According to Asiasis and shipbroker Compass Maritime, Yangzijiang Shipbuilding (YZJ) has secured a newbuild order for the construction of four 82,000DWT bulk carriers from Hong Kong-based Everbright Metal. The Kamsarmax vessels are scheduled for delivery from 4Q13 to 3Q14. At a price tag of US$26m/unit, these vessel orders are close to newbuild prices in Aug published by RS Platou
. … but still a slow year The group secured contracts worth US$295.1m in 1H12. Including this latest development, new orders clinched YTD would be around US$400m. However, we do note that the actual figure may be higher due to unannounced contracts that were not picked up by shipbrokers. Recall that the group clinched new orders worth about US$1.16b in FY11, while our new order win estimate for this year is US$800m.
Chinese yards forced to seek new grounds… for the better
In our view, the greatly reduced new order flow for traditional vessels that Chinese yards have been reliant on will only accelerate the transformation of the Chinese shipbuilding industry. The current difficult operating environment will mean
1) consolidation in a currently fragmented industry,
2) greater impetus to develop fuel efficient and eco-friendly vessels, as well as
3) product diversification.
Downturns favour the incumbent, and yards that have stronger balance sheets and resources are likely to emerge stronger if management perseveres in the yard transformation process.
Concentrating operations for production efficiency
In the medium term, however, the outlook for Chinese yards remains dim. In anticipation of idle capacity, YZJ will transfer all shipbuilding operations to its new yard (Jiangsu New Yangzijiang Shipbuilding) in 2013 while the Changbo and Xinfu yards remain on standby, so as to enhance production efficiency and cost competitiveness. We have lowered our FY13 gross profit margin assumptions for the group’s shipyard operations from 25.8% to 24.2% as vessel values have been trending lower. As such our fair value estimate slips from S$1.08 to S$1.03. Maintain HOLD.
Chinese yards vs Korean yards
China has overtaken S. Korea in the last few years to become the world’s leading shipbuilder in terms of output. According to Clarksons, China’s 212 yards delivered 18.4m CGT of vessels compared to S. Korea’s 15.8m CGT (24 yards) and Japan’s 8.9m (51 yards). Unlike S. Korea, China has many small and mid sized yards which are expected to consolidate. The Chinese shipbuilding industry is also very much geared towards building bulk carriers, which accounted for 63% of output in 20111. This segment of the shipbuilding market is particularly weak currently due to an oversupply of vessels. In contrast, S. Korean yards have a broader product range, and are better known for producing specialized units such as gas tankers, large containerships, and offshore vessels. Demand for such vessels is still holding up and is expected to remain healthy.
Chinese yards forced to seek new grounds… for the better
In our view, the greatly reduced new order flow for bulk carriers and traditional vessels that Chinese yards have been reliant on will only accelerate the transformation of the Chinese shipbuilding industry. The current difficult operating environment will mean 1) consolidation in a currently fragmented industry, 2) greater impetus to develop more fuel efficient and eco-friendly vessels, as well as 3) diversification into other kinds of products. Downturns favour the incumbent, and yards that have stronger balance sheets and resources are likely to emerge stronger if management perseveres in the yard transformation process.
Offshore oil and gas, windfarms and even bridges
The Chinese government has identified offshore oil and gas as a key area for development, and though there are a number of yards which claimed to have offshore fabrication capabilities, our checks indicate that there are only a handful of serious contenders:
1) Shanghai Waigaoqiao,
2) Dalian Shipbuilding,
3) Cosco Corp,
4) CIMC Raffles Yantai.
As for YZJ, it is currently building up its offshore rig building capabilities, and expects to deliver two jack-up rigs as a start. Vessel fabrication for offshore windfarms is also another area in which Chinese yards are pursuing, with 1) Zhong Chuan Heavy Industries, and 2) Daoda Heavy Industries as major players. Finally, we find that steel bridge structures may also be a product of yards, with Qingdao Wuchuan Heavy Industry as an example.
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