Low tide

Rising costs, weakening shipbuilding demand, a global recession and the accelerated yuan appreciation have dragged down a State-controlled heavyweight on the capital market.

China State Shipbuilding Corporation (CSSC), whose share price was once the highest in the country, stumbled to 110.12 yuan last Thursday from its peak price of 300 yuan on October 11 of 2007, a 63.29 percent tumble.

Steel-related materials account for 25 percent to 30 percent of CSSC's shipbuilding costs, says Guotai Jun'an Securities.

Although CSSC took the steel price hikes into consideration when accepting orders, the cost increases exceeded its expectations, says Zhang Jinchan, a shipbuilding analyst with Guotai Jun'an Securities.

"Iron and steel prices are soaring, but the company cannot raise the prices of orders it had taken," he says.

According to Zhang's research, CSSC's earnings per share (EPS) in 2008 will be reduced by 1 yuan due to rising iron and steel prices.

Besides rising shipbuilding costs, analysts and industry observers believe the economic slowdowns of the United States and Europe, followed by the global recession has caused shipbuilding demand to weaken. The industry is expected to suffer a slowdown in new orders and a price correction in stock prices.

In January and February 2008, new worldwide shipbuilding orders deceased significantly year-on-year, with the new orders this year at just 63 percent of the total for the same period in 2007, according to researchers at Guotai Jun'an Securities.

Currently, CSSC hold orders for 60-70 billion yuan worth of new ships. Advance payments account for 14 percent of its orders, while the number was 30 percent in 2007, according to a researcher from China Merchants Securities.

CSSC's share has entered a long term correction since the end of last year after its price skyrocketed from 8.37 yuan at the begging of 2006 to 300 yuan in October 2007, an increase of 3,484 percent.

The accelerated yuan appreciation is another factor cutting into CSSC's earnings in 2008.

CSSC exported ships to more than 40 countries and regions including the United States, Germany, Norway, France, Switzerland, Iran, Canada, Japan, Singapore and Malaysia.

But the yuan's rise will cut 0.5 yuan of CSSC's EPS, researchers in Guotai Jun'an Securities forecast.

Continued growth

However, despite the immediate gloom, CSSC is expected to continue posting a respectable earnings growth in 2008.

CSSC's backlog orders can support it for at least three years, analysts say.

As the world's second-ranking shipbuilder, CSSC has 10 percent of the new order after Hyundai Heavy Industries Co of South Korea.

To maintain its competitive advantage, CSSC says it spends heavily on research and development and improving its growth.

Xu Miao, deputy director of the technology department of CSSC says the company will continue to put 5 percent of its turnover into research and development this year to strengthen its independent innovation.

He also says that CSSC is trying to design and develop more high value-added and luxury cruise liners.

The shipbuilder is also accelerating construction in the country's key shipbuilding bases in the Yangtze River Delta and the Pearl River Delta.

The opening of the Changxin shipbuilding yard will greatly improve the shipbuilder's capacity, Xu says.

The shipbuilder is expected to grow in all its major businesses including manufacturing and maintenance and diesel engine manufacturing, Liu Rong from Merchants Securities says.

CSSC has also asked customers to increase their advance payment percentage.

Analysts predict a 7.55 yuan EPS in 2008 and 9.08 yuan in 2009.

Considering CSSC's 4.4-yuan EPS in 2007, many believe CSSC's stock price is experiencing a correction amid current market sentiment and say it's a good long-term investment choice.

(China Daily 04/28/2008 page3)