3 evidences prove Chinese yards' dismal state in Singapore

Cosco Corp may be a big casualty.

According to Nomura, besides Rongsheng, it believes other Chinese yards have significantly leveraged balance sheets. Among the Chinese yards listed in Singapore and based on reported 2012 annual results, Nomura sees Cosco Corp as most leveraged and is relatively more vulnerable, while Yangzijiang is relatively better placed. Nomura believes the key reason for the dismal state of affairs is owing to these three factors:

Weak order outlook in core segments of ship-building. The core shipbuilding sector is facing difficult operating conditions with weak orders and general oversupply of capacity in China. As such, rigs are trying to diversify into offshore rigs with limited success.

Limited experience in offshore rigs, resulting in project delays and cost overruns. Most of the china-based yards are therefore not just earning sub-optimal profits as they struggle up the learning curve; they also have to do so by effectively offering less attractive contract terms vs their Singapore counterparts. 

Super-stretched credit terms. Attractive payment terms to offshore clients (read tail heavy payments) to get orders effectively means the shipyards are financing the newbuilds themselves. Anecdotal evidence suggests that some of the yards have offered 10/90 payment terms to clients (10% down payment and the remaining 90% on delivery).

Here's more from Nomura:

Overall, as shown below, Cosco’s net debt to equity profile has been worsening rapidly since 2010 and, in our view, could be vulnerable to a  continued downturn in the core ship-building industry.

From our perspective, we believe, if ship-building orders do not recover near term, the Chinese government may be hard pressed to support the industry with continued balance sheet expansions at yards. That said, with new debt issues to struggling companies in China coming at a relatively lower pace, we could see more such events as Rongsheng.