Singapore yards benefit from China shipbuilding woes

By Rujun Shen

SINGAPORE, July 18 (Reuters) - Singapore's Keppel Corp Ltd

and Sembcorp Marine Ltd , the world's top offshore rig-makers, stand to be among the winners from Beijing's moves to tighten credit amid a downturn at China's shipyards.

The two companies have been under mounting pressure from Chinese yards offering generous payment terms, price discounts and help with financing.

That may be changing after Beijing pledged to cut credit to industries plagued with overcapacity, and China Rongsheng Heavy Industries Group , the country's largest private shipbuilder, fell into financial trouble.

 

" Something like this will absolutely make everyone double-check and say, 'Am I really sure I want to order from anywhere but the best yard?'" said Jon Windham, Barclays head of Asia industrials equity research.

Keppel reports quarterly results on Thursday, while Sembcorp Marine reports on Aug. 1.

A number of Chinese shipyards have tried their hand at offshore equipment manufacturing as their traditional shipbuilding businesses have slowed, and are on their way to win more orders for jackup rigs than Singapore's yards for a second year in a row. Rongsheng mainly builds dry bulk carriers and only set up its offshore rig arm in 2012.

Rongsheng could now become the biggest casualty of a local shipbuilding industry suffering from overcapacity and shrinking orders amid a global shipping downturn. New ship orders for Chinese builders fell by about half last year.

Within hours of Rongsheng's appeal for help from the Chinese government, Beijing this month vowed to harness its financial sector to help bring about an orderly closure of some factories in industries plagued by overcapacity.

NEGOTIATING POWER

The crunch at Chinese shipyards will strengthen the negotiating positions of Keppel Corp and Sembcorp Marine with customers who quote Chinese yards' terms to negotiate for better prices.

" The troubles in China's shipbuilding industry won't necessarily translate into higher margins or more order wins for Singapore's two yards since they have always been selective with the contracts they bid for," said Kristy Fong, investment manager at Aberdeen Asset Management Asia Ltd.

" But they will lead to fewer speculative orders and better quality orders for the industry in general," said Fong, whose company is Keppel's second-largest shareholder with a 5.36 percent stake, after Temasek Holdings Pte. Ltd.

Keppel delivered five rigs in the first quarter of the year, and seven in the second quarter, out of a record number of 20 rigs it plans to deliver for 2013. Nine of the rigs were delivered ahead of schedule, company data showed.

The quickened pace in rig delivery is expected to bring higher margins, analysts said. In the last quarter the company's operating margin stood at 14.4 percent, down from 18.8 percent in 2012.

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On the global orderbook for mobile drilling units, which include jackups, semi-submersibles, drillships, drilling barges and tenders, China led with a total of 56 units on order, followed by South Korea's 55 and Singapore's 42 as of early June, data from Clarkson Research Services showed.

(Editing by Jeremy Laurence)

((rujun.shen@thomsonreuters.com)(+65-6870-3726)(Reuters Messaging: rujun.shen.thomsonreuters.com@reuters.net))

Keywords: SINGAPORE RIGBUILDERS/

This article is written by Ng Tian Khean, who runs investment analysis based on Artificial Intelligence algorithms and has been republished with permission on Shares Investment.

The main advantage of technical analysis is that it enables us to see how the market prices in all the variables that affect a stock. For the short term, technical factors like trend, momentum, liquidity, reversion to the mean (the tendency for a stock to correct from overbought/oversold levels), and beta may be more important than the stock’s fundamentals. I regard my mathematical modelling and statistical analysis as a form of technical analysis since it is based only on Price and Volume data.

In this article, we compare the statistical properties of Keppel Corporation (Kep Corp) and Sembcorp Industries (SembCorp). The two conglomerates are usually associated with the offshore oil-rig building market, although they are diversified conglomerates. There have been some significant recent developments in oil rig market. On the one hand, Singapore yards now face serious competition from Chinese yards that are capable of offering lower prices and easier financing. Chinese yards have managed to secure a number of orders and whittled down the Singapore companies’ market share. But on the other hand, some analysts are still optimistic that the two Singapore companies will still do well with their oil rigs because (1) The Chinese yards are not yet capable of building high specification jack-ups, semi-submersibles and drill ships (2) The Chinese yards, as of current, do not have a track record of quality and reliability in delivering the rigs on time – two factors which are very important when you consider that day rate charter for rigs are well over US$150,000 a day, and any delays and breakdowns are very costly. (3) The market for rigs is growing because (a) even without any new exploration, countries like Indonesia, Malaysia, and Mexico want to stem the decrease in their oil production from existing wells by using new technology to stimulate and drill the wells. (b) A recent report in Bloomberg estimates that 57 percent of more than 1000 jack-up rigs are over 25 years old and need replacement. New rigs have superior design and technology and are less costly to operate. New safety and environmental regulations also increase the advantages of replacing old rigs.

When we buy Kep Corp or SembCorp to get an exposure to the oil rig industry, we are also exposed to the cycles, volatility and changes in the dynamics of this industry. But the two conglomerates also have other substantial businesses.  And via such technical analysis, we hope to find out which is a better buy when we want exposure to the oil rig industry but at the same time hedge against its volatility, cycles and a possible change in the secular trend.

We will give a score to each of six Indicators which denote the mathematical properties of their share price in terms of predictability, resilience, and sensitivity to changes in the general market as represented by the Straits Times Index.  Based on my two guiding principles of Diversity of Indicators and Consensus of Diverse Indicators, we will then compare their scores. Here is a brief description of Kep Corp and SembCorp:

Kep Corp comprises several diversified divisions:

Offshore and Marine-   Keppel Offshore & Marine (Keppel O& M), Keppel FELS, Keppel Shipyard, Keppel Singmarine, contributed 56 percent out of a Group revenue of $14 billion in 2012. Its high-tech departments with their proprietary designs have built deep water submersibles, wind turbine installation platforms an ice class FPSO (Floating Production, Storage, Off-loading), and a ground-breaking floating LNG terminal.

Infrastructure- Energy and infrastructure solutions including power plants cooling systems, waste management, logistics and data centres. Businesses which are reckoned to have good prospects.

Property- Keppel Land is the property arm of Keppel Corporation with activities in Beijing, Shanghai, Tianjin, Ho Chi Minh City and Jakarta. In Singapore, it is known for its developments in Keppel Bay and Marina Bay.

Investment – K1 Ventures has interests in several private equity companies, a financial services company, two education companies and a Chinese auto dealership.

SembCorp is also a conglomerate with diversified businesses:

Sembmarine - A listed subsidiary and contributed 44 percent of SembCorp’s $10 billion in its revenue for 2012. Like Keppel O& M, it comprises several yards involved in rig building, ship repair, ship conversions, and offshore construction and engineering. It has proprietary designs for deep-water jack-up rigs and semi-submersibles. The ship conversion division has done interesting conversions of cargo carriers to livestock carriers, tankers to FPSOs, and cargo carriers to container ships.

Sembcorp Utilities - Builds power plants, imports and distributes LNG, produces and supplies steam for industries, provides on-site logistics and waste management, supplies industrial water and water management solutions.

The Urban Development - Division of Sembcorp is a leading Asian developer with more than 20 years’ experience, undertaking master planning, land preparation and infrastructure development, and transforming raw land into townships. It has projects in China, Indonesia and Vietnam.

Here are the steps involved in our analysis:

1. Based on my Neural Network model, we simulate the trading of each rate over the period stated in Table 1 below. We then compare the actual annualized percentage change in the price of the stock over the trading period with the annualized percentage returns from the simulation. The simulation acts as a filter for our further analysis. If the returns are Positive, we do further analysis. If the returns are Negative we abort further analysis.
2. Further analysis (see Table 1) is based on six Indicators which denote different aspects of analysis. (a) The neural net Indicator provides a probability of the percentage gain/loss predicted over the five days from end of simulation. (b) The Trend Vigour Indicator indicates the strength of the trend either upward or downward. (c) The Signal to Noise Ratio indicates the clarity of the signal from the stock. If there is more signal than noise, we have more confidence in our analysis. (d) The Beta is the sensitivity of the stock to changes in the general market as represented by the Straits Index. (d) The Alpha is the portion of the price that is independent of movements in the Index (e) The Efficiency ratio is stock price direction divided by volatility and indicates how easy or difficult it is for the stock price to change.

The raw scores are then converted into a normalized scoring system that gives 1, 2, 0, -1, or-2 points. I would strongly encourage the reader to read a more detailed explanation of our model, the Indicators and scoring system by going to the link on my Blog. Any questions can also be sent to me via email.

Table 1: Number of Points Scored



The scores in Table 1 are derived from data as at “04 July 2013”. But the Indicator values are changing each day. The two charts below with their annotations, will help you visualise the ongoing changes in their technicals.


 


 
Conclusion
Kep Corp has a market capitalisation of $19 billion and SembCorp is much smaller at $9 billion.   Based on the above, KepCorp shows that it is more diversified.  Although both conglomerates depend on the offshore and marine sector for about half of their revenues, Kep Corp’s greater diversity makes for greater resilience to market forces.

But our analysis, as illustrated by the charts above indicate that recently, SembCorp seems to be catching up. The two stocks are still weak. In fact, the two charts above show that according to our rules of analysis, their Equity Line is on the border between rejection and acceptance for further analysis. Kep Corp’s score is 1 out of a maximum of 12, and SembCorp’s score is standing at zero out of 12 at the moment. Technically, there is very little difference between the two stocks at the moment. But SembCorp’s Beta of 0.74 and Alpha of 1.24 (not shown in charts here) will give it the advantage of play if the market moves upwards.