Nam Cheong

DMG & Partners Research, Sept 17

WE showcased Nam Cheong Limited (NCL) at our Hong Kong Asean Corporate Day last Thursday. Investors warmed up to the company's business model, growth prospects and low valuations, which struck a chord with value- and growth-oriented funds.

Meanwhile, the recovery of commercial shipbuilding in China is a strong support to vessel prices.

Maintain "buy" with $0.37 TP. Business model finds favour. Investors especially liked Nam Cheong's strong customer base in Malaysia, which effectively mitigates the build-to-stock model risk.

The company's RM1.4 billion-strong orderbook, consistent profitability during the financial crisis and solid prospects of securing more orders found fans among a diverse group of investors.

"Why can't customers bypass NCL and order directly from Chinese yards?" The answers are: as Chinese state-owned yards are not allowed to build-to-stock, any vessel ordered will need an 18- to 24-month lead time; financing is an issue for smaller private yards; operators do not have the required shipbuilding expertise to supervise the construction process, and NCL's large orders allow yards to achieve economies of scale, thus making NCL a preferred customer.

Treating customers as partners: Management said the only time when vessels were cancelled was in 2009, when bank financing dried up. The vessels were resold at even higher prices because of the shorter time to delivery. As a gesture of goodwill, NCL returned the deposits to the customers, who reciprocated with more orders.

Potential blockbuster product: Management said NCL is looking at creating a different product range that can "dominate the market in the next few years" while remaining understandably coy about the details. We expect more information in mid-FY2014 on this.

Maintain "buy", $0.37 TP. As the recovery in commercial shipbuilding may reduce pressure on offshore asset prices, we upgraded the oil-and-gas sector to "overweight". As a global industry leader at low valuations, NCL is one of our top picks.

BUY