China Shipbuilding Sector：Sailing in turbulent waters

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 20 July 2010 Asia Pacific Equity Research Capital Goods China Shipbuilding Sector ASSUMING COVERAGE Sailing in turbulent waters Figure 1: High backlog/fleet ratios negative for new orders and pricing 02040608010 0Jan 96Jan 98Jan 00Jan 02Jan 04Jan 06Jan 08Jan 10Tanker BulkerContainerTotal(%)02040608010 0Jan 96Jan 98Jan 00Jan 02Jan 04Jan 06Jan 08Jan 10Tanker BulkerContainerTotal(%)Source: Clarksons ■ No end to shipbuilding downturn in sight. Despite improved market sentiment together with a recovery in the global economy and freight rates, we do not believe a broad-based upturn in shipbuilding newbuild orders is imminent. The global backlog-to-fleet ratio remains high at above 40% and fluctuations in freight rates could deter ship owners from placing orders. ■ Risks on the downside. Together with the decline in orderbooks, we believe the margins of shipbuilders are at risk, as newbuild pricing remains weak, having fallen 26% from its peak and a further 8% from the 2009 average. Rising steel and labour costs present further risks to the profitability of shipbuilders. ■ Oversupply in bulker market, containership and tanker markets more balanced. Based on our global shipbuilding market model, the bulker market is expected to be in oversupply until 2012. Following high levels of scrappage and delays, the containership and tanker markets are now more balanced and better positioned for a recovery. ■ We prefer Yangzijiang over COSCO Corp. We assume coverage of Yangzijiang with an OUTPERFORM rating and a target price of S$1.70, and COSCO Corp with an UNDERPERFORM rating and a target price of S$1.20. There is a greater need for selective exposure in a prolonged downturn and our preference is for Yangzijiang, due to: 1) realistic market expectations with revenue for 2010-12E fully covered by its order book, 2) lower margin risks with its better track record in executing its orders and 3) an acquisition-led strategy to diversify into adjacent businesses. On our forecasts, COSCO is trading on a 2011E P/E of 18.8x versus Yangzijiang on 10.8x. Research Analysts Gerald Wong 65 6212 3037 gerald.wong@credit-suisse.com Bhuvnesh Singh 65 6212 3006 bhuvnesh.singh@credit-suisse.com Singapore Research Analyst Team Sean Quek, CFA (Strategy, Media, Telecom Services) Sanjay Jain (Banks) Tricia Song (Real Estate) Su Tye Chua (Small-Mid-Caps) Anand Swaminathan (Diversified Financials) Sam Lee (Transportation) Hung Bin Toh (Transportation) Ting Min Tan (Agricultural Products & Agribusiness) Danny Goh (Insurance) Foong Wai Loke (Casinos & Gaming) Paworamon (Poom) Suvarnatemee (Metals & Mining) Kun Lung Wu (Economics) Kwee Hong Ching (Strategy) 20 July 2010 China Shipbuilding Sector 2 Focus charts Figure 2: Shipbuilding new orders have not picked up significantly when measured in value Figure 3: Shipbuilding downturns can last for prolonged periods -5,00010,00015,00020,00025,00030,000Jan 06Jul 06Jan 07Jul 07Jan 08Jul 08Jan 09Jul 09Jan 10New Orders - Value (US$m) 02040608010 012 014 01970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010-60-40-20020406080Global Deliveries (LHS)Yo Y C ha ng e , % ( RH S)(%)02040608010 012 014 01970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010-60-40-20020406080Global Deliveries (LHS)Yo Y C ha ng e , % ( RH S)(%)Source: Clarksons, Credit Suisse estimates Source: Clarksons, Credit Suisse estimates Figure 4: Backlog-to-fleet ratios still high when compared to history – negative for orders Figure 5: Declining backlog negative for pricing 02040608010 0J an 96Jan 98Jan 00Jan 02Jan 04Jan 06Jan 08Jan 10Tanker BulkerContainerTotal(%)02040608010 0J an 96Jan 98Jan 00Jan 02Jan 04Jan 06Jan 08Jan 10Tanker BulkerContainerTotal(%) -3 0-1 010305070Ja n 97Jan 98Jan 99Jan 00Ja n 01Ja n 02Jan 03Jan 04Jan 05Ja n 06Ja n 07Jan 08Jan 09Jan 10-30-20-100102030World Orderbook (LHS)C lar kso ns N ewb ui l d ing Pr i ce In de x ( RH S )(%)( %)-3 0-1 010305070Ja n 97Jan 98Jan 99Jan 00Ja n 01Ja n 02Jan 03Jan 04Jan 05Ja n 06Ja n 07-3 0-1 010305070Ja n 97Jan 98Jan 99Jan 00Ja n 01Ja n 02Jan 03Jan 04Jan 05Ja n 06Ja n 07Jan 08Jan 09Jan 10-30-20-100102030World Orderbook (LHS)C lar kso ns N ewb ui l d ing Pr i ce In de x ( RH S )(%)( %)Source: Clarksons, Credit Suisse estimates Source: Clarksons, Credit Suisse estimates Figure 6: Yangzijiang has protected its margins in the downtur