshore sector when shipbuilding orders return to the Korean shipyards.

Reiterate "buy" on Keppel Corp (TP S$12.10) and Sembcorp Marine (TP S$5.20). TPs are adjusted lower marginally for market values of SOTP (sum-of-the-parts) components and higher risk-free rates (3 per cent) for DCF (discounted cash flow) valuations.

For the Chinese shipbuilders, we see downside earnings risks and further sector de-ratings. We lower TP for Cosco (TP S$0.65) with "sell" rating maintained. No change in Yangzijiang's (TP S$0.93) TP and "hold" rating.

OVERWEIGHT