China Shipbuilding Sector
Headwinds remain but opportunity in fuel-efficient vessels
● Credit Suisse hosted lunch with SS Teo, Chairman of Singapore‘s second largest (and the world‘s 19th largest) liner company Pacific International Line (unlisted), where he shared his thoughts on rates, profitability and newbuilding opportunities.
● Mr Teo believes that more Chinese yards may face financial difficulties this downturn vs in 08-09, with several small to mid sized yards already facing cash flow problems. At the same time, some orders may get cancelled as newbuild prices have declined by more than 50% from the peak. Ship financing remains challenging as European banks become more selective in their lending, while Chinese banks have not stepped in to fill the gap.
● In terms of newbuilding opportunities, Mr Teo noted that the company could be looking to upgrade its fleet to newer designs with higher energy efficiency. This is in line with our view that shipowners with a less efficient fleet could be in a sustained competitive disadvantage.
● We remain cautious on the Chinese shipbuilders, with a preference for Yangzijiang over Cosco Corp due to its technology in fuel efficient vessels, re-rating potential from entry into the offshore segment, and attractive valuation at 1.2x P/B.
More Chinese yards could face financial difficulties
Mr Teo believes that more yards in China will face financial difficulties this downturn vs in 08-09. Cash flow is an issue for the small to mid-sized yards, with many hardly able to pay even the ship classification society. Newbuild prices for 70,000 DWT bulk carrier have declined from peak of US$80mn, and Mr Teo noted that a Chinese yard recently sold a similar vessel for US$26mn. Due to the sharp decline in newbuild prices, some customers may prefer to lose their payment of 30-40% of contract value than to take delivery. This may trigger cancellations, particularly in the bulk carrier segment. However, he believes scrapping remains the key way to remove supply.
Ship financing remains challenging
European banks are lending very selectively to the shipping sector, with financing available only available to best in class customers. The syndication market is almost closed. Banks are imposing higher pricing and stricter terms for borrowing, with lower LTVs starting from 50-60% up to 70-75% in exceptional cases. At the same time, Chinese banks have not stepped in to fill the gap, with only 2-3 banks lending to the shipping sector. At its 1Q12 results briefing, Yangzijiang noted that borrowing costs for their customers at Chinese banks would be at LIBOR +400-500bps, with the exception of Seaspan, which managed to negotiate more attractive rates.
To assist customers with financing, some Chinese yards have resorted to ship leasing as an alternative model. Customers have to pay 30–40% of the vessel value, while the remaining 60–70% will be arranged by a bank. When the construction of the vessel is completed, it will be leased to the customer for 8–10 years. At the end of the lease, the vessel may be sold to the customer if it is able to pay the outstanding balloon payment.
Fuel efficient vessels – Opportunity or marketing gimmick?
In terms of newbuilding opportunities, Mr Teo believes that the company could be looking to upgrade its fleet to newer designs with higher energy efficiency. This is in contrast to comments made by other shipowners recently that fuel efficient vessels are a marketing gimmick by yards to fill their yard capacity. In our view, the new vessel designs represent a step change in technology and shipowners that do not upgrade their fleet could be left in a sustained competitive disadvantage. Seaspan has also committed to these fuel-efficient containerships, noting that it will continue to emphasise on its SAVER-vessel design, which ―provides customers with improved efficiency and operational savings‖.
Yangzijiang has noted interest in its 4,800 TEU containership design, which claims to be able to reduce oil consumption from 31% from 138t/day to 95t/day and improve full loading capacity by 29% from 2780 TEU to 3590 TEU. It remains confident that options with Seaspan for 10,000 TEU containerships will be exercised in 2H12.
Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse