Will Singapore shipbuilders' rally fade?

Shares of Singapore-listed shipbuilding firms including Yangzijiang Shipbuilding and Cosco Corp have surged over the past month, reflecting a slew of new orders in a recovering global economy. Shares of China-based Cosco have jumped about 9 percent since the start of June and Yangzijiang, also China-based, has risen 15 percent, outperforming the Straits Times Index's 7 percent gain.
Will fears of a double-dip recession spurred by concerns over Europe's debt problems and softening commodity demand from China threaten the sector's share rally?
RECOVERY TO DRIVE ORDERS
There is further upside to Singapore-listed shipbuilders that operate in China, supported by growing demand from Chinese ship owners and a good order pipeline, some analysts said.
"Chinese shipyards are likely to be winners going forward," said Thor Andre, a Singapore-based analyst at DnB NOR Markets. "Their low costs will help as margin pressures continue."
Andre expects Chinese yards such as Yangzijiang to gain market share due to lower costs and demand from China's shipowners.
Chinese shipping firms have been placing orders for vessels because newbuild prices have dropped significantly to historically attractive levels now, he said.
The Chinese government also offers good financing packages for companies building vessels in China, helping to boost the shipyard sector, he added.
DBS Vickers analyst Janice Chua says investors should buy shares of Cosco and Yangzijiang.
"The recent orders received by Chinese shipyards should provide some sustainability in their order books for the next few years," Chua said.
Yangzijiang had an order book worth $5.45 billion as of the end of April, while Cosco had an order book of $5.9 billion as of the end of March.
Chua is bullish on Cosco as she expects the shipbuilder to see a recovery in its margins this year, as it improves on its execution and delivers more vessels. The firm had a gross profit margin of 9.4 percent in the first quarter.
Andre of DnB NOR said Yangzijiang's price-to-earnings ratio of about 10 is attractive given the firm's growth potential and strong order book. He has a "buy" on Yangzijiang with a target price of S$1.50, representing a 3.4 percent upside.
OUTLOOK CLOUDED BY ECONOMIC RISKS
Others were not bullish on shipbuilders, given the cloudy outlook over the global economy and a possible supply glut of ships in the next two years.
"We think investors should wait for more positive indicators about how strong the economic recovery really is before investing . That will be a key factor," Nancy Wei, an analyst at UOB Kay Hian said.
Wei, who has a "neutral" on the sector, noted that the recent pick-up in vessel orders is still far from pre-crisis levels and the uncertainties about the pace of global economic recovery and Europe's debt woes may affect orders.
The bulk carrier segment may also prove to be a drag on shipbuilders due to weak freight rates.
The Baltic Exchange's main sea freight index, which gauges the cost of shipping commodities, has more than halved in a little over a month, because of weaker commodity demand from China, especially for iron ore.
Cosco and Yangzijiang have received several orders for bulk carriers in recent months, and the new supply entering the market may weigh on any nascent recovery in the sector.
"There's a supply overhang in the market from the last boom cycle when many firms placed orders for new ships," Rohan Suppiah, an analyst at Kim Eng Securities said.