Wednesday, July 10, 2013

Shipyard - China: Cash Is King (UOBKH)

Shipyard - China
Cash Is King
Chinese shipyards have been suffering from a very prolonged difficult period given three major challenges: a) massive delivery slippage, b) further worsening payment terms, and c) recent tight liquidity, all of which involve cash flow. Unless tight liquidity conditions see a substantial improvement in China, all shipyards will face heavy cash pressure. Maintain UNDERWEIGHT. Like YZJ, which has a strong balance sheet. Maintain SELL on RSHI, GSI and COS.

What’s New
• Yangzijiang Shipbuilding (YZJ SP) announced it has clinched 27 vessels in 1H13 with a total value of US$1.01b. They also have 51 options worth US$2.64b, of which 22 are for containerships worth US$1.56b and 29 are dry bulk carriers worth US$1.08b respectively.

• China Rongsheng Heavy Industries (RSHI, 1101 HK), clarified regarding newsflow about a strike and job cuts at its shipyard in Nantong. It also issued a profit warning saying it will book losses in 1H13 against a profit for 1H12.

• Maintain UNDERWEIGHT on sector amid a long and deep downcycle. Fundamentals of China’s shipyards are still deteriorating and there is no sign of a newbuild price recovery and improvement of payment terms. More importantly, recent tight credit condition will hurt small-to-mid sized non-SOE shipyards. We will continue to see more negative newsflow in the industry, which could depress share prices of listed companies.

• Like YZJ, the only cash-rich yard, with target price of S$1.22. Our only BUY call is YZJ because of its strong balance sheet and excellent order execution. Newbuild orders bottomed out in 2012 but 2013F P/B of 0.9x is still the historical trough.

• Maintain SELL on RSHI and GSI, with target price of HK$0.75 and HK$4.10 respectively. We maintain SELL on RSHI and Guangzhou Shipyard International (GSI, 317 HK). RSHI has a weak balance sheet (net gearing: 1.54x) and poor profitability, while GSI has a demanding 2013F P/B of 1.3x (pre-acquisition). For GSI, acquisition of Guangzhou Longxue would not help lift it to profitability in the next three years.

• Maintain SELL on COSCO Corporate (COS SP) and cut target price to S$0.70 from S$0.88. We lower the target P/B to 1.2x from 1.5x to reflect tight liquidity conditions for the Chinese shipbuilding industry, despite the newbuild orders recovery in 1H13.

Sector Catalysts
• Recovery of newbuild prices and higher downpayment percentage.

Assumption Changes
• None.

• Three challenges all about cash flow. We believe Chinese shipyards have been suffering for a very long difficult period given three major challenges: a) massive delivery slippage, b) further worsening payment terms, and c) recent tight liquidity. In fact, all three involve cash flow.

• Deliveries slippage: Less efficiency, higher working capital requirement. RSHI’s job cuts (from 38,000 workers in 2011 to 18,000 now) well reflect the severe deliveries slippage for Chinese shipyards. Given heavy backloaded payment terms since 2011, shipowners’ bargaining power has been increasing and shipyards are keener to accept delivery slippage to avoid order cancellation. Massive deliveries slippage also happened in 2009, but this time it is different. In 2009, most shipyards still had a strong orderbook but now, if few orders are won in 2012-13, their production will be significantly reduced on the deliveries slippage. In such case, working capital will rise on lower capacity utilisation.

• 2-3% downpayment now, never seen in any previous downcycles. We found some orders at Chinese shipyards are signed with extreme payment terms and downpayment has been further reduced to 2-3% of total value against 10-15% in a typical heavy backloaded payment model. One example is China International Marine Containers’ (CIMC) 8,800 TEU containerships placed to Dalian Shipyard. We believe more state-ownedenterprise (SOE) shipyards will keep lowering the downpayment percentage to compete with non-SOE shipyards as the former can get bank loans from SOE banks more easily.

• Tight liquidity to hit all yards. Shipbuilding may become an industry that Chinese banks would not touch, and particularly for non-SOE shipyards. With higher working capital requirement and tougher payment terms, shipyards with insufficient tonnage in their orderbook can hardly survive if banks stop lending. For SOE shipyards, banks might be more cautious in providing bank loans in future given current credit conditions.

• Japan vs China, a case showing financing capability is now the key to get orders. Japan’s market share had a spike in 2H12 due primarily to yen depreciation. For Japanese shipyards, price premium to Chinese shipyards has declined to 4-5% from 6-8%, as Japanese shipyards have gained some cost advantage from yen depreciation. Also rising awareness of eco design ships helps to increase Japan’s market share. Japan’s market share had a spike in 2H12 due primarily to yen depreciation. In 1H13, China regained its market share on strong order flow for SOE shipyards. If we only look at orders at Chinese shipyards, we also see the market shares of SOE and non-SOE shipyards have been changing since 2010. Market shares of non-SOE shipyards sharply declined to 26% in 1H13 from 2010’s 50%. This reflects that financing capability is now the key to get orders for shipyards.

• Decline in newbuild price, credit crunch.

Source/Extract/Excerpts/来源/转贴/摘录: UOB Kay Hian Research
Publish date: 09/07/13

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