China shipbuilders turn around

STOCKS OF CHINA shipbuilders Cosco Corp Singapore and JES International Holdings and Yangzijiang Shipbuilding have so far outperformed the STI. Year to date, Cosco is up 57% to close at $1.86 today, JES has more than doubled in price to 36.5 cents, and Yangzijiang is up by 46% to $1.76. During the week, Cosco and JES too were among the top volume movers. Is the worst over for China’s shipbuilders?
DBS Group Research believes China’s shipbuilding sector has emerged from its trough, it says in a report todaty. Positive signals are emerging, the report adds, including sustainable and stable orderflow; recovery in vessel prices; and firmer freight rates. Orders for bulk carriers, container vessels and tankers are also reviving and these could serve as catalysts for re-rating the companies.
Top on the list to benefit is Cosco. DBS has raised Cosco’s target price to $2.35. It also believes that Cosco has learnt from its past mistakes. “We believe Cosco has enormous earnings growth potential in the mid-term. Out of Cosco’s seven shipyards, Zhoushan, Dalian and Guangdong yards are engaged predominantly in shipbuilding,” the report states. Cosco’s construction lead time has shortened over the past one year but is still at a relatively high 14-16 months compared to less than 10 months for more efficient yards such as Yangzijiang. But shipbuilding capacity can be lifted by 30% through efficiency improvements, says DBS, which enables gross margins for shipbuilding will grow in tandem with efficiency from 6-8% currently to 15-20%. “Based on our estimates, a 1% increase in gross margin will boost Cosco’s bottomline by 4%,” says the research house.
Meanwhile, Cosco’s orderbook stands at US$5.5 billion ($7.3 billion) which is 3 times covered in terms of sales compared to Singapore offshore yards at less than one time, says DBS. And its orderbook is expected to swell with more offshore orders.
Although JES is the cheapest Chinese yard, the stock has surged 50% since Sept 21. It is also in a net cash position and should have positive free cash flow by next year. This makes it a candidate for privatisation, says DBS. It values JES based on 1.5 times FY11 price-to-book, giving a target of 46 cents. Its IPO price was 67 cents.
Genting saga continues
According to a Nomura Research report today, Genting Hong Kong, which is 19.3% owned by Genting Malaysia, could be given out as dividend-in-specie to Genting Malaysia shareholders.
Just to recap: Genting Singapore sold Genting UK to Genting Malaysia for the equivalent of $688.8 million. Now, after the 102% surge in Genting Hong Kong’s share price year-to-date, Genting Malaysia may want to cash out, Nomura reasons. “We believe the time is ripe for Genting Malaysia to monetise its 19.3% investment in Genting Hong Kong currently classified as available-for-sale financial assets in the balance sheet which is worth RM2.4 billion ($1.03 billion) at current market value. To detach itself from Genting Hong Kong, one quick option is to dividend its shares in specie to all shareholders ahead of its foray into the tightly regulated casino industry in the US, in our view,” the report states.
The other option would be for Genting Malaysia to shunt its Genting Hong Kong stake to Genting Singapore, but this is less likely. Whichever way, selling pressure on Genting Singapore and Hong Kong could persist in the coming week.
CHART VIEW
The STI (3,092) is at a resistance, quarterly momentum and short term stochastics have turned down and a retreat should be expected. Support appears at 3,030. The uptrend remains intact though, and an eventual long term target of 3,400 has been indicated from the break above 3,000.