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Shipbuilding/shipping: Deja Vu

Since the development of COVID-19 vaccines, shipbuilding and ocean shipping stocks have been following a similar pattern as in the market upturn of 2017. The economic recovery in 2021 will be driven by fiscal policies and stimulus measures implemented by developed countries. We expect shipping companies to see freight rate hikes and shipbuilders to enjoy continued growth in order placements. We retain our OVERWEIGHT view on shipbuilding and ocean shipping sectors.

Ocean shipping is in our favor this year given freight rate hikes and shipbuilding in 2022 after building up order backlogs. Valuations of shipping stocks are determined by freight rates and shipbuilding stocks by newbuilding prices. Newbuilding prices tend to rise during an upturn in order backlog following freight rate hikes and the subsequent increase in order placements.

Our top pick is Pan Ocean (028670KS). Share price gains are expected in 2021 on an uptrend in the Baltic Dry Index (BDI) driven by the recovery of emerging economies. The LNG shipping business should expand based on stable financials. The share price will likely pick up after the Lunar New Year’s holiday.

Freight rates and orders to grow on economic stimulus and fiscal policies

Global order placements are projected to grow 48.2% YoY to 79.84mn DWT in 2021. There will be a sharp increase in orders for vessels sensitive to economic conditions. By vessel type, order placements for containerships are estimated to grow 84.6%, bulk carriers 125.7%, LPG carriers 22.3%, LNG carriers 12.2%, and product carriers 3.7% YoY.

We forecast cargo handling volume to increase by 4.7% YoY and vessel tonnage by 2.7% YoY. With the recovery of developed and emerging economies, the Shanghai Containerized Freight Index (SCFI) and the BDI should reach 1,772p (+41.4% YoY) and 1,564p (+50.8% YoY), respectively. The growth of cargo handling volume will be led by expansionary fiscal policies of developed countries. We expect to see continued stimulus measures to make up for lost income of lower income families and solve the unemployment crisis. Following the vaccine development, emerging economies have enjoyed a short-term boost from the stabilizing financial market. In the longer term, they should see a gradual recovery in production and consumption, as stimulus measures implemented by developed economies will lead to income and consumption growth, thereby boosting imports from emerging economies.

Newbuilding prices to pick up from 2022 due to weak order backlog in 2021

We forecast newbuilding prices at 128p (+1.9% YoY) for 2021 and 138p (+7.9% YoY) for 2022. The price increase will be limited this year. Global order placements should visibly recover 48.2% YoY to 80mn DWT, but will likely be outnumbered by deliveries of 90mn DWT (+2.6% YoY). The backlog-to-delivery ratio (0.84 correlation coefficient with newbuilding price) should improve slightly to 1.6 years (+0.3% YoY) from 3Q21. Increases in the USD/KRW rate and heavy plate prices will undermine profitability of newbuild contracts.

Tougher regulations expected; Korean shipbuilders to enjoy market share gains

The International Maritime Organization’s Energy Efficiency Design Index (EEDI) phase 3requirements will be applicable from April 2022. The Energy Efficiency Existing Ship Index (EEXI) requirements, set to be introduced in 2023, will limit engine power of existing vessels as well as newbuilds. Tougher regulations should lead to a drop in vessel speed, reduction in effective vessel tonnage, freight rate hikes, and market share gains of Korean shipbuilders. To meet new requirements, shipping companies will likely opt for LNG-fueled ships in which Korean shipbuilders currently hold a 65.4%market share.
Source: Business Korea

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