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TOPIC: Shipping & Shipyards
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Shipping & Shipyards 5 Years, 11 Months ago Karma: 0
DBSV downgrades Shipping & Shipyards

Shipping & Shipyards
Show me the money!
By: Suvro SARKAR +65 6398 7973
HO Pei Hwa +65 6398 7968

· Sources of ship finance shrinking as European banks grapple with
debt crisis; shipyards likely to face risks of customer
defaults/deferments; new order flows drying up
· Outlook for shipping earnings remains muted as supply overhang is
yet to clear
· FULLY VALUED on Cosco Corp and NOL; BUY Yangzijiang for better
execution and lower customer default risk

No silver lining yet for the shipping sector. Supply-demand mismatch for
all major shipping sectors over the next couple of years will continue to
cap vessel earnings and asset values. While container shipping is likely to
be the first to recover, new ordering activity is still likely to be
subdued given the existing supply overhang. However, we are not calling for
a bottom yet, and maintain our FULLY VALUED call on NOL, especially given
its stretched balance sheet.

Shipping lenders likely to tighten purse strings. The European banks,
traditional lenders to the shipping industry, are grappling with the
fallout from the sovereign debt crisis in Europe as well as stricter
capital regulations, and appetite for shipping finance is likely to shrink
in future. Asian banks are only minor players, and with capital market
activity likely to be muted in the near term, asset sales and private
equity are the only other options for owners to raise money for capital
commitments. We have already seen some high profile bankruptcies like
General Maritime in the tanker sector, and with other owners talking of
restructuring their balance sheets, the prospects of cancellations and
deferments loom for shipyards, as there may be considerable funding gaps
for the US$364bn worth of ships currently on order. Going forward, we are
also concerned about the ability of owners to find financing for newbuilds,
likely limiting new order flows.

Shipyards feel the heat, selective BUY on Yangzijiang. While output in
2011-12 looks stable, book-to-bill ratios at the yards are hovering around
2x and growth beyond 2012 could be affected. In view of the sector
headwinds ahead – drying order flow, potential for margin contraction, and
heightened default and deferment risk – we advise investors to underweight
the shipbuilding sector. Selectively, we have a BUY on Yangzijiang on the
back of its undemanding valuations, as well as healthy balance sheet and
strong management, which should help it navigate tough times and emerge
stronger. We have a HOLD on JES and a FULLY VALUED rating on Cosco, given
its disappointing execution track record and a weaker customer profile
(higher vulnerability to customer defaults).
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