20082311526187

SECTOR UPDATE 6 August 2008
Bulk and Tanker Shipping

Is the party over?
UNDERWEIGHT
Maintained
PP14048/11/2008(006841)
Raymond Yap CFA - raymond.yap@cimb.com / David Y.K. Lee davidyk.lee@cimb.com
MICA (P) 006/03/2008
Please read carefully the important disclosures at the end of this publication.
REGIONAL
Contents
Investment Summary...................................................................................................3 Overview......................................................................................................................4 Dry bulk shipping ...................................................................................................4 Crude tanker shipping............................................................................................5 Dry bulk shipping .........................................................................................................6 Impact of conversions ............................................................................................6 Chinese shipyard delivery delays?.......................................................................10 Minimal cancellations or failures ..........................................................................12 Demolitions not likely until 2009-10......................................................................13 Demand outlook weakens....................................................................................15 The upshot heightened downside risks for dry bulk sector................................23 Upside risks .........................................................................................................26 Crude tanker shipping................................................................................................29 Demand ...............................................................................................................29 Supply of tanker vessels ......................................................................................32 Shipyard delivery delays? ....................................................................................34 Outlook for crude tanker rates..............................................................................34 Valuation and recommendation .................................................................................39 Dry bulk shipping .................................................................................................39 Pacific Basin (2343 HK, TP: HK$8.33, UNDERPERFORM) ................................39 STX Pan Ocean (STX SP, TP: S$2.06, UNDERPERFORM)...............................40 Maybulk (MBC MK, TP: RM3.00, UNDERPERFORM) ........................................40 Thoresen Thai Agencies (TTA TB, TP: THB36.00, UNDERPERFORM) .............41 Precious Shipping (PSL TB, TP: THB26.00, OUTPERFORM) ............................41 Crude tanker shipping..........................................................................................43 MISC (MISC MK, TP: RM10.00, NEUTRAL)........................................................43 Company Briefs .....................................................................................................45 Pacific Basin Shipping Ltd....................................................................................46 STX Pan Ocean ...................................................................................................50 Malaysian Bulk Carriers Bhd................................................................................54 Thoresen Thai Agencies ......................................................................................58 Precious Shipping ................................................................................................62 MISC Bhd.............................................................................................................66 Appendices ............................................................................................................70 1: List of actual / potential tanker conversions ....................................................71 2: Chinese shipyards dry bulk orderbook ...........................................................75 3: Profile of selected Chinese yards....................................................................76 4: Failed/cancelled orders (2007)........................................................................82 5: Dry bulk fleet development..............................................................................83 6: Crude tanker fleet development ......................................................................85
Bulk and Tanker Shipping 6 August 2008
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Investment Summary
UNDERWEIGHT dry bulk; NEUTRAL on crude tanker shipping. We maintain our UNDERWEIGHT rating on the dry bulk sector, and highlight that we have become more bearish from our previous reports. A large orderbook of tanker conversions will put upward pressure on supply over the next six months, while the Chinese economic slowdown may reduce demand for commodities. Meanwhile, we continue to be NEUTRAL on crude tanker shipping, as currently high freight rates will likely moderate next year from newbuilding deliveries, but continue to stay at relatively high levels due to the conversion pipeline and oil production growth. Significant downside risks for dry bulk; UNDERWEIGHT. We believe that the risks in the dry bulk sector are much higher than what the market is pricing in. Over the next six months, rates could fall as a result of acceleration of supply growth and potentially lower commodity demand growth. We expect a dramatic acceleration of deliveries of bulkers newly converted from tankers in 2H08. Furthermore, steel demand growth from non-shipping industrial users could be at risk from the sharp slowdown in global economic growth and Chinas slowing GDP expansion. The shortage of coking coal is also constraining growth in steel production, which could affect the pace of Chinas iron ore imports. After the Summer Olympics and Paralympic Games are over in September, dry bulk freight rates will most likely rise due to the resumption of Chinese economic activity temporarily shuttered for the two events. However, the upside could be limited by the factors outlined above. As share prices rally in 4Q08 after the games conclude, we recommend investors to sell the high risk names aggressively and switch to low-risk plays. Initiate coverage on Pacific Basin (TP: HK$8.33) with UNDERPERFORM; downgrade STX Pan Ocean (TP: S$2.06), TTA (TP: THB36.00) and Maybulk (TP: RM3.00) to UNDERPERFORM from Trading Sell. Our target prices have been derived by taking a discount to RNAV, with the size of the discount varying according to our assessment of earnings volatility and dividend yields. For Pacific Basin and Maybulk, we have applied a 30% discount on account of their high dividend yields and high forward contract cover. For STXPO, we have applied a 50% discount to RNAV, as the company has the highest earnings volatility in our universe from the use of chartered-in capacity. We have also used a 50% discount to derive TTAs price objective, in view of its low forward time charter cover. Within the dry bulk sector, we recommend investors switch to PSL (TP: THB26.00) where we upgrade to OUTPERFORM from Neutral. The target has been based on a 40% discount to RNAV. PSL is expected to outperform the rest of its peers as it has the highest and most aggressive forward contract cover. We expect the crude tanker shipping sector to surprise on the upside; NEUTRAL. Tankers are being converted in far greater numbers than we earlier expected, and the economics of dry bulk conversions are so compelling that we expect many more to be converted. Even though we expect record newbuilding deliveries in 2009, conversions could surprise on the upside and help guide next years rates only moderately lower from this years record levels. Furthermore, crude oil production growth will be driven by the Middle East region in the next two years, increasing tonnage demand and distances shipped. Maintain NEUTRAL on MISC (TP: RM10.00). Our target is based on a composite P/E valuation. We recommend investors who are spooked by the container downturn and the expected dry bulk rout to switch to MISC, where earnings should remain stable over the next two years. The strength of the crude tanker shipping sector, which accounts for 40% of pretax profit, will offset downside expected for the chemical and container shipping sectors. Meanwhile, the heavy engineering and offshore divisions have tremendous opportunities for earnings growth as Petronas dishes out more contracts for fabrication work and offshore structures.
Sector comparisons
Bloomberg ticker STX SP 2343 HK TTA TB PSL TB MBC MK MISC MK Price (Local) 2.50 10.80 37.75 19.60 3.68 8.85 Target price Mkt cap (Local) (US$ m) 2.06 3,750 8.33 2,415 36.00 726 26.00 608 3.00 1,126 10.00 10,074 Core P/E (x) CY2008 CY2009 3.9 6.1 4.1 6.2 3.0 4.9 4.1 4.1 7.0 10.4 15.0 14.8 6.2 7.8 3-yr EPS CAGR (%) (14.7) (10.8) (15.4) (1.8) (18.1) 3.3 (9.4) P/BV (x) CY2008 1.3 1.6 1.1 1.2 1.9 1.7 1.5 ROE (%) CY2008 41.7 51.5 41.0 32.3 42.8 11.9 36.9 Div yield (%) CY2008 1.3 13.8 8.4 12.8 18.4 5.3 9.9
STX Pan Ocean Pacific Basin TTA Precious Shipping Maybulk MISC Simple average
Recom. U U U O U N
O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy and TS = Trading Sell Source: Company, CIMB/CIMB-GK Research
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Overview
Dry bulk and crude oil tanker shipping. This report will address the outlook for the two sectors. Both are currently doing well from a historical freight rate perspective, but are likely to face varying degrees of pressure in 2009. This report fleshes out the dynamics of demand and supply, and addresses the various issues that will make a difference to the freight rate outlook. Our key conclusions are as follows.
Dry bulk shipping

Negative on dry bulk freight rate momentum Maintain UNDERWEIGHT as dry bulk freight rates could start major bear phase in six months or less. We think that dry bulk freight rates are likely to see one last leg up post Olympics, and then begin a long downward slide from late 2008 and into 2009. Most market participants are expecting the flood of newbuilding deliveries to pressure freight rates only from 2H09. However, substantial tanker-to-bulker conversions could bring it forward by six months. We have become more negative on the dry bulk sector. In our previous reports, we recommended long positions in dry bulk stocks after the summer correction, but we now believe that the risks of this strategy are not worth the rewards. The key event leading to our more bearish view is our re-evaluation of the size of the conversions taking place. We had previously expected only 4m dwt to be converted into dry bulk vessels in 2008, and another 4.5m dwt in 2009. However, we now forecast conversion deliveries of 8.8m dwt this year and another 4.7m dwt next year. We also have new worries about the pace of Chinese demand growth. Although there are opportunities to trade on a short-term post Olympics rebound, the rebound is unlikely to last very long or be very material, but in return, investors would be exposing themselves to significant downside risks. Instead, we recommend investors to view any post Olympics rebound as a major selling opportunity. Worries about demand. Our view has been formed on the basis of both demand and supply considerations. Growth of iron ore imports into China, although strong so far this year, could be affected by the pressures faced by the countrys steel industry. Coking coal is in short supply, and could act as a constraint on steel production growth. Thermal coal is also in short supply, and the resulting electricity shortages have already shuttered some of Chalcos aluminium smelting facilities. Meanwhile, higher iron ore and coking coal prices are pressurising profitability, and may cause the closure of the small inefficient steel mills. Even as Rio Tinto, BHP Billiton, Fortescue Metals Group and Vale ramp up production this year, we are worried that China may not be able to absorb all the volumes. Worries about supply. From a ship supply perspective, the size of the conversion orderbook is staggering and is likely to enter the dry bulk fleet in large numbers over the course of 2H08. The strength in the crude oil shipping markets is proof that conversions are happening. As the conversion yards generally take 12-15 months to complete the design cum conversion process, the dry bulk market should brace itself for annualised fleet growth of 13.2% hoh in 2H08, against just 5.6% hoh in 1H08. We believe that this will be enough to cap freight rates from rising further, and probably start to push rates lower. Six months from now, we may fondly remember the peak Baltic Dry Index of 11,793 points reached on 20 May 08 as the high water mark, unlikely to be revisited for some time to come. Cancellations of newbuilding orders and delivery delays from Chinese shipyards will not be large enough to materially alter the course of supply, in our opinion. Revising up 2008, revising down 2009 and 2010. We are revising up our 2008 average BDI projection from 8,000 to 8,500 points. On the other hand, we are lowering our 2009 forecast from 7,000 to 6,000 points, and reducing the 2010 expectation from 5,500 to 3,000 points. We now expect the average BDI to rise 20% yoy this year, followed by a 29% correction in 2009 and another 50% correction in 2010. The key derating catalysts include (1) deliveries of the large newbuilding and conversion orderbook from 2H08 which will materially boost supply; and (2) the concomitant threat of a slowdown in the growth of Chinese commodity imports as GDP growth moderates and as constraints arising from raw material and energy bottlenecks remain.
Sell aggressively into postOlympic rebound
Demand under pressure from raw material shortages
Staggering conversion orderbook
Baltic Dry Index revisions
Derating catalysts
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Crude tanker shipping

Conversion removals will keep rates high this year and next Maintain NEUTRAL as spectacular 2008 rates likely to moderate slightly in 2009. Crude tanker freight rates have enjoyed a spectacular run this year, against our expectations of a modest decline, with the principal cause being the removal of singlehull tankers for conversion into dry bulk, offshore and heavy lift vessels. We are expecting net year-end fleet growth of only 2.7% in 2008, against 6.5% had there been no conversions. We expect crude tanker rates to remain at elevated levels for the rest of 2008. Rates have also been strong because the worlds increased reliance on Middle Eastern oil has expanded distances shipped. Meanwhile, negative crack spreads on fuel oil have reduced the demand for sour crude, forcing Iran to use tankers as storage. The commercial obsolescence of single-hull tankers has also accelerated after the Hebei Spirit oil spill off the coast of South Korea last year, leading to stronger rates for double-hull vessels. Rates in 2009 may only be moderately lower because conversions could be larger than expected. Our base-case view is that crude tanker rates will decline in 2009 as a result of large newbuilding deliveries. However, the rate of decline may not be very significant, because conversion removals could surprise on the upside. Single-hull tanker shipowners are still rushing to capitalise on the strong dry bulk and FPSO rates. Currently we have factored in only confirmed and likely conversions into our tanker supply-demand model based on available data, but by the end of this year, additional conversion deals for next year will almost certainly emerge. Despite our expectation of weaker dry bulk freight rates in 2009, average rates will probably hold up at profitable levels, suggesting that the economics of conversion will still be viable. Furthermore, the decision to convert tankers to bulkers typically does not depend on prevailing spot market rates, but on the rates implied in long-term contracts of affreightment and longterm time charters. Some, though not all, to-be-converted very large ore carriers for the Brazil to China iron ore trade have indeed been locked into long-term COAs prior to the decision to convert. Given the very long distance between Brazil and China, uncompetitive pricing of Brazilian ore against Australian ore once the expensive spot freight is included in the price, and unrelenting pressure from the Australian miners for freight premium, Chinese iron ore importers will continue to regard conversions as strategically important and economically viable. Furthermore, we expect strong Middle East production growth next year, driven by planned Saudi Arabian production increases and possible higher Iraqi output. This will be very positive for tanker demand originating from the Middle East and will increase the tonne-mile demand of shipments. Together with potentially larger-than-expected conversions, tanker rates in 2009 may moderate only slightly. In 2010, average rates will probably head down slightly, but year-end rates could be higher. We think average rates could head lower because of the spillover impact of the newbuilding deliveries the year before. However, our base case view is that year-end rates could stabilise or head up slightly, as single hulls become technically obsolete and their removal substantially offsets newbuilding deliveries. Nevertheless, should single hull conversions or removals be brought forward one year to 2009, year-end 2010 rates could still head lower. BIDY revised upwards for all years. We are revising up our average BIDY assumptions to 1,700 points for 2008 (+48% yoy), followed by a 10% decline to 1,530 in 2009, and finally another 10% decline to 1,377 points in 2010. Our previous estimates for the BIDY was 1,163 points for 2008-09, and an unchanged 1,337 points in 2010.
Strong Middle East output growth to increase demand for tankers
Baltic Dirty Tanker Index revisions
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Dry bulk shipping

On the doorstep of a major correction The currently strong dry bulk market is on the doorstep of a major correction, with the primary driver being conversions of single-hull tankers into dry bulk carriers. We believe that the strength of the conversion orderbook will be enough to put a lid on material freight rates increases in 2H08, despite expectations of record iron ore volumes being shipped from Australia and Brazil. Many market commentators suggest 2H09 as the start of a bear market for dry bulk freight rates. We beg to differ and believe that freight rates could probably start trending down before the end of 2008. As a result, we view any post-Olympic BDI rally, driven by the restart of temporarily shuttered Chinese steel mills and other industrial facilities, as a strong signal to sell and exit the dry bulk sector completely. Other potential negative surprises include the possible slowdown of Chinese steel production, because of coking coal and electricity shortages, and because high raw material prices could affect the profitability of smaller steel mills. As we will show later, no amount of Chinese shipyard delivery delays or newbuilding order cancellations will be sufficient to bring the market into equilibrium in 2009 and 2010. Hence, we believe that 2009 and 2010 are likely to see major deterioration in average freight rates.
Impact of conversions
Dry bulk conversions are the What are conversions? A conversion involves turning one type of vessel into most common type another. Shipowners are motivated to perform conversions when the earnings potential of the new vessel type outstrips the potential of the existing vessel type, or when there are forthcoming regulatory restrictions that could result in technical or commercial obsolescence. The most common conversions currently involve the conversion of single-hull (SH) tankers to bulk carriers because IMO rules prohibit the trading of SH tankers beyond 1 Jan 2010. For example, SH very large crude carriers (VLCC) are commonly converted into very large ore carriers (VLOC). Suezmax tankers are also being converted to capesize ships. Other SH tankers are being converted to oil and gas vessels like FPSOs and heavy lift ships. Dry bulk conversions are the most common, accounting for some 60-70% of intended conversions, followed by conversions to FPSOs and heavy lift ships, which account for 20-25% of the total. The rest have been earmarked for conversion to double-hull (DH) tankers.
Figure 1: Composition of conversion orderbook By number of ships
SH to DH Tanker 34 SH to DH Tanker 3,299,635
By DWT
Tanker to FPSO / Heavy Lift 38
Tanker to Bulker 61
Tanker to FPSO / Heavy Lift 5,437,069
Tanker to Bulker 14,494,259
Source: Worldyards, CIMB/CIMB-GK Research
The deployment of VLOCs would displace capes out of Brazil-China ore trades. Capesize displacement could pressure rates globally Converted VLOCs will be deployed exclusively in the Brazil to China iron ore trade and cannot be used for ports in Australia or elsewhere due to draft restrictions. These extra large bulk carriers are important for Chinese importers of Brazilian ore, because of the distance and high freight costs between the two countries. Currently, the Chinese cfr price of Brazilian ore is at a competitive disadvantage against more proximate sources of ore from Australia. But VLOCs should help reduce or even eliminate the gap because of economies of scale.
Bulk and Tanker Shipping 6 August 2008 [ 6 ]
Tanker sales and purchase reports provide clues
The trickle of conversions will turn into a torrent
As VLOCs enter the Brazil to China iron ore trade, capesizes which currently service the trade will be forced to trade elsewhere. In the event of an oversupply, capesize rates will move lower, putting pressure on panamax and handy rates in a cascading effect. Quantifying the impact. We expect conversions to play a major role in augmenting dry bulk ship supply, especially during 2H08, but the conversion orderbook is opaque and difficult to pin down. Our methodology to quantify the size of conversions, has been to track the sales and purchases of single-hull tankers since 2007, because most or all of these SH tankers are intended for conversion (Appendix 1). The basis for our assumption is three fold: (1) very few shipowners would be willing to buy SH tankers for trading purposes, knowing that their commercial viability would cease from 2010 onwards; (2) many of the SH tanker S&P were concluded during a period of extremely low tanker rates and very high dry bulk and offshore rates; and (3) evidence that many of the SH tankers were indeed converted. The buyers intentions to convert are often indicated in shipbrokers S&P report, but at other times the intention is unknown or unclear. What we have done is to assume that half of these latter vessels will find their way to conversion, of which 70% will ultimately end up as dry bulk vessels. We think that this is a conservative assumption, as most, if not all the ships, will ultimately be converted. A summary of our findings is set out in Figure 2. Conversion deliveries to accelerate in 2H08. We believe that a total of 43 ships could be converted and delivered into the dry bulk fleet in 2008. But since only about seven ships were converted and delivered in 1H08, as many as 36 new conversions could enter the fleet in 2H08 (Figure 2). These calculations suggest that the global dry bulk fleet expansion will accelerate significantly in 2H08, from the relatively modest pace of growth in the immediately preceding six-month period. Newbuilding deliveries will also accelerate in the second half (Figure 3). As a result, the global fleet, which expanded by only 2.8% hoh in 1H08 (annualised +5.7%), will grow 6.4% hoh in the 2H (annualised +13.2%). The strong fleet growth in the next six months will make it more difficult for bulk freight rates to scale and sustain new heights in our opinion. Please refer to Appendix 5 for a full breakdown of the dry bulk fleet movement schedule.
Figure 2: Tanker-to-dry bulk conversions summary
Period 1H08 2H08 2008 2009 2010 Total (2008-2010) Total bulk Capesize/VLOC (> 100k dwt) Panamax (60-100k dwt) No of vessels DWT No of vessels DWT No of vessels DWT 5 1,013,549 1 57,153 7 1,132,854 36 7,718,013 30 7,131,487 7 648,678 43 26 3 72 8,850,867 4,669,410 607,551 14,127,828 35 17 2 54 8,145,036 3,875,808 484,942 12,505,786 8 9 1 18 705,831 793,602 122,609 1,622,042
Source: Poten and Partners, Clarkson Research Services, CIMB/CIMB-GK Research Note: The Handymax and Handysize columns are not displayed.
Figure 3: Dry bulk fleet movement schedule

Aggregate dry bulk fleet No of vessels DWT 6,691 392,560,000 144 9,987,146 7 1,132,854 0 0 6,842 403,680,000 267 18,196,004 36 7,718,013 0 0 7,145 429,594,017 792 62,125,705 26 4,669,410 -268 -11,530,000 7,695 484,859,132 1,066 100,695,742 3 607,551 -403 -17,295,000 8,361 568,867,425 Growth (%) - hoh
End 2007 + Deliveries (1H08) + Conversions (1H08) - Scrapping (1H08) End Jun 2008 + Deliveries (2H08) + Conversions (2H08) - Scrapping (2H08) End Dec 2008 + 2009 deliveries + 2009 conversions - 2009 scrapping End 2009F + 2010 deliveries +2010 conversions - 2010 scrapping End 2010F
2.8%
6.4%
Source: Poten and Partners, Clarkson Research Services, CIMB/CIMB-GK Research
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Worldyards has an even more aggressive conversions estimate
Our numbers look conservative. Our estimate for conversion deliveries of 43 ships totalling 8.9m dwt in 2008 is conservative relative to Worldyards numbers. Worldyards estimates that 57 ships will be converted in 2008, amounting to some 13.4m dwt (Figure 4), which is 52% higher than our current forecast. If Worldyards figures are accurate, the expansion in the dry bulk fleet will be even more phenomenal in 2H08. However, we have decided to use our more conservative estimate because conversion work may be delayed by yard congestion and bottlenecks in the supply of key equipment like hatch covers. The generally accepted rule of thumb is that it usually takes 5-6 months of engineering design and class approval, and another 5-6 months for the actual work of converting the vessel. However, the entire process has been delayed to approximately 15 months in total, particularly for projects launched in 2H07. As a result, some conversions intended for delivery in 2H08 may be pushed forward to 1H09. We believe we have already compensated for this issue, by employing lower conversion estimates for 2008 delivery than Worldyards estimates.
Figure 4: Worldyards estimate of tanker-to-dry bulk conversions
TOTAL No of ships DWT 57 13,437,133 4 1,057,126 61 14,494,259 Confirmed No of ships DWT 38 8,573,515 4 1,057,126 42 9,630,641 Not confirmed No of ships DWT 19 4,863,618 0 0 19 4,863,618
Delivery 2008 Delivery 2009 Total
Conversions make very good commercial sense
The economics of conversion to dry bulk is very attractive. Our analysis suggests a very robust rate of return for owners of converted VLOCs. We believe that the strength of the conversion economics means that interest in conversions will remain red hot even if spot dry bulk freight rates fall in the future. The assumptions behind our calculations and conclusions are set out in Figure 5. We assume that the interested ship owner does not currently own a SH tanker and will need to buy a 15-year old 250,000 dwt VLCC for US$45m, and then pay US$40m to the conversion yard. Hence, the total capital cost of the conversion project is US$85m. We assume that the VLOC will be able to trade for another 10 years before it is sold to the ship breakers at US$500/ldt at the ripe old age of 25 years. The current scrap price is more than US$700/ldt, but we have used a more conservative assumption. The vessel operating cost is assumed to be US$8,000/day, which covers crewing, maintenance, dry docking and insurance, while the bunker cost is assumed to be US$714/tonne. We also assume that the conversion project will be 80% financed by debt and 20% by equity. Hence the WACC is estimated to be 6.4% (cost of equity 12% and cost of debt 5%). Based on the above assumptions, the breakeven TCE earnings for the 250,000 dwt VLOC over a 10-year period is expected to be US$39,431/day (Figure 6). A five-year payback period will require US$59,590/day. This is extremely attractive to both charterers and ship owners, considering that the spot rate for a 165,000 dwt capesize sailing between Brazil and China is currently at around US$200,000/day.
Figure 5: Assumptions behind calculation of conversion returns
Cost of 15-yr 250k dwt VLCC (US$ m) Cost of conversion to VLOC (US$ m) Total capital cost (US$ m) Vessel operating cost (US$/day) Bunker cost (US$/tonne) Calculation of scrap value Total LDT Scrap value/LDT (US$) Scrap value (US$ m) Remaining useful life (no of years) Calculation of WACC Debt financing percentage (%) Interest rate (%) Equity financing percentage (%) Cost of equity (%) WACC (%) 45 40 85 8,000 714 31,000 500 15.5 10 80% 5% 20% 12% 6.4%
Source: Poten and Partners, Clarkson Research Services, DNV, STX Pan Ocean, Mercator Lines, CIMB/CIMB-GK Research
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Figure 6: Calculation of 10-year breakeven TCE/day

Discounted Cash Flow Capital cost (US$ m) Scrap value (US$ m) TCE earnings p.a. (US$ m) Vessel operating costs p.a. (US$ m) Total cash flow (US$ m) WACC (%) PVF Discounted cash flow (US$ m) NPV (US$ m) TCE earnings p.a. (US$ m) TCE earnings (US$/day) Year 0 -85.0 -85.0 6.4% 1.00 -85.0 0.0 1 13.8 -2.9 10.9 6.4% 0.94 10.2 2 13.8 -2.9 10.9 6.4% 0.88 9.5 3 13.8 -2.9 10.9 6.4% 0.82 8.9 4 13.8 -2.9 10.9 6.4% 0.77 8.4 5 13.8 -2.9 10.9 6.4% 0.72 7.8 6 13.8 -2.9 10.9 6.4% 0.67 7.3 7 13.8 -2.9 10.9 6.4% 0.63 6.8 8 13.8 -2.9 10.9 6.4% 0.59 6.4 9 13.8 -2.9 10.9 6.4% 0.55 6.0 10 15.5 13.8 -2.9 26.4 6.4% 0.52 13.6
13.8 39,431 Breakeven in 10 years
VLOC can reduce Brazilian iron ore costs by around 30% compared to capesize
Conversions will continue until current capesize spot rates fall 65%
Compelling VLOC economics relative to a capesize. To a Chinese buyer of iron ore from Brazil, chartering the VLOC is a much more compelling option, even though the VLOC must ballast (return empty) all the way to Tubarao, Brazil to take its next load of ore cargo. For instance, if the shipowner charged the 10-year breakeven TCE/day of US$39,431, the all-inclusive cost of Brazilian ore would only be US$110.50/tonne. At the five-year breakeven TCE/day of US$59,590, the landed cost of ore would rise to US$117.60/tonne. These rates are approximately 30% cheaper than the per tonne cfr cost of US$166.70 at current capesize spot rates, and more surprisingly, also cheaper than the US$120.70 it would cost to import one tonne of iron ore from Port Dampier, Australia (Figure 7). In terms of the per tonne freight rates, the percentage cost savings is even larger. At the 10-year breakeven, the VLOC freight cost between Brazil and Beilun or Baoshan in China is only US$30.80/tonne, or US$37.80/tonne at the five-year breakeven. This is between 57% and 65% cheaper than the prevailing spot rate of US$87/tonne on a capesize, and almost comparable to the per tonne capesize rate between Australia and China despite the much longer shipping distance between Brazil and China. Charterers and ship owners likely to want further conversions. The compelling economics of the VLOC will keep charterers and ship owners keenly interested in future conversions, even if spot freight rates fall in the coming years. Given the very long distance between Brazil and China, uncompetitive pricing of Brazilian ore against Australian ore once the expensive spot freight is included in the price, and unrelenting pressure from the Australian miners for freight premium, Chinese iron ore importers will continue to regard conversions as strategically important and economically viable. As our calculations above show, capesize spot rates would have to fall as much as 65% from current levels for the economics of converting a 15-year old VLCC to become unviable.
Figure 7: Relative cfr cost of iron ore to the Chinese buyer using different vessel types
10-yr b/eTCE Brazil-China VLOC 250,000 39,431 13.8 4 1,000,000 13.8 17.0 30.8 118.98 67% 79.7 110.5 5-yr b/eTCE Brazil-China VLOC 250,000 59,590 20.9 4 1,000,000 20.9 17.0 37.8 118.98 67% 79.7 117.6 Spot rate Brazil-China Capesize 165,000 210,978 73.8 6 990,000 74.6 12.4 87.0 118.98 67% 79.7 166.7 Spot rate Aust-China Capesize 167,500 129,119 45.2 12 2,010,000 22.5 8.5 31.0 144.66 62% 89.7 120.7
Brazil to China Size (dwt) TCE rate (US$/day) Charter costs p.a. (US$ m) No of trips/year Total cargo carried p.a. Freight cost (US$/tonne) - ex bunker Add: Bunker cost (US$/tonne) Current freight cost (US$/tonne) Fob cost of iron ore (US cents/dmtu) Fe content (assumed) Fob cost of iron ore (US$/tonne) Cfr price to Chinese buyer (US$/tonne)
a b c = b x 350 d e=axd f=c/e g h=f+g p q r=pxq s=h+r
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Chinese shipyard delivery delays?

Chinese yards account for 40% of the dry bulk orderbook Newbuilding delivery delays from Chinese shipyards have been touted as one reason why dry bulk freight rates can stay higher for longer periods. This argument is premised on the Chinese yards purported inexperience, equipment shortages, lack of qualified staff and issues relating to the credit crunch. Some shipowners that we have spoken to also told us that six-month delays are common at Chinese yards, although Korean and Japanese yards have been very prompt. Conversely, we understand that some Chinese deliveries have been early, and that some greenfield yards are of good repute. Chinese shipyards have come into focus because of their rapid capacity expansion and their significant presence in the dry bulk newbuilding orderbook. We calculated that Chinese yards account for some 40% of the orderbook, Japanese yards close to 30% and Korean yards about 20% (Figure 8). The full list of Chinese shipyards dry bulk orderbook is set out in Appendix 2.
Figure 8: Dry bulk orderbook by yard nationality
No of ships 1,187 835 546 361 2,929 Total DWT 103,467,281 73,355,949 56,217,480 24,031,749 257,072,459 Share (%) No of ships 40.5% 28.5% 18.6% 12.3% 100.0% Total DWT 40.2% 28.5% 21.9% 9.3% 100.0%
Chinese yards Japanese yards Korean yards Other yards Total bulk orderbook
Shipyard delays wont redress the oversupply
Unlikely to tilt market balance from oversupply. Our analysis suggests that any purported Chinese shipyard delivery delays will not help alleviate the expected oversupply situation that will develop from 2009 onwards. The expected oversupply is simply too large to be fully offset by any delays. Figure 9 below illustrate this in stark relief. We estimate that the market is oversupplied by 36.9m dwt in 2009, but the scheduled deliveries from Chinese yards total only 23.1m dwt. Similarly, the market is oversupplied by 77.4m dwt in 2010, but Chinese yards will deliver only 40.5m dwt of newbuildings in 2010. So even if every Chinese yard fails to deliver the entire orderbook, it will not be enough to balance the market and enable dry bulk freight rates to stay strong.
Figure 9: Purported delays will not help balance the market
2009 Total DWT 23,054,633 36,902,129 13,847,496 2010 Total DWT 40,543,410 77,430,489 36,887,079
Scheduled deliveries from Chinese yards Delivery delays required to bring market balance Difference
A B B-A
On a six-month delay scenario, which is possible and realistic, we calculate that the dry bulk market will continue to be oversupplied by 26.6m dwt in 2009 and a staggering 71.4m dwt in 2010 (Figure 10). If we assume a six-month delay for national shipyards and a 50% failure rate for privately-owned yards, the residual oversupply will be reduced slightly to 23.9m dwt in 2009 and 63.6m dwt in 2010 (Figure 11).
Figure 10: Six-month delay scenario
2009 Total DWT 36,902,129 23,054,633 12,780,171 10,274,462 26,627,667 2010 Total DWT 77,430,489 40,543,410 34,478,030 6,065,380 71,365,109
Delivery delays required to bring market balance Original delivery schedule Revised schedule on six month delay Delays Remaining oversupply
A x y B=x-y A-B
[ 10 ]
Figure 11: Six-month delay scenario for national yards and 50% failure rate for private yards
2009 Total DWT 36,902,129 23,054,633 10,022,498 13,032,135 23,869,994 2010 Total DWT 77,430,489 40,543,410 26,703,155 13,840,255 63,590,234
Delivery delays required to bring market balance Original delivery schedule Revised schedule on this scenario Delays Remaining oversupply
A x y B=x-y A-B
National yards should perform well
A couple of other points about Chinese yards might be of interest, and serve to illustrate the point that significant delivery failures are more bark than bite. First, national yards have a stranglehold on 60% of the total bulk orderbook, with their contribution rising over time, rather than declining (Figure 12). National yards like the China Shipbuilding Industry Corporation (CSIC) and the China State Shipbuilding Corporation (CSSC) have a long history, lots of experience and financial resources behind them. These national yards are considered to be least likely to fail to meet their delivery obligations, and also have a secure supply of components and engines to boot.
Figure 12: Chinese yards bulk deliveries by ownership
National Private Total Share (%) National Private No of ships 598 589 1,187 50.4% 49.6% Total DWT 62,207,605 41,259,676 103,467,281 60.1% 39.9% 2H08 2,700,465 2,612,203 5,312,668 50.8% 49.2% 2009 12,235,650 10,818,983 23,054,633 53.1% 46.9% 2010 22,930,590 17,612,820 40,543,410 56.6% 43.4% 2011 18,776,300 9,143,120 27,919,420 67.3% 32.7%
Not all greenfield yards are problematic
Second, greenfield yards deliveries will only be about 22-26% of total Chinese yards deliveries over 2009-11 (Figure 13). Greenfield yards are defined as yards which have not yet delivered any vessel to date. Among them are three national yards COSCO, Jiangnan Changxing, and Guangzhou Longxue which are financially and technically sound. Third, Jiangmen Nanyang is an example of a successful greenfield yard. The privately-owned shipyard was built from scratch and essentially delivered on time. In January, Pacific Basin Shipping took delivery of the Silver Lake, the first in a series of handysize bulkers which it had ordered from Chinas newest shipyard, Jiangmen Nanyang Ship Engineering. The maiden newbuilding by Jiangmen Nanyang was delivered about a month later than planned as a result of technical and managerial problems at the yard. However, considering that the ship was built at the same time as the construction of the shipyard, the achievement was impressive. Chairman David Turnbull remarked that it had taken just two and a half years for the shipyard to develop from a plan into an efficient shipbuilding facility. The second vessel was delivered on time in May.
[ 11 ]
Figure 13: Greenfield yards bulk orderbook and delivery schedule

Shipyard Zhoushan Jinhaiwan COSCO Samjin Shipbuilding Jiangnan Changxing Shipbuilding Penglai Zhongbai Guangzhou Longxue Shandong Huahai Fujian Guanhai Zhejiang Zhenghe Nantong Changqingsha Nantong Daoda Heavy Wuhan Huaxia Wuhu Shipyard (Chery) Yangzhou Guoyu Nantong Huigang Jiangsu Xiangshui Zhejiang Jiantiao Shandong Baibuting Nanjing Dongze Jiangnan Changxing Heavy Total Chinese yards' bulk orderbook Greenfield yards' share (%)
Ownership Private National Private National (CSSC) Private National (CSSC) Private Private Private Private Private Private Private Private Private Private Private Private Private National (CSSC)
2009 DWT 1,744,000 1,738,000 402,000 354,000 300,800 230,000 186,500 179,300 156,000 140,800 137,600 116,800 90,000 90,000 67,300 57,000 55,303 34,000 32,500 0 6,111,903 23,054,633 26.5%
2010 DWT 2,080,000 2,015,800 435,500 1,416,000 902,400 690,000 0 259,600 33,000 140,800 66,400 116,800 0 228,000 201,900 171,000 0 59,300 0 920,000 9,736,500 40,543,410 24.0%
2011 DWT 832,000 733,800 167,500 0 0 1,840,000 0 226,600 0 140,800 0 0 0 228,000 0 0 0 46,100 0 2,030,500 6,245,300 27,919,420 22.4%
Minimal cancellations or failures

Cancellations of current year Cancellation of current year orders unlikely as capital has been committed by owners. In a Marine Money conference held in early March, some observers orders unlikely suggested that there will be a significant shortfall in available financing for ship owners to take up their newbuilding orders. Graham Porter of Seaspan Advisory Services expected a shortfall of US$150bn in the US$300bn of debt financing required to take up US$450bn-500bn of the current global orderbook. At the recent Marine Money annual Ship Finance Forum held in Hong Kong, various banks quoted higher spreads. Using a hypothetical example of a modern containership on a 10-year charter to an Asian line, assuming 65% financing, pricing could be fixed at LIBOR+0.60% last June. Currently, however, banks will ask for between 1.0% and 1.5% on top of LIBOR. Nevertheless, even if a financing shortfall were to materialise, we believe that the impact would be felt primarily for 2010 deliveries and beyond. This is because orders for 2008 deliveries were most probably placed in 2005-2006, and 40% or more of the purchase price would have already been paid in earlier instalments. With so much capital already sunk in, ship owners are unlikely to want to cancel. Furthermore, after several years of very strong freight markets, they should be able to draw on their internal cash reserves to pay for current year deliveries, even though the ongoing credit crisis may affect their ability to pay for ships scheduled for later deliveries. If for some reason owners do cancel their 2008 scheduled deliveries, the shipyards may have already commenced steel cutting, block building and equipment purchasing. As such, shipyards will most likely continue the building process on their own account and then resell the vessel on the open market to third-party buyers, with possibly no impact on expected newbuilding supply for this year. If orders are cancelled before the shipyards start the building process, the logical step for the yards is to bring forward the construction of remaining vessels in the orderbook, which again may not affect the size of the near-term newbuilding supply. The Jinhui cancellations have no impact on near-term supply outlook. Recent examples of order failures or cancellations bear out our suspicions. For instance, Hong Kong-listed Jinhui Shipping and Transportation Ltd recently terminated shipbuilding contracts with China Shipbuilding Industry Corp for two 300,000 dwt VLOCs. Both VLOCs were scheduled to be delivered in 2011. The shipbuilding contracts were signed on 23 November 2007, but were terminated before the first instalment was due on 31 January 2008, at a penalty of only US$2m per vessel.
Bulk and Tanker Shipping 6 August 2008 [ 12 ]
When announcing the termination of the contract, Jinhui noted that although it was able to secure financing, the terms were no longer as attractive as before. The Jinhui cancellation has no impact on 2008-2009 supply expectations. Cancellation of only 4.6m dwt in 2007. According to Worldyards, only a very small number of ships were cancelled in 2007, many of them before the onset of the US subprime crisis (Appendix 4). There have been various cancellations this year, with the most recent being the cancellation of four product carrier orders at Hyundai Mipo, and the cancellation of eight containership orders at Daewoo Shipbuilding & Marine Engineering. Specifically on dry bulk orders, we understand that Rizhao Steel, Oscar Wehr and Ole Marten had ordered capesizes and handysizes but failed to arrange financing for all of their orders. However, these new orders are for 2010 delivery and beyond, and will not have an impact on near-term newbuilding deliveries. Can shipyards cancel? This is possible given the sharp rise in steel costs, and various shipyards have tried to renegotiate the terms of their existing contracts. However, we have not encountered any instance of shipyards reneging on their obligations. Cancellations could materialise when freight rates start to fall. As had been the case in the past, when freight rates enter into a bear phase, shipowners who had placed orders may try to postpone the date of the scheduled deliveries and perhaps even cancel outright. However, these cancellations or delays are the result of lower rates, and would not have happened had freight rates remained strong.
Demolitions not likely until 2009-10

Demolitions will not be material until rates correct significantly No demolitions this year. We also highlight that there have been no demolitions so far this year, and only very minimal demolitions in 2007, as freight rates have been very strong (Figure 14). Despite the very advanced age profile of handysize ships, demolitions will be few and far between, because owners of ageing tonnage can redeploy vessels to South America, Africa or Asia where port restrictions less severe. Meanwhile, according to Lloyds List, a 37,000 dwt large handysize built in 1977 in Japan can earn around $37,000 per day on the spot market, making the cost of a fiveyear special survey of about US$2m worthwhile. Our conversations with the dry bulk companies under our coverage confirm our belief that demolitions will not happen unless freight rates correct significantly. Hence, we think that demolitions will not be seen until 2009 and 2010.
Figure 14: Dry bulk demolitions
5,000,000 4,000,000 3,000,000 2,000,000 942,290 1,000,000 0 2003 2004 2005 2006 2007 1H08 330,373 392,845 0 1,837,221 120 Total DWT (LHS) No of ships (RHS) 100 80 60 40 20 0
4,094,094
Source: Clarkson Research Services, CIMB/CIMB-GK Research
Ageing profile. We recognise that aged ships will have to head to the scrap yard sooner or later. The sector that will benefit the most from scrapping, when it happens, is likely to be the handysize segment. Of the 115.2m dwt more than 20 years old in the global bulk fleet, the handysize segment takes the lions share at 47.7m dwt, or 41.4%. More importantly, ships aged more than 20 years old comprise 62% of the handysize fleet (Figures 15 and 16). In our fleet development model, we have assumed that there will be no demolitions this year, but 10% of panamax, capesize and handy vessels above 20 years old will be scrapped in 2009, followed by 15% in 2010.
[ 13 ]
Figure 15: Ageing profile of bulk carriers by age category (dwt) More than 20 years old
140 120 100 80 60 40 20 0 All Bulkers Handysize Handymax Panamax Capesize 18.1 47.7 24.1 25.4 20 0 All Bulkers Handysize Handymax Panamax Capesize 115.2 120 100 80 60 40 12.4 21.0 29.8 45.2 108.3
10-19 years old
5-9 years old

80 70 60 50 40 30 20 10 0 All Bulkers Handysize Handymax
0-4 years old

120 100 80 60 25.0 43.4 23.6 9.2 32.3 108.5
71.7
16.8 7.9
21.9
40 20 0
Panamax
Capesize
All Bulkers Handysize Handymax Panamax
Capesize
Figure 16: Ageing profile of bulk carriers by ship category (% of dwt) Handysize
0 - 4 years 11.9%
Handymax
0 - 4 years 29.7% > 20 years 22.8% 15 - 19 years 6.3%
> 20 years 61.8%
5 - 9 years 10.2%
10 - 14 years 11.7% 15 - 19 years 4.4%
5 - 9 years 21.1%
10 - 14 years 20.1%
Panamax
Capesize
5 - 9 years 22.5%
10 - 14 years 19.7%
5 - 9 years 16.1%
10 - 14 years 20.2%
[ 14 ]
Handysize rates likely less volatile due to potential scrapping. As a result of the aged profile of the handysize segment, we believe that fleet growth will be minimal in 2009 and 2010 (Figure 17). Handysize specialists like Precious Shipping are bullish about the prospects of their particular sector. However, it would be premature to conclude that the trend in handysize rate would decouple from the trend in capesize and panamax rates, because historically it has never happened. It is however reasonable to expect that handysize rate would exhibit less volatility than the rates of the larger vessel classes.
Figure 17: Fleet growth net of scrapping Handysize
Millions
Millions 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2007 2008F 2009F 2010F 2% 1% 0% Handy size tonnage grow th (dw t) Grow th (%) 5% 4% 3%
Handymax
14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2007 2008F 2009F 2010F Handy max tonnage grow th (dw t) Grow th (%) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
Panamax
Millions
Capesize
Millions
14% 12% 10% 8% 6% 4% 2% 0%
18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0
Panamax tonnage grow th (dw t) Grow th (%)
60.0 50.0 40.0 30.0 20.0 10.0 0.0
Capesize tonnage grow th (dw t) Grow th (%)
35% 30% 25% 20% 15% 10% 5% 0%
2007
2008F
2009F
2010F
2007
2008F
2009F
2010F
Demand outlook weakens

Although demand for the shipping of dry bulk commodities continues to be very strong, we are seeing some dark clouds on the horizon, due principally to the deteriorating business environment within China and in the US and Europe. Economic growth in China has slowed down for two consecutive quarters. Chinas 2Q GDP grew by only 10.1% yoy, a slowdown from 10.6% in 1Q and from a peak of 11.9% in 4Q07 (Figure 18). Much of the slowdown was caused by lower net exports and a contraction in Chinas trade surplus. In 2007 and 2008, transpacific eastbound (Asia to US) container volumes grew at very low single digit percentages at best, or even contracted. While the slowdown in the US was not a surprise, we view with alarm the dramatic slowdown in the European Union. Asia to Europe container volumes grew at a 20% pace in 2007, but slowed dramatically to only the 10% level in the first half of 2008. Business confidence readings which were strong in France and Germany in the early months of 2008 have dipped dramatically. Italy is stagnating. Spain, Ireland, Denmark are either in a recession or the brink of one. Demand for commodities could be affected. As favourable external economic conditions become unfavourable, Chinas demand for commodities is likely to moderate, in line with reduced demand for manufactured goods. Chinas economic growth has been the key driver for as much as 90% of incremental dry bulk shipping demand. We think that iron ore imports could be especially at risk, if steel demand
Slowing Chinese economic growth
[ 15 ]
moderates. Imports of thermal coal or coking coal are likely to stay strong and remain relatively unaffected by any economic slowdown, due to their critical shortage within China. Base case still for strong Chinese import growth. Despite the rising spectre of risks, we emphasise that our base-case assumption remains premised on the strong Chinese demand for iron ore and coal imports.
Figure 18: Chinas GDP growth (%)
12% 11% 10% 9% 8% 7% 6% 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 11.9% 10.6% 10.1%
Source: CEIC, CIMB/CIMB-GK Research
Iron ore import growth could Pace of iron ore import growth potentially at risk. Fixed asset investment growth slow if demand for industrial of 26.8% yoy in 1H08 and a 22.7% yoy expansion in floor space under construction or machinery steel also slow suggest that demand for steel from the Chinas construction sector is likely to stay fairly strong in the near term (Figures 19 and 20). Post earthquake reconstruction should add another layer of demand. However, that is only part of the story. Chinas construction sector underwrites consumption of 50-60% of the steel produced in the country. Another 10% comes from shipyards, where the large order backlog at the Chinese yards suggests little risk of lower steel consumption from this sector in the next two to three years. The remaining 30-40% of demand comes from machinery and other industries, and it is here that the global economic slowdown could exert its greatest influence. If steel consumption growth moderates, the expansion in steel production and iron ore consumption and imports will follow suit.
Figure 19: Chinas fixed asset investment (Rmb bn)
32% 30% 28% 26% 24% 22% 20% J F M A M J J A S O C D J F M A M J J A S O C D J F M A M J 06 07 08
FAI (RMB bn, RHS)
FAI: YTD (%YoY, LHS)
2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
[ 16 ]
Figure 20: Chinas floor space under construction (million square metres)
4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 J FMAM J J A SON D J F MAM J J A SOND J FMAM J J A SOND J FMAM J J A SON D J FMAM J 04 05 06 07 08
Floor space under construction - ytd (m sq m)
Growth (%)
35% 30% 25% 20% 15% 10% 5% 0%
Coking and thermal coal shortages could affect steel production growth
Dramatic slowdown in steel production from coking coal shortage. We are already witnessing a dramatic slowdown in Chinas steel production growth to just 10% yoy in 1H08, against 20% yoy in 1H07 and 15.8% yoy for 2007 (Figure 21). The countrys steel industry is constrained by a shortage of coking coal, and coke production growth appears to be slowing quickly (Figure 22). Thermal coal is also in short supply, and the resulting electricity shortages have already shuttered some of Chalcos aluminium smelting facilities in Shanxi. Chinas electricity production growth has plunged to only 8% yoy in June (Figure 23). Meanwhile, the higher iron ore and coking coal prices, and higher electricity tariffs are pressurising profitability, and may cause the closure of the small inefficient steel mills.
Figure 21: Chinas steel production
50,000 40,000 30,000 20,000 10,000 J FMAMJ J ASOND J FMAMJ J A SOND J FMAM J J A SOND J FMAM J J ASOND J FMAMJ J ASOND J FMAMJ 03 04 05 06 07 08
China's steel production (000 mt)
YTD growth (RHS)
35%
25%
15%
5%
Figure 22: Chinas coke production

30,000 27,500 30% 25,000 22,500 20,000 10% 17,500 15,000 J F M AM J J A S ON D J F M AM J J A S O ND J F M AM J J A S ON D J F M AM J 05 06 07 08
Coke production (000 tonnes)
Growth (%)
40%
20%
0%
[ 17 ]
Figure 23: Chinas electricity production

300 250 20% 200 10% 150 100 J FMAM J J ASOND J FMAM J J A SOND J FMAM J J A SOND J FMAM J J A SOND J FMAM J J A SOND J FMAM J 03 04 05 06 07 08
Electricity production (bn kwh)
Growth (%)
30%
0%
[ 18 ]
Figure 24: Crude steel production and consumption

(m tonnes) Crude steel consumption EU27 United States Brazil Russia China Japan Korea Taiwan India Others Change EU27 United States Brazil Russia China Japan Korea Taiwan India Others 2005A 1,126 182 113 19 36 350 83 49 24 41 229 2006A 1,239 213 129 21 43 384 83 52 24 49 241 +113 +31 +16 +2 +7 +34 +0 +3 +0 +8 +12 2007A 1,322 218 123 22 46 438 83 53 25 54 260 +83 +5 -6 +1 +3 +54 +0 +1 +1 +5 +19 2008F 1,398 222 123 23 50 482 84 56 25 59 274 +76 +4 +0 +1 +4 +44 +1 +3 +0 +5 +14 2009F 1,474 223 125 24 53 528 84 58 27 65 287 +76 +1 +2 +1 +3 +46 +0 +2 +2 +6 +13 2010F 1,543 224 127 25 57 570 84 60 28 70 298 +69 +1 +2 +1 +4 +42 +0 +2 +1 +5 +11 2011F 1,616 224 128 26 61 616 84 62 29 76 310 +73 +0 +1 +1 +4 +46 +0 +2 +1 +6 +12 2012F 1,692 224 129 28 64 665 84 64 30 81 323 +76 +0 +1 +2 +3 +49 +0 +2 +1 +5 +13 2013F 1,769 225 129 29 67 715 85 67 30 87 335 +77 +1 +0 +1 +3 +50 +1 +3 +0 +6 +12
(m tonnes) Crude steel production EU27 United States Brazil Russia China Japan Korea Taiwan India Others Change EU27 United States Brazil Russia China Japan Korea Taiwan India Others Excess of production over consumption
Source: ABARE, CIMB/CIMB-GK estimates
2005A 1,140 196 95 32 66 356 112 48 19 38 178
2006A 1,250 207 99 31 71 423 116 48 20 49 186 +110 +11 +4 -1 +5 +67 +4 +0 +1 +11 +8
2007A 1,344 211 97 34 72 489 120 51 21 53 196 +94 +4 -2 +3 +1 +66 +4 +3 +1 +4 +10 +22
2008F 1,415 214 100 35 76 533 121 53 21 57 205 +71 +3 +3 +1 +4 +44 +1 +2 +0 +4 +9 +17
2009F 1,492 216 101 37 80 586 121 54 22 61 214 +77 +2 +1 +2 +4 +53 +0 +1 +1 +4 +9 +18
2010F 1,554 216 99 39 81 633 121 55 22 66 222 +62 +0 -2 +2 +1 +47 +0 +1 +0 +5 +8 +11
2011F 1,626 217 100 41 84 684 122 56 23 71 228 +72 +1 +1 +2 +3 +51 +1 +1 +1 +5 +6 +10
2012F 1,700 218 100 43 88 735 122 57 23 76 238 +74 +1 +0 +2 +4 +51 +0 +1 +0 +5 +10 +8
2013F 1,779 220 101 45 91 790 122 58 24 81 247 +79 +2 +1 +2 +3 +55 +0 +1 +1 +5 +9 +10
+14
+11
ABARE revised down Chinas iron ore import growth for 2008
Will new iron ore supply find a home in China? Over the past few years, every incremental tonne of high quality iron ore mined in Australia and Brazil has found a ready buyer in China. This is because Chinas domestically-mined ore is high cost and has a low Fe content. We will not see any change to this relationship in the near term, in our opinion. However, given the stresses now faced by Chinas steel mills, there is a growing possibility that China may not be able to absorb this years record mining production increases from Rio Tinto, BHP Billiton, Fortescue Metals Group and Vale.
[ 19 ]
The Australian Bureau of Agricultural and Resource Economics (ABARE) in its Jun quarter report on Australian commodities revised down Chinas crude steel production estimate for 2008 from 538m to 533m tonnes, suggesting full-year growth expectations of only 9% (Figure 24). ABARE also revised down Chinas iron ore imports by 4% from 453m to 435m tonnes for 2008 (Figure 25), on the basis of a lower steel production forecast and higher-thanexpected domestic iron ore production. Chinas domestic iron ore production continues to barrel ahead, and has defied our expectations of moderation. Production reached a record 81.6m tonnes in June, representing growth of 20.3% yoy (Figure 26).
Figure 25: Iron ore trade
(m tonnes) Iron ore imports EU27 Japan China Korea Taiwan Others Change in imports EU27 Japan China Korea Taiwan Others (m tonnes) Iron ore exports Australia Brazil India Canada South Africa Sweden Others Change in exports Australia Brazil India Canada South Africa
2005A 744 160 132 275 43 15 119
2006A 765 170 134 326 44 15 76 +21 +10 +2 +51 +1 +0 -43
2007A 835 174 139 384 44 16 78 +70 +4 +5 +58 +0 +1 +2 2007A 835 267 269 93 28 32 20 126 +70 +20 +22 +7 +0 +5
2008F 924 177 143 435 48 16 105 +89 +3 +4 +51 +4 +0 +27 2008F 924 328 306 100 30 35 22 103 +89 +61 +37 +7 +2 +3
2009F 999 179 143 487 49 16 125 +75 +2 +0 +52 +1 +0 +20 2009F 999 377 345 94 30 39 24 90 +75 +49 +39 -6 +0 +4
2010F 1,069 179 144 555 49 17 125 +70 +0 +1 +68 +0 +1 +0 2010F 1,069 389 395 89 30 42 25 99 +70 +12 +50 -5 +0 +3
2011F 1,148 180 145 617 50 17 139 +79 +1 +1 +62 +1 +0 +14 2011F 1,148 432 432 89 31 43 26 95 +79 +43 +37 +0 +1 +1
2012F 1,227 180 146 684 51 18 148 +79 +0 +1 +67 +1 +1 +9 2012F 1,227 471 468 88 32 45 28 95 +79 +39 +36 -1 +1 +2
2013F 1,310 182 147 761 52 18 150 +83 +2 +1 +77 +1 +0 +2 2013F 1,310 506 502 88 33 46 29 106 +83 +35 +34 +0 +1 +1
2005A 744 239 223 81 28 27 18 128
2006A 765 247 247 86 28 27 18 112 +21 +8 +24 +5 +0 +0
Figure 26: Chinas iron ore production (million tonnes)

85,000 75,000 65,000 55,000 45,000 35,000 25,000 15,000 J F M AM J J A S ON D J F M AM J J A S ON D J F M AM J J A S ON D J F MAM J 05 06 07 08
Iron ore production (000 tonnes)
Growth (%)
70% 60% 50% 40% 30% 20% 10% 0%
[ 20 ]
Iron ore inventories remain high
Chinas iron ore inventories remain high and actually rose throughout July, despite widely-expected destocking (Figures 27 and 28). Inventory as at 1 August was 73.5m tonnes, 60% higher than a year ago. Iron ore traders and steel mills might be accelerating the pace of imports to prepare for the potential Olympic-related disruptions. The implication is that the pace of Chinas iron ore imports could weaken in August and September, and may not see rebound until 4Q08.
Figure 27: Chinas iron ore inventories at various ports vs. monthly steel production
80,000 70,000 60,000 50,000 40,000 30,000 J A S O N D J F M A M J 06 07
Source: Bloomberg, CIMB/CIMB-GK Research Note: The last three readings are weekly data for the month of July
Iron ore inventories (000 tonnes) Inventory:Monthly Steel Production
1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80
J A S O N D J F M A M J J- J- J- J- A08 1W 2W 3W 4W 1W
Figure 28: Chinas iron ore imports (million tonnes)

45,000 40,000 35,000 30,000 25,000 20,000 15,000 J F MAM J J A S ON D J F MAM J J A S ON D J F M AM J J A S ON D J F MAM J 05 06 07 08
Iron ore imports (000 tonnes)
Growth (%)
50% 40% 30% 20% 10% 0% -10%
Coking coal demand strong
Trade in coking and thermal coal to remain robust. Unlike the risks faced by the iron ore trade, the trade in coking coal and thermal coal should be unaffected because of global shortages. The bottleneck in the coal trades is not demand, but rather supply. The floods in Queensland, Australia in mid-January and mid-February resulted in the loss of around 10m tonnes of coal export capacity for 1H08. The largest miner in Queenslands Bowen Basin BHP Billiton Mitsubishi Alliance (BMA) and BHP Billiton Mitsui (BMC) announced reduced output of between 7.0m-8.5m tonnes for the six months to June 2008, and other miners in the area were also affected. We believe production is now back to normal, but the output for the 2H will not be able to replace lost production in 1H. For 2008, ABARE is expecting only 7m tonnes growth in global coking coal trade, with Australian exports falling 3m tonnes. Given the strong global demand for coking coal, we expect stronger export growth to reassert itself from 2009 onwards.
[ 21 ]
Figure 29: Coking coal trade

(m tonnes) Coking coal imports EU27 Japan China Korea Taiwan India Brazil Others Change in imports EU27 Japan China Korea Taiwan India Brazil
(m tonnes) Coking coal exports Australia Canada United States Russia Others Change in exports Australia Canada United States Russia Others
2005A 206 51 63 7 21 5 20 15 24
2006A 219 53 60 9 20 6 19 13 39 +13 +2 -3 +2 -1 +1 -1 -2
2007A 229 55 64 10 22 7 22 15 34 +10 +2 +4 +1 +2 +1 +3 +2

2007A 229 138 27 29 13 22 +10 +14 +2 +4 +3 -13
2008F 236 57 65 12 22 7 25 16 32 +7 +2 +1 +2 +0 +0 +3 +1
2008F 236 135 29 32 15 25 +7 -3 +2 +3 +2 +3
2009F 253 58 65 13 23 7 29 17 41 +17 +1 +0 +1 +1 +0 +4 +1

2009F 253 149 31 35 16 22 +17 +14 +2 +3 +1 -3
2010F 248 59 66 15 23 7 30 18 30 -5 +1 +1 +2 +0 +0 +1 +1
2010F 248 146 26 30 16 30 -5 -3 -5 -5 +0 +8
2011F 258 60 66 16 23 7 32 19 35 +10 +1 +0 +1 +0 +0 +2 +1

2011F 258 153 27 30 17 31 +10 +7 +1 +0 +1 +1
2012F 270 62 66 17 23 7 35 20 40 +12 +2 +0 +1 +0 +0 +3 +1

2012F 270 163 28 31 19 29 +12 +10 +1 +1 +2 -2
2013F 280 64 67 18 24 7 37 21 42 +10 +2 +1 +1 +1 +0 +2 +1

2013F 280 173 29 31 21 26 +10 +10 +1 +0 +2 -3
2005A 206 125 26 26 12 17
2006A 219 124 25 25 10 35 +13 -1 -1 -1 -2 +18
Thermal coal trade driven by Growth in steam coal trade to continue with strong Indonesian production. Indonesian output Indonesia is now the single largest exporter of steam or thermal coal, with an expected 29% market share of global exports in 2008. The second largest exporter, Australia, has a 17% share. Although growth in Australian exports of steam coal is expected to be crimped by infrastructure issues at the Newcastle port and Queensland ports, strong growth in Indonesian exports is driving global trade growth. Furthermore, the commissioning of Indonesian coal-fired power plants has been slower than expected, allowing the increased production to be exported. ABARE expects the overall seaborne thermal trade to grow 22m tonnes (3% yoy) in 2008, driven by China and Indias strong demand for electricity and the importance of coal as a source of energy in those two countries. Indonesia should increase exports by 15m tonnes (8% yoy) in 2008, against 18m tonne (10.6%) growth in 2007. New Australian supply is likely to be weak at just 8m tonnes growth (7% yoy) while Chinas exports could fall 4m tonnes or 8%. Weaker Chinese exports and stronger Indonesian exports will contribute to higher tonne mile demand.
[ 22 ]
Figure 30: Thermal coal trade

(m tonnes) Thermal coal imports EU27 Japan Korea Taiwan China India Others Change in imports EU27 Japan Korea Taiwan China India Others 2006A 635 181 118 60 58 34 24 162 2007A 683 173 124 67 60 45 29 186 +48 -8 +6 +7 +3 +11 +5 +24 2008F 705 171 131 75 63 41 33 191 +22 -2 +7 +8 +3 -4 +4 +5 2009F 731 174 132 80 64 43 39 199 +26 +2 +1 +5 +1 +2 +6 +8 2010F 737 173 123 78 65 56 47 196 +6 -1 -9 -3 +1 +13 +8 -3 2011F 752 174 123 78 65 59 52 200 +15 +1 +0 +1 +1 +3 +5 +4 2012F 769 174 124 79 66 62 60 204 +17 +0 +0 +1 +1 +3 +8 +4 2013F 792 174 124 83 68 65 70 208 +24 +0 +0 +4 +2 +3 +10 +4
(m tonnes) Thermal coal exports Australia China Columbia Indonesia Russia South Africa United States Others Change in exports Australia China Columbia Indonesia Russia South Africa United States Others
2006A 635 112 59 60 170 77 68 20 70
2007A 683 112 51 65 188 75 68 24 101 +48 +1 -8 +5 +18 -2 +0 +4 +31
2008F 705 120 47 69 203 72 67 26 101 +22 +8 -4 +4 +15 -3 -1 +2 -0
2009F 731 125 40 73 217 73 69 26 108 +26 +5 -7 +4 +14 +1 +2 +0 +7
2010F 737 135 31 78 215 79 78 24 97 +6 +10 -9 +5 -2 +6 +9 -2 -11
2011F 752 155 29 83 222 80 81 23 79 +15 +20 -2 +5 +7 +1 +3 -1 -18
2012F 769 165 27 88 229 81 83 22 73 +17 +10 -2 +5 +7 +1 +2 -1 -6
2013F 792 172 25 93 232 82 85 22 81 +24 +7 -2 +5 +3 +1 +2 -1 +8
The upshot heightened downside risks for dry bulk sector

Sell on post-Olympic rebound Revising up 2008, revising down 2009 and 2010. We are revising up our 2008 average BDI projection from 8,000 to 8,500 points. On the other hand, we are lowering our 2009 forecast from 7,000 to 6,000 points, and reducing the 2010 expectation from 5,500 to 3,000 points. We now expect the average BDI to rise 20% yoy this year, followed by a 29% correction in 2009 and another 50% correction in 2010. Sell aggressively on the post-Olympics rebound. Despite our average 2008 upgrade, we believe that the highest point of the BDI is probably behind us. While a post-Olympics freight rate rally driven by the resumption of the shuttered production facilities could be strong, we are growing less confident on the sustainability and the depth of any rally. We believe that investors should use the opportunity provided by the post-Olympic rally to sell the high risk names aggressively and switch to the low risk plays.. This strategy represents our more negative view on the dry bulk sector. In our previous reports, we recommended long positions in dry bulk stocks after the summer correction, but we now believe that the risks of this strategy are not worth the rewards.
[ 23 ]
The key event leading to our more bearish view is our re-evaluation of the size of the conversions taking place. We had previously expected only 4m dwt to be converted into dry bulk vessels in 2008, and another 4.5m dwt in 2009. However, we now forecast conversion deliveries of 8.8m dwt this year and another 4.7m dwt next year. Our forecasts are conservative, and Worldyards estimated as many as 50 converted tankers (11.7m dwt) could enter the dry bulk fleet over the next six months. We also have new worries about the pace of Chinese demand growth, as GDP expansion moderates, and the steel industry faces coking and thermal coal shortages.
Figure 31: Baltic Dry Index projections annual averages
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2002 2003 2004 2005 2006 2007 2008F 2009F 2010F 1,145 130% 71% -25% -6% 2,639 122% 20% -29% -50% 4,505 3,378 3,188 3,000 7,076 6,000 8,500
Source: Bloomberg, CIMB/CIMB-GK Research
Figure 32: Baltic Dry Index

13,000 11,000 9,000 7,000 5,000 3,000 1,000 J FMAMJ J ASOND J FMAMJ J ASOND J FMAMJ J ASOND J FMAMJ J ASOND J FMAMJ J ASOND J FMAMJ J A 03 04 05 06 07 08
Baltic Dry Index
Quarterly average
Figure 33: Baltic Capesize, Panamax, Supramax and Handysize indices

20,000 15,000 10,000 5,000 0 J FMAMJ J ASOND J FMAMJ J ASOND J FMAM J J ASOND J FMAM J J A SOND J FMAMJ J ASOND J FMAMJ J 03 04 05 06 07 08
Baltic Capesize Index Baltic Panamax Index Baltic Supramax Index Baltic Handysize Index
[ 24 ]
Figure 34: Capesize Time Charter Equivalent Rates (US$/day) Tubarao, Brazil to Beilun, China
250,000 200,000 150,000 100,000 50,000 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 03 04 05 06 07 08 QTD
Capesize ore (Tubarao-Beilun)
Growth (%)
500% 400% 300% 200% 100% 0% -100%
Figure 35: Panamax Time Charter Equivalent Rates (US$/day) Newcastle, Australia to Japan
100,000 80,000 60,000 40,000 20,000 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 03 04 05 06 07 08 QTD
Panamax coal (Newcastle-Japan)
Growth (%)
600% 500% 400% 300% 200% 100% 0% -100%
Figure 36: Share prices against the Baltic Dry Index Precious Shipping vs. BDI
Baltic Dry Index PSL TB Equity
Thoresen Thai Agencies vs. BDI

13,000 11,000 9,000 7,000 5,000 3,000 1,000 J FMAMJ JASOND J FMAMJ J ASONDJ FMAMJ JA 06 07 08
Baltic Dry Index TTA TB Equity
13,000 11,000 9,000 7,000 5,000 3,000 1,000
40 35 30 25 20 15 10 5 0 08
70 60 50 40 30 20 10 0
J FMAMJ JASOND J FMAMJ J ASONDJ FMAMJ JA 06 07
Malaysian Bulk Carriers vs. BDI

Baltic Dry Index MBC MK Equity
STX Pan Ocean vs. BDI

13,000 11,000 9,000 7,000 5,000 3,000 1,000 J FMAMJJASONDJ FMAMJJASONDJ FMAMJJA 06 07 08
Baltic Dry Index STX SP Equity
13,000 11,000 9,000 7,000 5,000 3,000 1,000
6.00 5.00 4.00 3.00 2.00 1.00 0.00
5.00 4.00 3.00 2.00 1.00 0.00
J FMAMJJASONDJ FMAMJ JASONDJ FMAMJJA 06 07 08
[ 25 ]
Pacific Basin vs. BDI

13,000 11,000 9,000 7,000 5,000 3,000 1,000 J FMAMJ JASONDJ FMAMJ JASONDJ FMAMJ JA 06 07 08 Baltic Dry Index 2343 HK Equity 20.00 15.00 10.00 5.00 0.00
China Shipping Development vs. BDI

13,000 11,000 9,000 7,000 5,000 3,000 1,000 J FMAMJ JASONDJ FMAMJJASONDJFMAMJJA 06 07 08
Baltic Dry Index 1138 HK Equity
30.00 25.00 20.00 15.00 10.00 5.00 0.00
Upside risks
Rebound expected after Olympics Rebound post Games could be very strong. The Summer Olympics (8-24 August) and the Paralympic Games (6-17 September) in Beijing could cause a two month-long economic slowdown in northern China, if the government enforces widespread closure of factories and power plants surrounding Beijing. The impact, however, will be temporary and industrial output post August could roar back with a vengeance. If the rebound is stronger and longer than we expect, investors who are not invested in the sector may miss out. Conversion output could be delayed. Although we expect a lot of conversion deliveries in 2H08, some may be delayed by yard congestion and bottlenecks in the supply of key equipment like hatch covers. The generally accepted rule of thumb is that it usually takes 5-6 months of engineering design and class approval, and another 5-6 months for the actual work of converting the vessel. However, this process has been delayed to approximately 15 months in total, particularly for projects launched in 2H07. As a result, some conversions intended for delivery in 2H08 may be pushed forward to 1H09. However, we believe we have already compensated for this issue, by lowering our own conversion estimates for 2008 delivery from the higher Worldyards estimates. Fortescue Metals Group to contribute 25m tonnes of iron ore exports in 2H08. FMG is on track to emerge as the third major supplier of iron ore from the Pilbara region of Western Australia. If it succeeds in delivering 25m tonnes of iron ore output for export to China, it will be concentrated in the second half of this year. Higher coking coal cargoes in 2H. The floods which inundated the coal mines in Queensland, Australia in January and February probably removed 10m tonnes of export capacity in 1H08. This sets the stage for a 2H recovery of coking coal export volumes, which we estimate could rise by as much as 20% hoh. BHP Billiton recently announced that its previously flooded mines have recommenced production, and that output will gradually rise to original levels.
Yards may delay on conversion jobs
FMG output to kick in second half 2008
Higher coking coal cargoes in second half 2008
[ 26 ]
Figure 37: Supply-demand balance in the dry bulk sector

Source: Clarkson 2003 m mt yoy % 37 7.7% 6 3.5% 46 11.3% -6 -2.2% 37 4.2% 120 5.4% 2003 m dwt 71.2 57.3 82.8 98.2 309.5 305.8 2003 364 168 -196 stronger +130.4% yoy % -1.2% 5.1% 1.4% 4.5% 2.4% 4.5% m dwt 72.6 61.2 89.1 105.6 328.5 319.0 2004 755 203 -551 stronger +70.7% Source: Clarkson 2004 m mt yoy % 79 15.3% 1 0.6% 21 4.6% 10 3.8% 138 5.9% 249 7.1% 2004 yoy % 2.0% 6.8% 7.6% 7.5% 6.1% 4.3% m dwt 73.6 66.6 96.1 114.1 350.4 339.5 2005 318 315 -4 softer -25.0% Source: Clarkson 2005 m mt yoy % 65 10.9% 2 1.1% 24 5.1% -3 -1.1% 17 1.6% 105 4.2% 2005 yoy % 1.4% 8.8% 7.9% 8.0% 6.7% 6.4% m dwt 73.9 71.3 103.8 124.1 373.1 361.8 2006 594 343 -251 softer -5.6% Source: Clarkson 2006 m mt yoy % 61 9.1% 8 0.5% 46 4.2% 20 3.7% 61 1.6% 196 4.2% 2006 yoy % 0.4% 7.1% 8.0% 8.8% 6.5% 6.6%
Trade growth (m mt) Iron ore Coking coal Steam coal Grain Minor bulk (incl. alumina/bauxite/phosphate) Bulk demand growth Fleet at year-end (m dwt) Handysize Handymax Panamax inc Combo Capesize inc Combo Available vessels Average fleet capacity (m dwt) Panamax-vessel equivalent growth (number of ships) Demand growth Supply growth Change in Supply-Demand balance Freight rates Average change in Baltic Dry Index (%)
Notes: 1. Supply and demand growth is in terms of Panamax equivalents 2. Demand growth = trade growth converted into Panamax vessels based on: 55,000t cargoes x 6 trips a year 3. Supply growth = net change in bulk fleet divided by 65,000 dwt. 4. Supply/Demand balance: +ve number = ship surplus (rate bearish); -ve number = ship deficit (rate bullish)
Source: Ciarkson 2007 m mt yoy % 65 9.0% 14 7.4% 22 4.0% 3 1.0% 54 4.9% 158 5.6% 2007 m dwt 76.0 76.9 108.3 131.4 392.6 382.8 367.5 2007 479 89 -390 stronger 122.0% yoy % 2.8% 7.9% 4.3% 5.9% 5.2% 5.8% 1.6% m dwt 79.5 85.1 116.7 148.3 429.6 411.1 398.7 2008F 506 480 -26 stronger 0.0% Source: CIMB forecast 2008F m mt yoy % 90 11.4% 7 3.4% 22 3.9% 7 2.4% 41 3.6% 167 5.6% 2008F yoy % 4.7% 10.7% 7.8% 12.8% 9.4% 7.4% 8.5% m dwt 81.9 98.3 126.2 178.5 484.9 457.2 448.1 2009F 558 759 201 softer? 0.0% Source: CIMB forecast 2009F m mt yoy % 92 10.5% 12 5.5% 29 5.0% 11 3.7% 40 3.4% 184 5.8% 2009F yoy % 3.0% 15.4% 8.2% 20.4% 12.9% 11.2% 12.4% m dwt 82.2 110.4 142.1 234.2 568.9 526.9 521.6 2010F 515 1,131 616 softer? 0.0% Source: CIMB forecast 2010F m mt yoy % 98 10.1% 11 5.0% 6 1.0% 13 4.3% 41 3.4% 170 5.1% 2010F yoy % 0.4% 12.3% 12.6% 31.2% 17.3% 15.2% 16.4%
Trade growth (m mt) Iron ore Coking coal Steam coal Grain Minor bulk (incl. alumina/bauxite/phosphate) Bulk demand growth Fleet at year-end (m dwt) Handysize Handymax Panamax inc Combo Capesize inc Combo Available vessels Average fleet capacity (m dwt) Effective capacity (m dwt) Panamax-vessel equivalent growth (number of ships) Demand growth Supply growth Change in Supply-Demand balance Freight rates Average change in Baltic Dry Index (%)
Source: Clarkson Research Services, CIMB/CIMB-GK estimates
[ 27 ]
Figure 38: Selected events in the dry bulk sector

Dec 06 China's Baosteel agrees 2005 BDI trends low er all through 2005 as demand for commodities moderate from 2004 lev els, and v essel Aug 04 Japan's Kansai Electric Pow er shuts dow n all its nuclear plants due to an accident at its Mihama plant, raising demand for alternativ e fuel such as coal. 13,000 11,000 9,000 7,000 5,000 3,000 1,000 J FM AM J J A S ON D J F M AM J J A S ON D J FM AM J J A S ON D J F M A M J J A S ON D J F M AM J J A S O N D J F M A M J J A 03 1Q03 China's economic grow th takes off, w ith 1Q03 real GDP grow ing 10.3% y oy , and sustaining abov e the 9% for the nex t sev en quarters 1H04 BDI corrects ov er fears about China's macroeconomic tightening measures and w hether it w ill cause hard landing 04 4Q04 China's economic grow th breaches the 10% mark in 4Q04 and stay s around those lev els for the nex t six quarters
Source: CIMB/CIMB-GK estimates
Dec 07 - Jan 08 Vale defers nomination of ships to ease congestion off Brazil. BHP Billiton declares force majeure on Queensland coal operations. China bans ex port of coal after snow storms. Feb 08 Steel mills agree w ith Vale for 65% increase in iron ore contract price. China begins stockpiling iron ore. Mar 08 China delay s taking deliv ery of spot iron ore shipments from Australia. Argentinean farmers strike and prev ent mov ement of grain to ex port terminals. May 08 China raises port charges for storage of iron ore. China orders steel mills in Hebei to control pollution during Oly mpics. Fortescue Metals Group loads its first iron ore cargo bound for China. Jun 08 Baosteel agrees to an 85% price hike w ith Rio Tinto and BHP Billiton. Jul 08 Factory closures in areas surrounding Beijing from 20 Jul. China's 2Q GDP grow th slow s to 10.1%, from 10.6% in 1Q and 11.9% in 4Q07. Aug 08 Beijing Oly mpics from 8-24 Aug. Sep 08 Paraly mpic Games from 6-17 Sep.
to a 9.5% price hike for iron ore for the Apr 07 Mar 08 period. 1Q07 China's GDP grow th May 06 China's steel mills return to buy iron ore after reluctantly agreeing to a 19.5% price hike for iron ore for the Apr 06 - Mar 07 period. This is the key ev ent that marked the start of the BDI rally . breaches 11% Jan 07 China becomes a net importer of coal for the first time Feb 07 Vesel queues off New castle rise to 73 ships
deliv eries accelerate Feb 05 Nippon Steel and other Japanese steel mills agree w ith CVRD for a 71.5% price hike for iron ore for the Apr 07 - Mar 08 period.
Baltic Dry Index Quarterly av erage
05 4Q05
06 Sep 06
07 May 07
08
China's steel mills slow dow n import of iron ore in order to influence ongoing price negotiations, causing BDI to remain w eak until May 06
Australian coal miners decide to abandon the capacity balancing sy stem, w hich
Vesel queues off New castle fall to 56 after Aussie miners decide to reimpose ex port
quotas, but rises back to 74 increased v esel queues in Jun due to storms. off New castle.
[ 28 ]

Conversion removals and stronger demand to keep rates elevated Spectacular rally to continue for the rest of 2008. Crude tanker freight rates have enjoyed a spectacular run this year, against our expectations of a modest decline. We expect rates to remain strong for the remainder of the year, but moderate in 2009 under the weight of newbuilding deliveries. However, as we will elaborate later, 2009 tanker rates may not be materially lower, as conversion removals will probably be higher than our current expectations. Both demand and supply factors have played a role in the current freight rate strength. Although demand growth has been revised down as a result of record crude oil prices, demand is still expected to grow globally at a pace of 0.9% yoy in 2008, as consumption growth in Asia offsets consumption declines in the developed world. Rates have also been strong because the worlds increased reliance on Middle Eastern oil has expanded the distances shipped. Supply growth has been negligible so far this year, with the removal of single-hull tankers for conversion into dry bulk, offshore and heavy lift vessels. The commercial obsolescence of single-hull tankers has also accelerated after the Hebei Spirit oil spill off the coast of South Korea last year, leading to stronger rates for double-hull vessels. Meanwhile, negative crack spreads on fuel oil have reduced the demand for sour crude, forcing Iran to use tankers as storage.
Demand
Consumption in China rising Demand still growing despite high oil price. Although demand growth has been the fastest revised down by the International Energy Agency and OPEC throughout 2008 as a result of record crude oil prices, demand is still expected to grow globally at a pace of 0.9% yoy for the full year (Figure 39). Consumption growth in Asia is expected to offset consumption declines in the developed world, with Chinese, Middle Eastern and Latin American consumption growing the fastest (Figure 40). Global production of oil has also increased at a fairly strong pace of 1.9% yoy during 1H08 to an average of 86.8m bpd, from 85.2m a year ago (Figure 41). Further production increases are likely, underwritten by the Saudi Arabian commitment to pump more oil, and also higher output in Iraq and Angola.
Figure 39: Oil demand (m bpd)
89 88 87 86 85 84 83 82 2004 2005 2006 2007 2008F 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08F 3Q08F 4Q08F Total demand (m bpd) Growth (%) 2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0%
Source: IEA, CIMB/CIMB-GK Research
[ 29 ]
Figure 40: Forecast growth in oil demand for 2008

6.0% 4.5% 3.0% 1.5% 0.0% -1.5% -3.0%
5.5%
5.1% 4.3% 2.1% 1.3% 0.6% 0.0% OECD Europe North America -1.9%
China
Middle East
Latin America
FSU
Asia ex China, ex Japan
OECD Asia
Figure 41: Global production of crude oil (m bpd)

88 87 86 85 84 83 82 '04 '05 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J 06 07 08
Total production (m bpd)
Growth (%)
3% 2% 1% 0% -1% -2%
Greater reliance on Middle East oil increases shipping distances
Higher tonne mile demand. Tanker rates have also been strong because the worlds increased reliance on Middle Eastern and West African oil has expanded the distances shipped. From the charts in Figure 42, it is clear that production is growing strongly from those two locations, offsetting weakening growth in North Africa and declining production in Latin/South America and Europe. As oil production declines in the North Sea and Mexico/Venezuela, which export most of their oil to Europe and the US respectively, oil will have to be imported from sources further away. Weakening production in North Africa also has a similar impact, as it sends most of its oil to Europe. Meanwhile, higher oil production in the Middle East and West Africa will satisfy this replacement demand, and is positive for tonne miles because of the longer distances between load and discharge ports. Within West Africa, the decline in Nigerian production and concomitant rise in Angolan output also have beneficial tonne mile implications. Most of Nigerian crude finds its way to the US, so as the formers output decreases, the US will have to import more oil from the Middle East. On the other hand, rising Angolan production is primarily headed to China, which is further away from Angola than the US.
Figure 42: Regional oil production Middle East production growing rapidly
24.0 23.5 23.0 22.5 22.0 21.5 21.0 '04 F M AM J J A S ON D J F M AM J J A S ON D J F M AM J '05J 06 07 08 Middle East production (m bpd) Growth (%) 8% 6% 4% 2% 0% -2% -4% -6% -8%
Change (m bpd)
1.0 0.5 0.0 -0.5 -1.0 -1.5 J F M A M J J A S O N D J F M A M J 07 08 Saudi Arabia Iraq
[ 30 ]
West African production growing

4.2 4.0 3.8 3.6 3.4 '0405J F M AM J J AS ON D J F M AM J J AS ON D J F M AM J ' 06 07 08 -0.6 West African production (m bpd) Grow th (%) 10% 8% 6% 4% 2% 0% -2% -4% -6% 0.4 0.2 0.0 -0.2 -0.4
Change (m bpd)
J F M A M J J A S O N D J F M A M J 07 08
Nigeria
Angola
North African production growth faltering

4.0 North African production (m bpd) Grow th (%) 3% 2% 1% 0% 3.6 -1% -2% 3.4 '0405J F M AM J J AS ON D J F M AM J J AS ON D J F M AM J ' 06 07 08 -3% 0.1 0.1 0.0 0.0 0.0 0.0 0.0 -0.1 Liby a
Change (m bpd)
Algeria
3.8
Latin/South American production falling

11.0 10.8 10.6 10.4 10.2 10.0 9.8 9.6 '04 FM AM J J A S ON D J F MAM J J A SOND J FM AM J ' 05J 06 07 08 Latin/South American production (m bpd) Grow th (%) 0% -1% -2% -3% -4% -5% -6% -7% 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 Mex ico
Change (m bpd)
Venezuela
Brazil
European production falling

6.5 6.0 5.5 5.0 4.5 4.0 06
Change (m bpd)
0% -2% -4% -6% -8% 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 -0.5 UK Norw ay J F M A M J J A S O N D J F M A M J 07 08
European production (m bpd) Grow th (%) '04 FM AM J J A SON D J FM AM J J A SON D J FM AM J ' 05J 07 08
-10% -12%
[ 31 ]
Figure 43: Share of global oil production (m bpd, %) June 2007

North Middle East, 21.85, 49.1% Africa, 3.70, 8.3% West Africa, 3.85, 8.7% Latin/South America, 10.41, Europe, 4.66, 10.5%
June 2008
North Africa, 3.74, 8.2% Middle East, 23.43, 51.3% Europe, 4.46, 9.8% Latin/South America, 10.08, 22.1% West Africa, 3.99, 8.7%
23.4%
Supply of tanker vessels

Fleet growth negligible due to conversions Minimal growth in fleet due to conversions. Supply growth has been negligible so far this year, with the removal of single-hull tankers for conversion into dry bulk, offshore and heavy lift vessels. Many of these vessels have been removed from the tanker fleet but have not yet entered the dry bulk fleet, because of the 12-15 months it requires for the conversion process to be completed. This explains why both the tanker and dry bulk markets have been strong in 1H08. We estimate that the global tanker fleet grew by only four ships in 1H08, representing a hoh tonnage growth of only 0.8%, which is remarkable given that 45 newbuildings were delivered in the past six months (Figure 44). Scrapping took out 11 ships while 30 ships were removed for conversion. The VLCC fleet grew by only two ships, the suezmax fleet increased by three vessels, the aframax fleet was unchanged and the panamax fleet was down by one ship. We expect a further 11 ships to be scrapped and 23 ships to be removed for conversion in 2H08, substantially offsetting the 71 newbuilding deliveries. This will take the full-year fleet growth to only 41 ships, representing net year-end tonnage growth of only 2.7%, against 6.5% had there been no conversions. In 2009, we expect 33 scrapping candidates and 38 conversions, but net fleet growth should accelerate to 9.2% yoy because of the 207 scheduled newbuilding deliveries. Please refer to Appendix 6 for a full breakdown of the tanker fleet movement schedule.
Figure 44: Tanker fleet movement schedule Double and single hulls combined
Aggregate crude tanker fleet No of vessels DWT 1,603 274,120,000 45 8,342,197 -11 -1,463,991 -30 -4,788,206 1,607 276,210,000 71 12,368,112 -11 -1,486,009 -23 -5,498,174 1,644 281,593,930 207 38,576,934 -5,762,905 -33 -6,856,601 -38 1,781 307,551,358 169 33,497,978 -24,544,734 -140 1,810 316,504,603 Growth (%) - hoh
End 2007 + Deliveries (1H08) - Scrapping (1H08) - Conversions (1H08) End Jun 2008 + Deliveries (2H08) - Scrapping (2H08) - Conversions (2H08) End Dec 2008 + 2009 deliveries - 2009 scrapping - 2009 conversions End 2009F + 2010 deliveries - 2010 scrapping / conversion End 2010F
0.8%
1.9%
[ 32 ]
Figure 45: Tanker fleet movement schedule Double hull only

Aggregate DH crude tanker fleet No of vessels DWT 1,282 215,607,656 45 8,342,197 71 12,368,112 1,398 236,317,965 207 38,576,934 1,605 274,894,899 169 33,497,978 1,774 308,392,877
End 2007 + 2008 deliveries (YTD) + 2008 deliveries (remaining) End 2008F + 2009 deliveries End 2009F + 2010 deliveries End 2010F
Figure 46: Tanker fleet movement schedule Single hull only

Aggregate SH crude tanker fleet No of vessels DWT 321 58,512,344 -53 -10,286,380 -22 -2,950,000 246 45,275,965 -38 -6,856,601 -33 -5,762,905 176 32,656,459 -140 -24,544,734 36 8,111,726
End 2007 - 2008 conversions - 2008 scrapping End 2008F - 2009 conversions - 2009 scrapping End 2009F - 2010 scrapping / conversion End 2010F
Rising commercial obsolescence of single hulls help rates improve
Increased preference for double-hull vessels. The commercial obsolescence of single-hull tankers has also accelerated after the Hebei Spirit oil spill off the coast of South Korea last year, leading to stronger premiums for double-hull vessels. For the 4M08 period, the global share of DH tankers rose to 69.2% from 60.6% a year ago. The Arabian Gulf to Far East route saw a 14.4 percentage point jump in DH chartering. Japan saw the largest percentage point increase in the employment of DHs, but Korea and China also saw material increases. The effect of increased DH chartering preference has been to reduce the effective supply of tankers. Nevertheless, under current tight tanker market conditions, both SH and DH rates have moved higher.
Figure 47: Share of double hull voyages By load area

100% 80% 60% 40% 20% 0% AG-FE Non AG-FE Total World Jan-Apr 08 Jan-Apr 07 44.8% 30.4% 93.8% 88.1% 69.2% 60.6% 60% 40% 20% 0% Japan Korea China 37.9% 24.6% 21.7% 100% 80% 65.2%
By country of discharge
Jan-Apr 08 Jan-Apr 07
79.4% 67.6%
Source: Tankers International, OSG, CIMB/CIMB-GK Research
[ 33 ]
Reduced preference for sour Floating crude oil storage in Iran. In May and June, Iran was reported to be using crude force Iran to store oil up to 15 VLCCs to store its crude oil output offshore, near the Kharg island loading facility. Iran had problems selling its crude output at the desired price, and resorted to storage while waiting for better offers. This supported high tanker freight rates because storage reduced available tanker capacity for voyages. In a very tight market for crude oil, it may appear strange that Iran would have to resort to storage. However, what Iran cannot sell is its sour crude production, which has lower global demand compared to sweet, light crude. The problem with sour crude is that the simple refining process generates a high proportion of residual fuel oil, which has a negative crack spread against crude. Simple refineries incur losses processing sour crude, and only more complex refineries can process sour crude for a higher proportion of profitable middle distillate (gasoil, diesel, kerosene and jet fuel) and gasoline output. The global shortage of complex refineries means that sour crude producers like Iran will have to offer a large discount to sweet crude to sell their output. The alternative is to store the sour crude until better offers appear. Iran had said that it wanted to clear the oil stored in the 15 VLCCs by mid summer, and had in fact offered discounts on its sour crude. Nevertheless the issue surrounding the marketability of sour crude is structural in nature, and there is unlikely to be any short-term solution. As a result, Iran and other sour crude producers may have to resort to storage on an ongoing basis. However, the number of tankers set aside for storage will be difficult to predict. Furthermore, when the oil markets are in contango (futures price is higher than spot price), oil traders are encouraged to store oil for forward sales. Conversely, traders will have no incentive to store when oil markets are in backwardation (futures price is lower than spot price). Oil markets do switch between contango and backwardation, and that would also be difficult to forecast. As a result, although storage is a contributor to the tightness or otherwise of the tanker markets, its impact will be challenging to quantify.
Shipyard delivery delays?

We do not view potential shipyard delivery delays as being material enough to change the demand-supply equilibrium in 2009 and beyond. Unlike the dry bulk sector where Chinese yards account for 40% of the orderbook, Chinese yards occupy only a quarter of the outstanding tanker deliveries (Figure 48). In the event of a six-month delay for the entire Chinese yard orderbook, we estimate that next years fleet growth will be reduced by 1.2m dwt, which is small compared to the expected delivery of 26m dwt.
Figure 48: Crude tanker orderbook by yard nationality
No of ships 153 111 272 44 580 Total DWT 31,180,119 20,269,163 54,578,103 10,329,180 116,356,565 Share (%) No of ships 26.4% 19.1% 46.9% 7.6% 100.0% Total DWT 26.8% 17.4% 46.9% 8.9% 100.0%
Chinese yards Japanese yards Korean yards Other yards Total crude orderbook
Outlook for crude tanker rates

Tanker rates to remain high in 2008 Elevated for the rest of 2008, slightly weaker in 2009, slightly down to stable in 2010. Tanker rate strength this year will be underpinned by significant SH removals from the global fleet, coupled with strong Middle East crude oil production growth. In 2009, newbuilding deliveries will probably drag rates lower as the rate of conversions slows. However, if the number of conversions surprises on the upside from our current expectations, which is possible, average tanker rates may fall only slightly in 2009. In 2010, average rates will probably head down moderately, but year end rates could stabilise or head up slightly, as the mandatory single-hull removals substantially offset deliveries. Nevertheless, should single hull conversions or removals be brought forward one year to 2009, end-2010 rates could still head lower.
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Demand for crude tanker shipping should be underpinned by expected increases in Saudi Arabian production. Crude oil supply from Saudi Arabia has been increasing throughout 2008, and has now exceeded its formal production quota of 8.94m bpd. In May, the Saudis produced 9.2m bpd, which has increased to 9.7m bpd currently via a 300,000 bpd increase in June and by another 200,000 bpd rise in July. The Khursaniyah oil field will come on line anytime now, after being delayed from August 2007, and it will contribute 500,000 bpd incrementally. The Kurais project is expected to contribute another 1.2m bpd of production from June 2009. These plans suggest that Saudi Arabia could increase oil production from an average of 8.49m bpd in 2007, to 9.24m bpd in 2008 (+8.8%), to 10.51m bpd in 2009 (+13.7%). As both Khursaniyah and Kurais will supply the prized Arab Light Crude, as opposed to the less desirable sour grades, there should be no shortage of buyers. Meanwhile, as the situation in Iraq stabilises with less violence and fewer attacks on export pipeline infrastructure, Iraq should be able to sustain its current 2.5m bpd production for the rest of 2008. The IEA raised the possibility of Iraq increasing production further by 500,000 bpd in the near term, once plans to repair the strategic north-south pipeline are completed. Further production increases are possible in 2009 and beyond, as Iraq has awarded some field development contracts recently to Exxon Mobil, Shell, BP, Total and Chevron. Conversions next year could Rates in 2009 may only be moderately lower because conversions could be larger than expected. Our base-case view is that crude tanker rates will decline in help keep rates elevated 2009 as a result of large newbuilding deliveries. However, the rate of decline may not be very significant, because conversion removals could surprise on the upside. Single-hull tanker shipowners are still rushing to capitalise on the strong dry bulk and FPSO rates. Currently we have factored in only confirmed and likely conversions into our tanker supply-demand model based on available data, but by the end of this year, additional conversion deals for next year will almost certainly emerge. Despite our expectation of weaker dry bulk freight rates in 2009, on average it will probably hold up at profitable levels, suggesting that the economics of conversion will still be viable. Furthermore, the decision to convert tankers to bulkers typically does not depend on prevailing spot market rates, but on the rates implied in long-term contracts of affreightment (COA) and long-term time charters. Some to-be-converted very large ore carriers for the Brazil to China iron ore trade have indeed been locked into longterm COAs prior to the decision to convert. Given the very long distance between Brazil and China, uncompetitive pricing of Brazilian ore against Australian ore once the expensive spot freight is included in the price, and unrelenting pressure from the Australian miners for freight premium, Chinese iron ore importers will continue to regard conversions as strategically important and economically viable. Please refer to Figures 5 to 7 in the dry bulk section of this report for a more comprehensive treatment of this topic. Furthermore, we expect strong Middle East production growth next year, driven by planned Saudi Arabian production increases and possible higher Iraqi output. This will be very positive for tanker demand originating from the Middle East and increase the tonne-mile demand of shipments. Together with potentially larger-than-expected conversions, tanker rates in 2009 may moderate only slightly. In 2010, average rates will probably head down slightly, but year-end rates 2010 rates to be lower on could be higher. We think average rates could head lower because of the spillover average impact of the newbuilding deliveries the year before. However, our base-case view is that year-end rates could stabilise or head up slightly, as single hulls become technically obsolete and their removal substantially offsets newbuilding deliveries. Nevertheless, should single-hull conversions or removals be brought forward one year to 2009, end-2010 rates could still head lower. BIDY revised upwards for all years. We are revising up our average BIDY Baltic Dirty Tanker Index revisions assumptions to 1,700 points for 2008 (+48% yoy), followed by a 10% decline to 1,530 in 2009, and finally another 10% decline to 1,377 points in 2010. Our previous estimates for the BIDY was 1,163 points for 2008-09, and an unchanged 1,337 points in 2010. VLCCs to benefit most from VLCCs are the preferred exposure. The change in the patterns of trade has affected Middle East oil and from the relative fortunes of the various vessel classes. While VLCCs, suezmaxes, conversion removals aframaxes and panamaxes have all benefited from stronger tanker rates, VLCC rates have risen the most. This is because the Middle East sends more than two-thirds of its oil to Asia Pacific, and Arabian Gulf to Far East volumes are primarily exported using VLCCs. Angolan crude is also exported to China using VLCCs. Large increases in Saudi Arabian production in 2008 and 2009
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Going forward, VLCCs appear to be best primed to benefit from increased Saudi Arabian, and possibly Iraqi, oil production for 2H08 and 2009. We believe that the excess VLCC supply in 2009 and 2010 is minimal, because of more Middle Eastern cargoes and also because of the ongoing SH conversion and scrapping. The shorter-haul trades North Sea to UK/Continent and Caribbean to US Gulf which employ primarily aframax vessels, have been affected by reduced oil production in the UK, Norway and Mexico. Hence, aframax rates have not performed as well as the VLCC rates.
Figure 49: Baltic Dirty Tanker Index projections annual averages
2,000 1,500 1,000 500 0 2002 2003 2004 2005 2006 2007 2008F 2009F 2010F 1,780 1,510 1,349 837 61% 32% -15% -14% -11% 48% -10% -10% 1,292 1,146 1,700
1,530
1,377
Figure 50: Baltic Dirty Tanker Index

3,500 3,000 2,500 2,000 1,500 1,000 500 J FMAM J J A SOND J FMAM J J A SOND J FMAMJ J ASOND J FMAMJ J ASOND J FMAM J J A SOND J FMAM J J A 03 04 05 06 07 08
Baltic Dirty Tanker Index
Quarterly average
Figure 51: VLCC Time Charter Equivalent Rates (US$/day) Ras Tanura, Saudi Arabia to Chiba, Japan
200,000 150,000 100,000 50,000 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 03 04 05 06 07 08 QTD VLCC TCE earnings (AG-FE) Grow th (%) 700% 600% 500% 400% 300% 200% 100% 0% -100%
Source: Bloomberg, CIMB/CIMB-GK Research Notes: AG Arabian Gulf, FE Far East
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Figure 52: Suezmax Time Charter Equivalent Rates (US$/day) Sidi Kerir, Egypt to Lavera, France
160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 03 04 05 06 07 08 QTD Suezmax TCE earnings (MED-MED) Grow th (%) 600% 500% 400% 300% 200% 100% 0% -100%
Source: Bloomberg, CIMB/CIMB-GK Research Notes: MED Mediterranean
Figure 53: Aframax Time Charter Equivalent Rates (US$/day) Sidi Kerir, Egypt to Trieste, Italy
80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 03 04 05 06 07 08 QTD Aframax TCE earnings (MED-MED) Grow th (%) 350% 300% 250% 200% 150% 100% 50% 0% -50% -100%
Source: Bloomberg, CIMB/CIMB-GK Research Notes: MED Mediterranean
Figure 54: Aframax Time Charter Equivalent Rates (US$/day) Curacao, Venezuela to Texas City, USA
70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 03 04 05 06 07 08 QTD Aframax TCE earnings (CARIB-USG) Grow th (%) 250% 200% 150% 100% 50% 0% -50% -100%
Source: Bloomberg, CIMB/CIMB-GK Research Notes: CARIB Caribbean, USG US Gulf
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Figure 55: Supply-demand balance in the crude tanker sector

Source: Clarkson 2003 m dwt yoy % 211.6 5.2% 114.8 6.6% 46.8 6.4% 41.1 3.5% 8.9 -8.2% 2003 Avg Crude Tanker Fleet - VLCC/ULCC - Suezmax - Aframax - Panamax m dwt 214.6 124.7 42.7 47.2 9.3 2003 m dwt 211.6 214.6 15.4 7.0 1.1 -1.3 -0.7 1,347.2 60.9% yoy % -2.2% 0.1% 4.0% 6.0% -0.8% m dwt 231.0 127.8 44.3 50.0 8.8 2004 m dwt 15.8 16.3 0.5 -6.6 -1.0 -1.6 0.6 1,785.9 32.6% Source: Clarkson 2004 m dwt yoy % 227.4 7.5% 124.5 8.4% 49.5 5.8% 45.5 10.7% 7.9 -11.2% 2004 yoy % 7.6% 2.5% 3.9% 5.9% -4.8% m dwt 243.2 134.1 47.1 53.0 9.0 2005 m dwt 4.0 12.2 8.2 5.2 1.5 1.0 0.6 1,510.7 -15.4% Source: Clarkson 2005 m dwt yoy % 231.4 1.8% 125.6 0.9% 50.8 2.6% 47.5 4.4% 7.5 -5.1% 2005 yoy % 5.3% 5.0% 6.2% 5.9% 1.8% m dwt 256.5 140.0 50.6 56.2 9.7 2006 m dwt 4.6 13.3 8.7 3.1 4.5 0.4 0.7 1,291.9 -14.5% Source: Clarkson 2006 m dwt yoy % 236 2.0% 128.4 2.2% 49.8 -2.0% 50.3 5.9% 7.5 0.0% 2006 yoy % 5.5% 4.4% 7.4% 6.0% 8.3%
Crude Tanker Demand - VLCC/ULCC - Suezmax - Aframax - Panamax
Growth in Tanker Demand Growth in Avg Tanker Fleet Change in Market Balance - VLCC/ULCC - Suezmax - Aframax - Panamax Avg Baltic Dirty Tanker Index
Notes: 1. Change in Market Balance = Growth in Avg Tanker Fleet, less Growth in Tanker Demand 2. A positive change in market balance indicates deteriorating fundamentals, whereas a negative number indicates improving fundamentals.
Crude Tanker Demand - VLCC/ULCC - Suezmax - Aframax - Panamax
Source: Clarkson 2007 m dwt yoy % 241.1 2.2% 129.7 1.0% 50.5 1.4% 53.5 6.4% 7.4 -1.3% 2007
Source: CIMB forecast 2008F m dwt yoy % 252.5 4.7% 136.2 5.0% 52.7 4.4% 56.1 4.9% 7.5 1.4% 2008F
Avg Crude Tanker Fleet - VLCC/ULCC - Suezmax - Aframax - Panamax
m dwt 268.0 145.3 53.5 59.2 10.0 2007 m dwt 5.1 11.6 6.5 4.0 2.2 -0.1 0.4 1,146.2
yoy % 4.5% 3.8% 5.7% 5.5% 2.9%
m dwt 277.9 149.5 55.4 63.2 9.8 2008F m dwt 11.4 9.8 -1.6 -2.3 -0.3 1.4 -0.3
yoy % 3.7% 2.8% 3.5% 6.7% -1.8%
m dwt 294.6 156.7 59.7 68.2 9.9 2009F m dwt 10.7 16.7 6.0 0.4 2.2 3.3 0.1
yoy % 6.0% 4.9% 7.8% 7.9% 1.3%
m dwt 312.0 164.3 65.4 72.4 9.9 2010F m dwt 11.2 17.5 6.3 0.4 3.5 2.4 -0.1
yoy % 5.9% 4.8% 9.6% 6.1% -0.2%
Growth in Tanker Demand Growth in Avg Tanker Fleet Change in Market Balance - VLCC/ULCC - Suezmax - Aframax - Panamax Avg Baltic Dirty Tanker Index
-11.3%
1,700.0
48.3%
1,530.0
-10.0%
1,377.0
-10.0%
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Valuation and recommendation

Dry bulk shipping
UNDERWEIGHT on conversion worries, China worries Maintain UNDERWEIGHT on the dry bulk sector. We first downgraded the sector to underweight on 22 May, as the BDI ascended to the stratospheric high of 11,793 points just two days earlier. We sensed near-term downside risks from the rapidly escalating Chinese iron ore port inventories and the expectation that higher port storage charges could dissuade further stockpiling. We also worried about the impact of planned factory closures during the Beijing Olympics on steel mills demand for iron ore. Subsequent to our downgrade, share prices started to fall sharply. The BDI corrected 25% to close at 8,856 points on 23 August, driven by a slowdown in the frenetic pace of chartering activity for iron ore shipments and a month-on-month moderation in the quantity of Chinese iron ore imports. The traditional summer lull, where there are fewer grain cargoes, also influenced the panamax market. With the factory closures partly in place since 20 July and likely to last until 20 September, we expect dry bulk freight rates to continue moderating in the next two months. The key uncertainty is what happens after the Olympics. Market consensus is that freight rates will see renewed vitality, as the shuttered Chinese factories roar back into action. This is also our base-case view. However, we see this as a strong signal to exit the sector, as the flood of conversions will start pouring in during the next six months. Demand growth also appears at risk, as Chinese steel production growth is decelerating fast given coking coal and thermal coal shortages, and the pace of Chinas GDP expansion is cooling off quickly. Although iron ore output from Australia will accelerate in the next six months, we believed that it will be matched by the influx of VLOCs converted from tankers. This will prevent freight rates from rallying. Sell on the post-Olympic rebound. Dry bulk freight rates could start a major bear phase in six months or less, caused by the double blow of more ship supply and possibly declining demand growth. Most market participants are expecting the flood of newbuilding deliveries to pressure freight rates only from 2H09, but substantial tankerto-bulker conversions could bring it forward by six months. Although there are opportunities to trade on a short-term post-Olympics rebound, we are extremely hesitant to recommend this strategy, because the rebound is unlikely to last very long or be very material and investors would be exposing themselves to significant downside risks. In this respect, we have become more negative on the dry bulk sector compared to our previous reports, where we had recommended long positions in dry bulk stocks after the summer correction. The key event leading to our more bearish view is our upward reassessment of the size of the conversions taking place, and new worries about the pace of Chinese demand growth. Revising up 2008, revising down 2009 and 2010. We are revising up our 2008 average BDI projection from 8,000 to 8,500 points. On the other hand, we are lowering our 2009 forecast from 7,000 to 6,000 points, and reducing the 2010 expectation from 5,500 to 3,000 points. We now expect the average BDI to rise 20% yoy this year, followed by a 29% correction in 2009 and another 50% correction in 2010. The key derating catalysts include (1) deliveries of the large newbuilding and conversion orderbook from 2H08 which will materially boost supply; and (2) the concomitant threat of a slowdown in the growth of Chinese commodity imports as GDP growth moderates and as constraints arising from raw material and energy bottlenecks remain.
Baltic Dry Index revisions
Derating catalysts
Pacific Basin (2343 HK, TP: HK$8.33, UNDERPERFORM)

Non-dry bulk businesses unlikely to buffer downside on dry bulk earnings Initiate coverage with UNDERPERFORM and a target price of HK$8.33. Management has had an excellent track record of enhancing shareholder value. However, the company will not be able escape the impact of lower industry-wide freight rates as fundamentals in the dry bulk sector deteriorate over the next 12 months. Earnings contribution from non-dry bulk sectors like roll-on, roll-off vessels, port operations and the towage business, will not likely offset the downdraft in the dry bulk sector. ROE peak already reached. We forecast earnings to fall 34.1% in 2009. We think it will be difficult for Pacific Basin to surpass the 69.8% ROE recorded in 2007. A lower ROE of an estimated 51.5% for 2008 signals the start of a downtrend in the sector.
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Pacific Basin has largely outperformed the market during the first half of 2008, supported by its stronger-than-expected results and the strong BDI. We think the share price has yet to discount fully the lower forward earnings. Our price target for the company is based on a 30% discount to its RNAV, which is computed by aggregating the market value of the owned fleet, the market value of finance and operating lease vessels net of the cost of associated purchase options, and a 4x P/E multiple on earnings from the chartered-in fleet. Contract covers are in place for 83% and 93% of handysize and handymax hire days for FY08. The company has also already secured 37% and 75% of hire days for handysize and handymax, respectively, for FY09. As a result, Pacific Basin should be partially protected by any rate weakness that might develop from the oversupply situation in 2009. Nevertheless, we still expect earnings to decline as freight rates fall by 20% in 2009 and 25% in 2010, from the excess supply of conversions and newbuilding deliveries, and slower commodity demand.
STX Pan Ocean (STX SP, TP: S$2.06, UNDERPERFORM)

Highest risk from aggressive We downgrade STXPO from Trading Sell to UNDERPERFORM, with an use of chartered-in capacity unchanged target price of S$2.06. We are leaving forecasts unchanged pending the release of 2Q results. Although the results are likely to be good, we believe that the poor outlook for the dry bulk sector from late 2008 will be a more important determinant of share price direction. Our target price has been lowered from S$2.32 as we up the RNAV discount from 40% to 50%. The RNAV fuses the market value of its existing fleet and newbuildings, with a 4x P/E valuation for its chartered-in earnings, and the market value of its holdings in Korea Express (000120 KS, Not Rated). STXPO has the highest risk profile among the dry bulk stocks we cover, with the thinnest margins arising from the heavy use of chartered-in vessels. Also, over the past year, STXPO has rapidly increased the number of short-term chartered ships in a bid to amplify the volume of business done in a strong freight market. As a result, its earnings have benefited from a double dose of higher rates and volume. Conversely, as freight rates weaken, we think that STXPO will reduce the number of short-term chartered in vessels, and earnings could fall from a double dose of lower rates and volume. The upshot is that STXPOs earnings volatility from any upward or downward movement in freight rates will be magnified. Container shipping also at risk. STXPO has never earned a profit on its container business, and current economic conditions will probably increase the size of the losses. STXPO operates a very small fleet of six owned container ships and three long-term leases, and does not enjoy any economies of scale. Forecast risk. There is a higher level of forecast risk inherent in STXPO, as we are unable to track movements in its short-term chartered-in capacity closely, due to the lack of disclosure. Also, managements chartering plans may change quickly. STXPO also does not disclose average time charter rates or charter-in costs. Diversification to non-shipping businesses could pose risks. The companys plans to start a ship finance and derivatives business is a departure from its core shipping business. Although STXPO used to participate actively in freight forward agreement trades, we are unclear if it has the necessary skills to be a successful investment bank. Given that we expect dry freight markets to enter a downturn from 2009 onwards, the value of ship assets may come under pressure, raising risks for ship financiers as collateral values drop. In June, STXPO also indicated its intention to participate in any group bid for a 50.4% stake in Daewoo Shipbuilding & Marine Engineering. Whether this particular bid proceeds or not, shareholders should be aware that STXPO appears keen to diversify into unrelated businesses.
Maybulk (MBC MK, TP: RM3.00, UNDERPERFORM)

Highest dividend yields, but may not be sustainable in downturn Maybulk is now an UNDERPERFORM instead of a Trading Sell with an unchanged price objective of RM3.00. We have upped Maybulks RNAV by 12% to RM4.20, after updating our valuation of individual vessels for current second-hand prices. But our price objective is now based on a wider RNAV discount of 30% instead of 20% as we have turned more negative on the dry bulk sector. We are raising FY08 EPS by 12% on higher rate assumptions, but are lowering FY09-10 by 9-27% as a glut develops on the dry bulk market.
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Capacity for dividends to decline from 2009. We currently expect a net DPS of 50 sen this year, providing investors with a comfortable gross yield of 18.4%. Our DPS assumption could be raised if more vessel disposals materialise, although we highlight that current high freight rates discourage further disposals. Nevertheless, from 2009 onwards, the capacity to pay dividends from core earnings is likely to be crimped if our bearish expectations for the dry bulk sector materialise. We expect core earnings to fall by 33.5% in 2009 and 44.3% in 2010, as a result of lower average dry bulk freight rates. We also expect net DPS to be reduced to 20 sen in 2009 and 10 sen in 2010. As such, we expect the stock to come under pressure after it goes ex of the interim dividend in September, and especially after it goes ex of the final dividend in April next year.
Thoresen Thai Agencies (TTA TB, TP: THB36.00, UNDERPERFORM)

Hidden value in Mermaid Maritime, but dry bulk earnings still key to group outlook We downgrade TTA from Trading Sell to UNDERPERFORM, but with a higher target price of THB36.00. Our price objective pegs a 50% discount to its RNAV, which is the sum of the market value of TTAs bulkers and the value of its shares in Mermaid Maritime (MMT SP, Not Rated). Within the Thai dry bulk sector, we recommend investors to switch to PSL (OUTPERFORM, TP: THB26), which has significant rate protection stretching into next year. We have reduced our earnings forecasts by 27% for FY09 and 36% for FY10 but have left 2008 EPS essentially unchanged. We are now more negative on the sectors fundamentals as a result of the impending deployment of large numbers of converted tankers. We have priced TTA and PSL at a relatively large discount from RNAV, as the Thai dry bulk sector has typically traded below RNAV even in the most bullish freight environments. This could be due to discount for the Thai market in general, or perhaps because both companies have ageing fleets that would require replacement in the medium term. Mermaid Maritime (MMT SP, Not Rated), which is 55%-owned by TTA, is expected to perform better in the next two financial years due to higher day rates and more rigs and vessels. However, our estimates suggest that the higher earnings from MMT are unlikely to be sufficient to offset the potentially rapid decline in bulker earnings.
Precious Shipping (PSL TB, TP: THB26.00, OUTPERFORM)

Lowest risk due to aggressive forward lock-ins Our rating for PSL is now upgraded to OUTPERFORM from Neutral, with a higher target price of THB26.00. Our target price has been increased because we have updated our valuation of individual vessels for current second-hand prices. The basis of the target remains unchanged at a 40% discount to its RNAV. We have increased our EPS forecasts by 2% for 2009 and by 6% for 2010 as we lower our overly aggressive cost inflation assumptions. On the back of better earnings visibility, we have also raised our per share dividend estimate from THB2.25 in 2009 and THB2.00 in 2010, to THB2.50 for both years, implying gross dividend yields of 12.8%. PSL is one of the most defensive companies in our dry bulk universe, at the opposite end of the risk spectrum from STX Pan Ocean. PSL has already locked in 96% of this years hire days at an average TCE rate of US$16,043/day, which virtually guarantees PSL a 22% yoy rise in rates. More importantly, for 2009 which we expect to be a weak year, PSL has locked in 64% of days at an average rate of US$15,540, a mere 3% lower than the 2008 average. As PSL continues to lock in more of next years available days over the next six to nine months, PSL may still take average 2009 rates higher to our forecast of over US$17,000/day. What this means is that PSL will not suffer the same sort of earnings volatility as its peers, and its ability to pay dividends should not suffer this year and next. For 2010, PSL has only locked in 29% of hire days at a lower average TCE of US$13,045. As a result, PSLs earnings are unlikely to escape the sector-wide pressure on rates in 2010. For 2011, 14% of days have been secured at a higher rate of US$16,943 this because lucrative five-year time charters have already been secured for two 32,000 dwt newbuildings that will be delivered in March and December 2010.
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Risky near-term BDI outlook unlikely to hurt share price further. The share price has declined significantly over the past quarter, and even though dry bulk freight rates could be weak over the next two months as China enters the Olympic Games period, we think that PSL may not see significant further selldown given its attractive valuations and improved earnings outlook.
Figure 56: 12-month forward P/BV charts Pacific Basin
4.00 Price (LHS) 3.00 Price (S$) 2.00 1.00 0.50 0.00 ASONDJ FMAMJ JASONDJ FMAMJ JASONDJ FMAMJ 05 06 07 08 0.00 P/Book (RHS) 2.50 2.00 1.50 1.00 P/BV (x)
STX Pan Ocean

3.00
Thoresen Thai Agencies
Precious Shipping
Malaysian Bulk Carriers
China Shipping Development
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NEUTRAL as rates expected to moderate slightly on conversion removals, strong Middle East output growth in 2009 Maintain NEUTRAL as spectacular 2008 rates likely to moderate slightly in 2009. Crude tanker freight rates have enjoyed a spectacular run this year, against our expectations of a modest decline, with the principal cause being the removal of singlehull tankers for conversion into dry bulk, offshore and heavy lift vessels. We are expecting net year-end fleet growth of only 2.7% in 2008, against 6.5% had there been no conversions. We expect crude tanker rates to remain at elevated levels for the rest of 2008. Conversions and removals of single-hull tankers key to freight rate strength. Crude tanker freight rates have enjoyed a spectacular run this year, against our previous expectations of a modest decline, because SH tankers have been converted into dry bulk, offshore and heavy lift vessels at a much faster pace than we previously thought possible. Rates in 2009 may only be moderately lower because conversions could be larger than expected. Our base case view is that crude tanker rates will decline in 2009 as a result of large newbuilding deliveries. However, the rate of decline may not be very significant, because conversion removals could surprise on the upside. Single-hull tanker shipowners are still rushing to capitalise on the strong dry bulk and FPSO rates. Currently we have factored in only confirmed and likely conversions into our tanker supply-demand model based on available data, but by the end of this year, additional conversion deals for next year will almost certainly emerge. Despite our expectation of weaker dry bulk freight rates in 2009, average rates will probably hold up at profitable levels, suggesting that the economics of conversion will still be viable. Furthermore, we expect strong Middle East production growth next year, driven by planned Saudi Arabian production increases and possible higher Iraqi output. This will be very positive for tanker demand originating from the Middle East and will increase the tonne-mile demand of shipments. The commercial obsolescence of single-hull tankers has also accelerated after the Hebei Spirit oil spill off the coast of South Korea last year, leading to stronger rates for double-hull vessels. Together with potentially larger-than-expected conversions, tanker rates in 2009 may come off only slightly. In 2010, average rates will probably head down slightly, but year-end rates could be higher. We think average rates could head lower because of the spillover impact of the newbuilding deliveries the year before. However, our base case view is that year end rates could stabilise or head up slightly, as single hulls become technically obsolete and their removal substantially offsets newbuilding deliveries. Nevertheless, should single-hull conversions or removals be brought forward one year to 2009, year-end 2010 rates could still head lower. BIDY revised upwards for all years. We are revising up our average BIDY assumptions to 1,700 points for 2008 (+48% yoy), followed by a 10% decline to 1,530 in 2009, and finally another 10% decline to 1,377 points in 2010. Our previous estimates for the BIDY was 1,163 points for 2008-09, and an unchanged 1,337 points in 2010.
Baltic Dirty Tanker Index revisions
MISC (MISC MK, TP: RM10.00, NEUTRAL)

Tanker sector up, balancing weaker chemical / liner performances Maintain NEUTRAL with unchanged target price of RM10.00. We recommend investors to switch to MISC as it offers defensive earnings in an otherwise tumultuous container and dry bulk shipping environment. We expect MISCs core earnings to remain stable this year and next. Crude tanker shipping rates have been very strong this year, a result of the removal of tankers for conversion into bulk carriers and offshore vessels. We expect rates to weaken in 2009 because of newbuilding deliveries, but to remain at historically high levels because of the tanker-to-bulker conversion pipeline. Weaker container and chemical shipping. The higher crude tanker shipping profits this financial year should help offset the weakness at the container shipping arm. Meanwhile, chemical shipping profits should also be lower because spot rates are declining from vessel oversupply. Our forecasts have adjusted upwards by 1-3% for various housekeeping revisions. Our price objective is based on a composite P/E valuation of the individual businesses.
[ 43 ]
Ramunia purchase important medium-term contributor
We have revised down our target P/E of 20x for the LNG business to 16x as global delays in the commissioning of new LNG facilities make it increasingly difficult for the division to grow its earnings via third-party contracts. We have also trimmed our 13x P/E multiple for the petroleum and chemical shipping earnings to 12x, to take into account current multiples of shipping companies in the same sectors. However, we have raised our heavy engineering P/E target from 18x to 25x as current earnings do not reflect the significant potential for MMHE. We have retained our 20x valuation for the offshore division, also on account of its growth potential. The liner division is now valued a 50% discount to the market value of its fleet instead of 10x P/E as the business turns in a loss. Heavy engineering and offshore strong. Apart from an upward revision in crude tanker shipping rates, other catalysts include the likely completion of the Ramunia purchase by the end of 2008, which will increase substantially the available yard fabrication space for wholly-owned Malaysian Marine and Heavy Engineering. The offshore division is also expected to do better, with the full-year contribution of FPSO Kikeh and FSO Abu Cluster, both of which commenced in 2007, and the upcoming contribution of FPSO Espirito Santo.
Figure 57: Forward P/BV charts MISC Berlian Laju Tanker
Source: Bloomberg
[ 44 ]
COMPANY BRIEFS
[ 45 ]
INITIATING COVERAGE 6 August 2008
Pacific Basin Shipping Ltd

Rough seas ahead
UNDERPERFORM HK$10.80
Maintained @04/08/08 Target: HK$8.33 Dry Bulk Shipping
2343 HK / 2343.HK
David Y.K. Lee +852 2532 1112 davidyk.lee@cimb.com, Raymond Yap +603 2084 9769 raymond.yap@cimb.com
Rough seas ahead for dry bulk companies. We believe that the risks in the dry bulk sector are extremely high. Over the next six months, rates could fall lower from the acceleration in supply growth and potentially lower commodity demand growth. ROE peak already reached. As one of the worlds leading dry bulk shipping companies, Pacific Basin will not be spared and is set for earnings declines from next year onwards. We expect the companys ROE to fall from last years 69.8% to 51.5% in 2008, in line with our forecast of weakness in the dry bulk sector. Sinking money into new non-core operations. To offset the expected downturn of the sector, the group is investing close to 70% of its 2008-2011 capital expenditure on new operations, mostly on RoRo vessels but also on tugs and ports. However, the new ventures will not contribute materially and group earnings will still be driven by dry bulk shipping as the core business. Starting coverage with UNDERPERFORM and target price of HK$8.33, which is based on 30% discount to its sum-of-parts valuation. The RNAV combines the market value of the existing fleet and newbuildings, with a 4x P/E valuation for its chartered-in earnings. Our call is based on the negative cyclical momentum, and is unrelated to the quality of management, which we consider to be excellent.
Financial summary
FYE Dec Revenue (US$ m) EBITDA (US$ m) EBITDA margins (%) Pretax profit (US$ m) Net profit (US$ m) EPS (HK cts) EPS growth (%) P/E (x) Core EPS (HK cts) Core EPS growth (%) Core P/E (x) FD core EPS (HK cts) FD core P/E (x) Gross DPS (HK cts) Dividend yield (%) P/BV (x) ROE (%) Net gearing (%) Net cash per share (HK$) P/FCFE (x) EV/EBITDA (x) CIMB/Consensus (x) 2006 620.4 148.8 24.0% 111.4 110.3 65.0 (28.2%) 16.6 46.3 (34.9%) 23.3 46.0 23.5 60.2 5.6% 4.4 22.7% 59.2% N/A (21.6) 14.2 2007 1,177.3 402.4 34.2% 473.0 472.1 234.5 260.5% 4.6 154.7 234.4% 7.0 154.5 7.0 144.2 13.4% 2.5 69.8% 1.2% N/A 3.0 5.4 2008F 1,502.6 621.4 41.4% 604.8 601.8 277.7 18.4% 3.9 265.1 71.3% 4.1 234.3 4.6 148.6 13.8% 1.6 51.5% N/A 1.73 5.9 3.1 1.08 2009F 1,288.7 438.2 34.0% 392.4 390.4 174.6 (37.1%) 6.2 174.6 (34.1%) 6.2 161.0 6.7 88.3 8.2% 1.4 24.7% N/A 2.14 9.4 4.4 0.84 2010F 1,050.0 312.9 29.8% 262.6 261.3 116.9 (33.1%) 9.2 116.9 (33.1%) 9.2 109.5 9.9 60.4 5.6% 1.3 14.8% N/A 2.32 15.6 6.1 0.80
Note: Per share data translated into listing currency at current fx spot rates, valuation methodology based on house forex forecasts Source: Company, CIMB-GK Research, Bloomberg
Price chart
0.70
18.7
Market capitalisation & share price info

0.60 0.50 0.40 0.30 0.20
16.7 14.7 12.7 10.7 8.7 Aug-07
0.10 0.00
Jan-08
Volume 100m (R.H.Scale)
Jun-08
Pacific Basin Shipping Ltd
Market cap 12-mth price range 3-mth avg daily volume # of shares (m) Est. free float (%) Conv. secs (m) Conv. price (HK$)
Source: Company, CIMB-GK Research, Bloomberg
HK$18,844m/US$2,415m HK$18.40/HK$9.20 15.8m 1,745 100.0 157.4 19.28
Share price perf. (%) Relative Absolute Major shareholders BNP Paribas Jersey Trust Corp. JP Morgan Chase Morgan Stanley
1M 3M (7.4) (12.2) (3.6) (25.8)
12M (5.7) (9.6) % held 9.7 6.4 5.7
Source: Bloomberg
[ 46 ]
CHINA/ HONG KONG
Background
A leader in dry bulk shipping Pacific Basin Shipping is one of the worlds leading dry bulk shipping companies, operating principally in the Asia-Pacific region. It operates mainly handy in Asia-Pacific region class vessels with sizes ranging from 25,000 to 60,000 deadweight tonnes (dwt). Handysize vessels may be equipped with onboard cranes and are small enough to serve ports with inadequate facilities and shallow draft. Many ports in Asia have size and handling restrictions and are well suited for handysize or handymax vessels.
Figure 1: Breakdown of Pacific Basins cargoes carried and fleet types Dry bulk cargo mix for handysize
Forest Products 8% Grains 9% Petcoke / Coal 7%
Current fleet profile (no of ships)

Barge, 1, 1%
Other Bulks 33%
Tugs, 9, 10% Handymax, 17, 18%
Concentrate 9%
Steel & Scrap 11%
Source: Company, CIMB-GK Research
Fertilisers 11%
Cement 12%
Handysize, 66, 71%
Focus on transporting minor Tied to Asias growing need for commodities. Pacific Basin specialises in bulk commodities transporting minor bulk commodities, including forest products, iron and steel fertiliser, agricultural products, cement and other products. Cargos are mainly loaded at commodities-rich regions like Australia, New Zealand and the west coast of North America, and discharged at China, Japan and South Korea. The top 15 customers, which account for 31% of revenue, include the biggest names in mining, agriculture and mineral trading, metals and other more specialised commodities.
Business strategy
90% of earnings from dry bulk shipping Core focus on dry bulk shipping. Most of the companys current earnings are derived from freight and charter hire related to dry bulk shipping. Handysize vessel operation contributes around 80% to recurring earnings and another 10% comes from handymax vessels. Other operations include port service i.e. harbour tugs in Australia. Future operations will include Roll-on, Roll-off (RoRo) vessels and bulk port business. Mix of owned and leased ships. Owned and finance leased ships currently account for half of its fleet of 93 handy class vessels. As a result, Pacific Basin achieved an EBITDA margin of 34.2% in 2007, below comparable handy class vessel operators like Precious Shipping and Malaysian Bulk Carriers, both of which own all their ships. This is because chartered-in ships incur lease rentals. Pacific Basin will add more owned ships with the delivery of eight new handy class vessels in 2008-09. The chartered-in fleet will be increased by only one bulker in 2008. The company has not ordered new handy class vessels for 2010 onwards as it is not willing to commit to long delivery lead times and the high price of newbuilds. Regular sales and leaseback. To maintain a young fleet, Pacific Basin actively manages its ship assets through a sale-and-leaseback strategy. The big increase in ship prices in the recent years has allowed the company to realise substantial gains and boost its earnings. With ship prices remaining high, we expect the company is expected to book more gains, though we have not factored this into our model. Increased investment in non-core business. Given the rising risk of a down cycle in the dry bulk sector, Pacific Basin is trying to smooth out its future earnings by investing more in other operations. It has allocated up to 69% of its 2008-2011 total capital expenditure budget to investments that will generate an additional revenue stream, focused primarily on RoRo vessels. Pacific Basin started RoRo business by acquiring four newbuildings in February 08, and another two newbuildings in July. None of the vessels have been received yet, with the first to be delivered in 3Q09, four to be delivered in 2010 and the last in 2011. RoRo vessels allow wheeled cargoes to be swiftly loaded and discharged.
Gains from sales and leaseback of vessels boosted earnings
New investments mostly allocated to non-core operations
[ 47 ]
Non-core earnings not material until 2010
Pacific Basin believes that the long-term outlook for RoRo sector is promising, especially in the Far East and South-east Asia where the long coast lines of China, Vietnam and short sea routes between other fast-growing nations in the region are well-suited to RoRo services. In addition, more than 40% of the existing RoRo vessels are aged 25 years or above and the current orderbook comprise less than 20% of the existing world fleet. Investing in cargo terminal and harbour towage. Wholly-owned Asia Pacific Maritime & Infrastructure Group (APMIG) concluded its first cargo terminal deal in July 2007 with a capital injection of US$17m for a 45% stake in Nanjing Longtan Tianyu Terminal. The Nanjing Longtan Tianyu terminal is at the highest point of the Yangtze River that is accessible to handysize tonnage. The terminal is part of the larger Longtan port and logistics base on the eastern outskirts of Nanjing City. The terminal is expected to benefit from the increasing volume of cargoes that are being transported to and from the developing central and western regions. Pacific Basin acquired 90% of an Australian harbour towage company for US$17.3m in November 2007. The company is now called Pacific Basin Towage and is based in the Australian ports of Brisbane, Melbourne and Port Botany in Sydney. The towage business involves guiding ships to dock safely at the harbour. Pacific Basin Towage currently has fleet of three owned and six chartered-in tugs and has six more tugs on order, with two each to be delivered in 2008-10. The company believes that the expansion of emerging market trade and cargo vessel fleet growth will lead to increased demand for harbour tugs. We have not included any contribution from the business into our forecasts. Earnings from these non-core businesses will not be material until 2010. The company has not provided any earnings guidance to date, and we believe that the future earnings contribution will materialise gradually. We have not imputed any contribution into our forecasts.

Peak earnings already behind us Initiate coverage with UNDERPERFORM and a target price of HK$8.33. Management has had an excellent track record of enhancing shareholder value. However, the company will not be able escape the impact of lower industry-wide freight rates as fundamentals in the dry bulk sector deteriorate over the next 12 months. Earnings contribution from non-dry bulk sectors like RoRo vessels, port operations and the towage business, will not likely offset the downdraft in the dry bulk sector. Contract covers are in place for 83% and 93% of handysize and handymax hire days for FY08. The company has also already secured 37% and 75% of hire days for handysize and handymax, respectively, for FY09. As a result, Pacific Basin should be partially protected by any rate weakness that might develop from the oversupply situation in 2009. Nevertheless, we still expect earnings to decline as freight rates fall by 20% in 2009 and 25% in 2010, from the excess supply of conversions and newbuilding deliveries, and slower commodity demand. Our price target for the company is based on a 30% discount to its RNAV, which is computed by aggregating the market value of the owned fleet, the market value of finance and operating lease vessels net of the cost of associated purchase options, and a 4x P/E multiple on earnings from the chartered-in fleet.
Figure 2: Sum-of-the-parts valuation
Market value of owned fleet Add: Market value of finance lease vessels Less Finance lease purchase option cost Add: To date progressive payments for newbuildings (US$ m) Add: Valuation of operating lease earnings (FY09E 4x P/E) Add: Net cash Add: Other net current assets Total (US$ m) No of shares (m) Per share value (US$) Exchange rate (HK$:US$) Per share value (HK$) Discount ratio Targe price (HK$)
US$ m 1,300.4 650.0 (237.9) 141.4 530.5 281.7 (2.8) 2,663.3 1,744.6 1.53 7.80 11.91 30% 8.33
[ 48 ]
Financial tables
PROFIT & LOSS (US$ m, FYE Dec) Revenue Operating expenses EBITDA Depreciation & amortisation EBIT Net interest & invt income Associates contribution Exceptional items Others Pretax profit Tax Minority interests Net profit Adj. wt. shares (m) Unadj. year-end shares (m) BALANCE SHEET (US$ m, end Dec) Fixed assets Intangible assets Other long-term assets Total non-current assets Cash and equivalents Stocks Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders funds Minority interests NTA/share (HK$) CASH FLOW (US$ m, FYE Dec) Pretax profit Depreciation & noncash adj. Working capital changes Cash tax paid Others Cash flow from operations Capex Net investments & sale of FA Others Cash flow from investing Debt raised/(repaid) Equity raised/(repaid) Dividends paid Cash interest & others Cash flow from financing Change in cash Change in net cash/(debt) Ending net cash/(debt)
KEY RATIOS 2006 620 (472) 149 (32) 117 (24) 3 24 (8) 111 (1) 0 110 1,323 1,558 2007 1,177 (775) 402 (36) 366 (18) 8 137 (21) 473 (1) 0 472 1,571 1,584 2008F 1,503 (881) 621 (42) 579 (12) 10 28 0 605 (3) 0 602 1,691 1,745 2009F 1,289 (850) 438 (50) 388 (6) 10 0 0 392 (2) 0 390 1,745 1,745 2010F 1,050 (737) 313 (56) 257 (4) 10 0 0 263 (1) 0 261 1,745 1,745 (FYE Dec) Revenue growth (%) EBITDA growth (%) Pretax margins (%) Net profit margins (%) Interest cover (x) Effective tax rates (%) Net dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days) 2006 43.1 (10.6) 18.0 17.8 4.3 1.0 77.7 26.8 0.0 41.1 2007 89.7 170.3 40.2 40.1 15.2 0.2 51.7 22.3 3.1 25.8 2008F 27.6 54.4 40.3 40.1 17.5 0.5 44.9 27.2 5.2 25.0 2009F (14.2) (29.5) 30.4 30.3 11.8 0.5 42.5 33.0 6.3 30.5 2010F (18.5) (28.6) 25.0 24.9 7.8 0.5 43.4 33.9 7.1 34.3
KEY DRIVERS 2006 741 25 28 794 63 0 46 17 126 70 24 13 107 327 2 328 485 0 2.30 2007 756 36 42 834 650 20 98 53 821 96 24 30 150 637 0 637 867 0 4.09 2008F 935 36 52 1,023 1,046 23 125 53 1,247 110 24 30 163 637 0 637 1,470 0 6.41 2009F 1,072 36 62 1,170 1,138 22 108 53 1,321 106 24 30 160 637 0 637 1,694 0 7.42 2010F 1,178 36 72 1,286 1,180 19 88 53 1,339 92 24 30 145 637 0 637 1,842 0 8.08 (FYE Dec) Baltic Dry Index (yoy change %) Bulk rates (US$/day) Fleet size (number of vessels) 2007 122.0% 23,200 80 2008F 20.1% 32,480 84 2009F -29.4% 25,984 84 2010F -50.0% 19,488 84
12M - FORWARD FD CORE P/E (X) 2006 111 32 (5) (1) 10 148 (287) 40 6 (241) 34 157 (92) (25) 74 (19) (52) (287) 2007 473 36 (51) (1) (143) 314 (259) 353 8 102 310 6 (136) (9) 170 586 277 (11) 2008F 605 42 (17) (3) (26) 602 (283) 89 0 (194) 0 271 (270) (12) (11) 397 397 386 2009F 392 50 15 (2) (4) 451 (188) 0 0 (188) 0 0 (166) (6) (171) 92 92 478 2010F 263 56 9 (1) (6) 320 (162) 0 0 (162) 0 0 (113) (4) (117) 41 41 519
8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
[ 49 ]
COMPANY UPDATE 6 August 2008
STX Pan Ocean

Thin margins, risky earnings
UNDERPERFORM S$2.50
Downgraded @04/08/08 Target: S$2.06 Dry Bulk Shipping
STX SP / STXP.SI
Raymond Yap CFA +603 2084 9769 raymond.yap@cimb.com
Riskiest stock in our dry bulk universe. STXPO has the lowest margins among the dry bulk companies we cover, which will accentuate earnings volatility when rates trend up or down. The companys dry bulk earnings almost quadrupled last year as the BDI more than doubled. The volatility has also been accentuated by STXPOs liberal use of chartered-in capacity, which we expect to account for 70-80% of total dry bulk hire days this year. The use of chartered-in capacity invariably weakens average margins because of the hire costs. Chartered-in capacity a double-edged sword. Charter-ins have enabled STXPO to expand the volume of business done in an environment of rising freight rates, using a profitable strategy of chartering-out ships on a shorter period than the tenure of the charter-ins. But if freight rates start heading south, the dangers of such a leveraged strategy increase, and the volume of business done using chartered-in ships may have to be reduced to mitigate risks. Downgrade from Trading Sell to UNDERPERFORM with a lower target price of S$2.06 (50% discount from RNAV) vs. S$2.32 previously (40% discount). We are leaving forecasts unchanged pending the 2Q results. The poor outlook for the dry bulk sector from late 2008 will be the key determinant of share price direction. STXPO also has exposure to container shipping, which could be pressured from declining global trade growth, offsetting gains from product tanker shipping.
Financial summary
FYE Dec Revenue (US$ m) EBITDA (US$ m) EBITDA margins (%) Pretax profit (US$ m) Net profit (US$ m) EPS (S cts) EPS growth (%) P/E (x) Core EPS (S cts) Core EPS growth (%) Core P/E (x) Gross DPS (S cts) Dividend yield (%) P/BV (x) ROE (%) Net gearing (%) Net cash per share (S$) P/FCFE (x) EV/EBITDA (x) % change in EPS estimates CIMB/Consensus (x) 2006 2,947.8 241.9 8.2% 152.1 154.2 12.3 (43.3%) 21.2 15.0 (26.6%) 17.5 3.2 1.2% 4.0 19.9% 34.7% N/A (33.1) 13.7 2007 5,818.7 596.5 10.3% 537.6 527.3 38.3 210.9% 6.8 38.8 159.3% 6.8 7.3 2.8% 2.1 39.3% N/A 0.08 (82.6) 5.3 2008F 8,538.4 1,071.9 12.6% 991.7 971.9 64.8 69.0% 4.0 64.8 67.1% 4.0 3.2 1.2% 1.4 41.7% N/A 0.20 18.6 3.1 N/A 1.28 2009F 7,926.3 727.3 9.2% 628.7 616.1 41.1 (36.6%) 6.4 41.1 (36.6%) 6.4 3.2 1.2% 1.2 20.0% N/A 0.18 190.4 4.6 N/A 1.00 2010F 6,591.7 492.9 7.5% 368.6 361.2 24.1 (41.4%) 10.9 24.1 (41.4%) 10.9 3.2 1.2% 1.1 10.2% N/A 0.14 (193.5) 6.9 N/A 1.00
Note: Per share data translated into listing currency at current fx spot rates, valuation methodology based on house forex forecasts Source: Company, CIMB-GK Research, Bloomberg
Price chart
4.1 3.6 3.1 2.6 2.1 1.6 Aug-07

0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00
Jan-08 Jun-08
STX Pan Ocean
Market cap 12-mth price range 3-mth avg daily volume # of shares (m) Est. free float (%) Conv. secs (m)
S$5,393m/US$3,930m S$3.99/S$1.69 4.6m 2,059 40.0 N/A
Share price perf. (%) Relative Absolute Major shareholders STX Shipbuilding Co Ltd Korea Development Bank
1M 3M 6.2 (26.6) 7.3 (34.6)
12M 26.9 7.3 % held 38.9 18.7
Source: Bloomberg
[ 50 ]
SINGAPORE
Volatile earnings expected

Low margins means more volatility Low margins to accentuate earnings fluctuations. In the last financial year, STXPO achieved a core net profit margin of only 8.6%, against 24.4% for TTA, 28.4% for Pacific Basin, 44.3% for PSL and a staggering 58.5% for Maybulk (Figure 1). As STXPO has the lowest margins among the dry bulk companies we cover, its earnings volatility will also be the greatest. The thin margins are a result of STXPOs liberal use of chartered-in capacity, which we expect to account for 70-80% of total dry bulk hire days this year. At the other extreme, PSL uses no chartered-in ships while TTA and Maybulk use a small proportion. Pacific Basin relies on operating lease vessels for about half of its total capacity. The use of chartered-in capacity invariably weakens average margins because of the hire costs. For instance, in 1Q08, STXPOs owned vessels achieved a gross profit margin of 48%, against just 12% for its chartered-in vessels (Figure 2).
Figure 1: Core net profit margins for FY07
60% 50% 40% 30% 20% 10% 0% STX Pan Ocean
Source: Companies, CIMB-GK Research
58.5% 44.3%
24.4%
28.4%
8.6%
TTA
Pacific Basin
PSL
Maybulk
Figure 2: Gross profit margins of owned vs. chartered-in fleet (group-wide)

50% 40% 30% 20% 10% 0% 1QFY05 2QFY05 3QFY05 4QFY05 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07 2QFY07 3QFY07 4QFY07 1QFY08
48%
41% 28%
Ow ned v essels
Chartered-in v essels 37% 35% 29%
44%
48% 40% 39%
25%
26% 22%
6%
9%
11% 1% 3% 5% 5%
8%
7%
7%
7%
9%
12%
Outlook
Chartered-in capacity could fall when rates fall Chartered-in capacity a double-edged sword. Charter-ins have enabled STXPO to expand the volume of business done in an environment of rising freight rates, using a profitable strategy of chartering-out ships on a shorter period than the tenure of the charter-ins. Charter rates vary inversely with the duration of the charter period. For instance, the daily charter-in rate for a 12-month period will typically be lower than the daily charter-out rate for a six-month period. As a result, ship operators will earn a profit by chartering out on two six-month periods a ship that has been chartered-in for a full 12 months. When freight rates are rising, the ship operators profit will expand because the charter-out rate on the second six-month period will be higher than the rate for the initial six months. But if freight rates start declining, the dangers of such a leveraged strategy increase. The charter-out rate on the second six-month period may be lower than the initial six months, and may even fall below the charter-in rate. In order to mitigate risk, STXPO may have to reduce the volume of business done using chartered-in ships. As a result, in a period of weak dry bulk fundamentals, STXPO may suffer the twin effects of rate
[ 51 ]
weakness and lower business volumes.

V
Figure 3: Segmental breakdown

US$ m, FYE Dec Bulk Tanker Car carrier Container Others Total revenue 2007 5,289.6 181.0 67.3 277.2 3.6 5,818.7 2008F 7,934.4 219.9 67.3 316.8 0.0 8,538.4 2009F 7,193.9 235.5 101.0 396.0 0.0 7,926.3 2010F 5,732.6 255.3 168.3 435.6 0.0 6,591.7
Bulk Tanker Car carrier Container Others Total EBIT

510.1 27.1 16.2 (27.4) 18.8 544.8
952.1 28.6 16.2 (25.3) 20.0 991.5
575.5 25.9 24.2 (19.8) 20.0 625.8
286.6 33.2 40.4 (13.1) 20.0 367.1

Target price lowered to S$2.06 Downgrade from Trading Sell to UNDERPERFORM with target price of S$2.06. We are leaving forecasts unchanged pending the release of 2Q results. Although the results are likely to be good, we believe that the poor outlook for the dry bulk sector from late 2008 will be a more important determinant of share price direction. Our target price has been lowered from S$2.32 as we up the RNAV discount from 40% to 50% Container shipping also at risk. STXPO has never earned a profit on its container business, and current economic conditions will probably increase the size of the losses. STXPO operates a very small fleet of six owned container ships and three long-term leases, and does not enjoy any economies of scale. Forecast risk. There is a higher level of forecast risk inherent in STXPO, as we are unable to track movements in its short-term chartered-in capacity closely, due to the lack of disclosure. Also, managements chartering plans may change quickly. STXPO also does not disclose average time charter rates or charter-in costs. Diversification to non-shipping businesses could pose risks. The companys plans to start a ship finance and derivatives business is a departure from its core shipping business. Although STXPO used to participate actively in freight forward agreement trades, we are unclear if it has the necessary skills to be a successful investment bank. Given that we expect dry freight markets to enter a downturn from 2009 onwards, the value of ship assets may come under pressure, raising risks for ship financiers as collateral values drop. In June, STXPO also indicated its intention to participate in any group bid for a 50.4% stake in Daewoo Shipbuilding & Marine Engineering. Whether this particular bid proceeds or not, shareholders should be aware that STXPO appears keen to diversify into unrelated businesses.
Figure 4: Sum-of-the-parts valuation
Value (US$ m) 2,548.0 935.3 1,945.0 234.1 297.0 236.1 6,195.6
Container shipping may be weaker
Diversification into nonshipping businesses
Market value of owned fleet (US$ m) Add: To-date progressive payments for newbuildings (US$ m) Add: Valuation of charter-in earnings (at 4x 2009 P/E) Add: Market value of Korea Express (US$ m) Add: Net cash FY08F (US$ m) Add: Other net assets FY08F (excluding cash/debt) (US$ m) Total (US$ m) No of shares (m) Per share value (US$) Exchange rate (S$:US$) Per share value (S$) Discount (%) Target price (S$)
Source: Company, CIMB/CIMB-GK Research
2,058.6 3.01 1.37 4.12 50% 2.06
[ 52 ]
Financial tables
PROFIT & LOSS (US$ m, FYE Dec) Revenue Operating expenses EBITDA Depreciation & amortisation EBIT Net interest & invt income Associates contribution Exceptional items Others Pretax profit Tax Minority interests Net profit Adj. wt. shares (m) Unadj. year-end shares (m) BALANCE SHEET (US$ m, end Dec) Fixed assets Intangible assets Other long-term assets Total non-current assets Cash and equivalents Stocks Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders funds Minority interests NTA/share (S$) CASH FLOW (US$ m, FYE Dec) Pretax profit Depreciation & noncash adj. Working capital changes Cash tax paid Others Cash flow from operations Capex Net investments & sale of FA Others Cash flow from investing Debt raised/(repaid) Equity raised/(repaid) Dividends paid Cash interest & others Cash flow from financing Change in cash Change in net cash/(debt) Ending net cash/(debt)
KEY RATIOS 2006 2,948 (2,706) 242 (44) 198 (13) 0 (33) 0 152 2 0 154 1,715 1,715 2007 5,819 (5,222) 597 (52) 545 (2) 1 (6) 0 538 (10) 0 527 1,887 2,059 2008F 8,538 (7,467) 1,072 (80) 992 (1) 1 0 0 992 (20) 0 972 2,059 2,059 2009F 7,926 (7,199) 727 (101) 626 2 1 0 0 629 (13) 0 616 2,059 2,059 2010F 6,592 (6,099) 493 (126) 367 0 1 0 0 369 (7) 0 361 2,059 2,059 (FYE Dec) Revenue growth (%) EBITDA growth (%) Pretax margins (%) Net profit margins (%) Interest cover (x) Effective tax rates (%) Net dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days) 2006 8.3 (19.2) 5.2 5.2 10.7 N/A 21.8 33.1 2.7 23.9 2007 97.4 146.6 9.2 9.1 34.7 1.9 16.3 33.1 1.7 24.8 2008F 46.7 79.7 11.6 11.4 36.2 2.0 4.1 39.6 1.7 30.6 2009F (7.2) (32.2) 7.9 7.8 22.8 2.0 6.5 48.9 2.1 38.1 2010F (16.8) (32.2) 5.6 5.5 13.4 2.0 11.1 N/A N/A N/A
KEY DRIVERS 2006 763 17 256 1,037 133 23 306 37 498 201 47 58 307 369 44 414 818 0 0.64 2007 1,284 28 305 1,617 673 33 751 99 1,557 590 64 119 773 484 55 539 1,865 2 1.22 2008F 1,932 28 306 2,265 845 47 1,102 99 2,093 844 64 120 1,027 484 55 539 2,796 2 1.85 2009F 2,577 28 307 2,911 825 45 1,023 99 1,993 813 64 121 998 484 55 539 3,372 2 2.23 2010F 3,012 28 308 3,348 765 39 851 99 1,753 689 64 121 874 484 55 539 3,693 2 2.44 (FYE Dec) Fleet size (number of vessels) No of dry bulk ships No of chemical tankers No of container ships No of pure car carriers No of LNG tankers Baltic Dry Index (yoy change %) Bulk rates (US$/day) 2007 62 47 9 4 2 N/A 122.0% 48,329 2008F 70 48 14 6 2 N/A 20.1% 53,162 2009F 87 58 16 8 4 1 -29.4% 45,188 2010F 105 74 16 8 6 1 -50.0% 33,891
12M - FORWARD FD CORE P/E (X) 2006 152 44 (75) 17 16 155 (122) 69 5 (47) (45) 0 (84) (162) (291) (183) (138) (284) 2007 538 52 (70) (3) 5 521 (426) (42) (52) (520) 132 624 (39) (177) 539 541 409 126 2008F 992 80 (112) (20) 26 967 (728) 0 0 (728) 0 0 (40) (27) (68) 171 171 297 2009F 629 101 50 (13) 26 794 (746) 0 0 (746) 0 0 (40) (27) (68) (20) (20) 277 2010F 369 126 55 (7) 26 568 (561) 0 0 (561) 0 0 (40) (27) (68) (61) (61) 217
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[ 53 ]

CIMB Research Report
Malaysian Bulk Carriers Bhd

Yields alone may not keep valuations aloft
UNDERPERFORM RM3.68
Downgraded @04/08/08 Target: RM3.00 Dry Bulk Shipping
MBC MK / MBCB.KL
Funding record dividends from vessel disposals. Maybulk has crystallised US$152m in proceeds from the sale of three vessels this year two handymax bulkers and one MR tanker. The gains are likely to be used to finance bumper dividends and have probably helped to support the share price at lofty valuations.After these disposals, it will have 10 bulkers and three tankers left in its fleet. While further disposals may be possible, currently high freight rates are a powerful disincentive . Capacity for dividends to decline from 2009. We currently expect a net DPS of 50 sen this year, providing investors with a comfortable gross yield of 18.4%. Nevertheless, from 2009 onwards, the capacity to pay dividends from core earnings is likely to be crimped if our bearish expectations for the dry bulk sector materialise. Maybulks valuation premium over its peers may then begin to narrow. As such, we expect the stock to come under pressure after it goes ex of the interim dividend in September, and especially after it goes ex of the final dividend in April next year. Downgrade from Trading Sell to UNDERPERFORM, target price unchanged at RM3.00. We have upped Maybulks RNAV by 12% to RM4.20, after updating our valuation of individual vessels for current second-hand prices. But our price objective is now based on a wider RNAV discount of 30% instead of 20% as we have turned more negative on the dry bulk sector. We are raising FY08 EPS by 12% on higher rate assumptions, but are lowering FY09-10 by 9-27% as a glut develops on the dry bulk market.
Financial summary
FYE Dec Revenue (RM m) EBITDA (RM m) EBITDA margins (%) Pretax profit (RM m) Net profit (RM m) EPS (sen) EPS growth (%) P/E (x) Core EPS (sen) Core EPS growth (%) Core P/E (x) Gross DPS (sen) Dividend yield (%) P/BV (x) ROE (%) Net cash per share (RM) P/FCFE (x) EV/EBITDA (x) % change in EPS estimates CIMB/Consensus (x)
Source: Company, CIMB Research, Bloomberg
2006 441.6 289.9 65.6% 313.5 300.6 30.1 (53.4%) 12.2 30.1 29.5% 12.2 33.3 9.1% 2.4 19.9% 0.28 (325.7) 11.8
2007 608.1 389.8 64.1% 580.4 544.7 54.5 81.2% 6.8 35.7 18.7% 10.3 52.1 14.1% 2.2 33.5% 0.68 5.9 7.8
2008F 867.6 510.3 58.8% 814.8 787.2 78.7 44.5% 4.7 52.9 48.4% 7.0 67.6 18.4% 1.9 42.8% 1.24 3.5 4.9 12.0% 1.41
2009F 615.7 304.8 49.5% 371.3 352.2 35.2 (55.3%) 10.4 35.2 (33.5%) 10.4 27.0 7.3% 1.7 17.1% 1.42 12.7 7.6 (8.5%) 0.93
2010F 442.6 135.8 30.7% 208.4 196.1 19.6 (44.3%) 18.8 19.6 (44.3%) 18.8 13.5 3.7% 1.6 9.0% 1.54 18.4 16.1 (27.3%) 0.59
Price chart
0.80
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Jun-08
Malaysian Bulk Carriers Bhd
RM3,680m/US$1,128m RM5.05/RM3.25 0.9m 1,000 31.0 N/A
Share price perf. (%) Relative Absolute Major shareholders Pacific Carriers Ltd. Global Maritime Ventures Malayan Sugar Manuf.
1M 3M 0.9 (3.1) 2.2 (12.8)
12M 13.8 (2.1) % held 34.5 21.5 14.0
Source: Bloomberg
[ 54 ]
MALAYSIA
High yields from asset disposals

Further disposals possible, but not guaranteed Funding record dividends from vessel disposals. Maybulk is part owner-operator and part asset player, running very profitable operations while keeping an eye on opportunities in the sales and purchase market. With the rally in second-hand prices over the past few years, Maybulk has sold more vessels than it has purchased, and refrained from buying until asset values correct in an eventual market downturn. In the meantime, the disposal gains have been used to finance record dividends, helping to keep valuations at lofty levels. Current and future disposals. Maybulk has crystallised US$152m (RM486m) in proceeds from the sale of three vessels this year two handymax bulkers and one MR tanker. After these disposals, it will have 10 bulkers and three tankers left in its fleet. Further disposals may be possible but high freight rates are powerful disincentive. The company had last year indicated that it may dispose of three 23-24 year old handysize vessels, but under current freight rates, the cash profits are so lucrative that Maybulk will probably keep the ships. Maybulk had sold four MR tanker newbuildings over the past two years, but will likely keep the remaining three to maintain a presence in the market.
Figure 1: Current fleet composition
Bulk Carriers Vessel name 1 Alam Sempurna 2 Alam Senang 3 Alam Gula 4 Alam Selamat 5 Alam Mesra 6 Alam Padu 7 Alam Permai 8 Alam Penting 9 Alam Pesona 10 Alam Pintar Total Bulker Fleet DWT Year built Feb-84 Mar-84 May-85 Jul-92 Oct-00 Apr-05 Jun-05 Jul-05 Sep-05 Oct-05 Own/Lease Own Own Own Sold and leased Own Own Own JV / Own Own Own DWT 28,094 28,098 23,418 39,110 46,644 87,052 87,052 87,052 87,052 87,052 600,624 Category Handysize Handysize Handysize Handymax Handymax Post Panamax Post Panamax Post Panamax Post Panamax Post Panamax % owned 100% 100% 100% 100% 70% 100% 100% 50% 100% 100%
Product Tankers Year built Vessel name May-99 1 Alam Bitara Mar-01 2 Alam Budi May-01 3 Alam Bistari Total Product Tanker Fleet DWT
Own/Lease Own Own Own
DWT 45,513 47,065 47,065 139,643
Category MR MR MR
% owned 100% 100% 100%
Figure 2: Disposals since 2005

Vessel 1a b c d Penyu Agar Penyu Sisik Penyu Daun Penyu Pipih Date Feb-05 Year built Nov-03 Apr-05 Sep-05 Jan-06 Type of ship Panamax Tanker Panamax Tanker Panamax Tanker Panamax Tanker DWT 72,718 72,718 72,718 72,718 50,296 50,296 Nature of sale Outright sale Outright sale Outright sale Outright sale Outright sale Outright sale Proceeds (RM m) 311.6
2a Alam Mutiara b Alam Maju 3 4 5 6 Alam Sentosa Alam Selamat Alam Sejahtera Alam Sentosa
Feb-05
Apr-05 Handymax Bulker Apr-05 Handymax Bulker Apr-92 Jul-92 Jan-85 Apr-92 May-06 Feb-07 Handymax Bulker Handymax Bulker Handysize Bulker Handymax Bulker MR Tanker MR Tanker
258.4 72.6 75.0 37.1 82.9 279.5 146.4 140.8 140.5 204.5
Apr-05 Oct-05 Nov-06 Dec-06 Mar-07 Mar-07 Nov-07 Jan-08 Feb-08 Feb-08
39,110 Sale and leaseback 39,110 Sale and leaseback 29,692 Outright sale 39,110 Outright sale 34,780 34,780 34,780 39,110 34,780 46,644 Outright sale Outright sale Outright sale Outright sale Outright sale Outright sale
7a Alam Cantik b Alam Cepat 8 9 10 11 Alam Cergas Alam Selaras Alam Comel Alam Makmur
Jun-07 MR Tanker Feb-92 Handymax Bulker Aug-07 MR Tanker Nov-00 Handymax Bulker
[ 55 ]

Freight rate downturn could Capacity for dividends to decline from 2009. We currently expect a net DPS of 50 reduce dividend payout sen this year, providing investors with a comfortable gross yield of 18.4%. Our DPS assumption could be raised if more vessel disposals materialise, although we highlight that current high freight rates discourage further disposals. Nevertheless, from 2009 onwards, the capacity to pay dividends from core earnings is likely to be crimped if our bearish expectations for the dry bulk sector materialise. We expect core earnings to fall by 33.5% in 2009 and 44.3% in 2010, as a result of lower average dry bulk freight rates. We also expect net DPS to be reduced to 20 sen in 2009 and 10 sen in 2010. As such, we expect the stock to come under pressure after it goes ex of the interim dividend in September, and especially after it goes ex of the final dividend in April next year. Downgrade from Trading Sell to UNDERPERFORM, target price unchanged at RM3.00. We have upped Maybulks RNAV by 12% to RM4.20, after updating our valuation of individual vessels for current second-hand prices. But our price objective is now based on a wider RNAV discount of 30% instead of 20% as we have turned more negative on the dry bulk sector. We are raising FY08 EPS by 12% on higher rate assumptions, but are lowering FY09-10 by 9-27% as a glut develops on the dry bulk market.
Figure 3: RNAV and target price calculation
Fleet value (US$ m) Exchange rate (RM:US$) Fleet value (RM m) Add: Net cash FY08F (RM m) Add: Other net assets FY08F (RM m) Total (RM m) No of shares (m) Per share RNAV (RM) Discount (%) Target price (RM)
Source: Company, CIMB Research
797.0 3.30 2,630.1 1,242.6 420.1 4,292.8 1,000 4.29 30.0% 3.00

RM m, FYE Dec Bulk Tanker Others Total revenue 2007 485.5 116.3 6.3 608.1 2008F 788.3 74.3 5.0 867.6 2009F 555.5 55.2 5.0 615.7 2010F 389.7 48.0 5.0 442.6
Bulk Tanker Others Total PBT

304.9 60.2 26.5 391.6
496.7 40.9 19.5 557.0
344.4 27.6 (0.7) 371.3
214.3 26.4 (32.3) 208.4
[ 56 ]
Financial tables
PROFIT & LOSS (RM m, FYE Dec) Revenue Operating expenses EBITDA Depreciation & amortisation EBIT Net interest & invt income Associates contribution Exceptional items Others Pretax profit Tax Minority interests Net profit Adj. wt. shares (m) Unadj. year-end shares (m) BALANCE SHEET (RM m, end Dec) Fixed assets Intangible assets Other long-term assets Total non-current assets Cash and equivalents Stocks Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders funds Minority interests NTA/share (RM) CASH FLOW (RM m, FYE Dec) Pretax profit Depreciation & noncash adj. Working capital changes Cash tax paid Others Cash flow from operations Capex Net investments & sale of FA Others Cash flow from investing Debt raised/(repaid) Equity raised/(repaid) Dividends paid Cash interest & others Cash flow from financing Change in cash Change in net cash/(debt) Ending net cash/(debt)
KEY RATIOS 2006 442 (152) 290 (40) 250 48 16 0 0 314 (1) (12) 301 1,000 800 2007 608 (218) 390 (40) 350 26 15 189 0 580 (3) (33) 545 1,000 1,000 2008F 868 (357) 510 (19) 491 53 13 258 0 815 0 (28) 787 1,000 1,000 2009F 616 (311) 305 (15) 290 69 12 0 0 371 0 (19) 352 1,000 1,000 2010F 443 (307) 136 (14) 122 75 12 0 0 208 0 (12) 196 1,000 1,000 (FYE Dec) Revenue growth (%) EBITDA growth (%) Pretax margins (%) Net profit margins (%) Interest cover (x) Effective tax rates (%) Net dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days) 2006 11.6 10.4 71.0 68.1 6.9 0.4 79.8 25.0 5.8 54.4 2007 37.7 34.5 95.4 89.6 16.1 0.4 69.8 22.8 3.8 39.7 2008F 42.7 30.9 93.9 90.7 25.6 0.0 63.5 21.8 3.6 33.7 2009F (29.0) (40.3) 60.3 57.2 15.1 0.0 56.8 30.9 5.9 55.2 2010F (28.1) (55.4) 47.1 44.3 6.3 0.0 51.0 30.7 7.6 70.9
KEY DRIVERS 2006 1,057 0 36 1,094 693 6 33 263 995 72 73 1 145 336 0 336 1,554 53 1.55 2007 674 0 48 721 1,027 7 43 390 1,466 61 7 2 69 343 1 344 1,695 79 1.70 2008F 426 0 61 487 1,592 11 61 390 2,054 100 7 2 108 343 1 344 1,982 107 1.98 2009F 412 0 73 485 1,772 9 43 390 2,215 87 7 2 95 343 1 344 2,134 126 2.13 2010F 398 0 85 483 1,894 9 31 390 2,324 85 7 2 94 343 1 344 2,230 138 2.23 (FYE Dec) Fleet size (number of vessels) Baltic Dry Index (yoy change %) Bulk rates (US$/day) Clean tanker TCE rates (US$/day) 2007 N/A 0.0% 30,095 20,141 2008F 21 21.2% 39,124 20,141 2009F 19 -29.4% 33,255 18,127 2010F 20 -50.0% 24,941 16,314
12M - FORWARD FD CORE P/E (X) 2006 314 40 7 (1) (187) 173 (165) 1 0 (164) (3) 0 (57) (31) (91) (82) (79) 284 2007 580 40 (21) (1) (219) 379 (194) 510 41 357 (91) 2 (96) (247) (433) 303 394 678 2008F 815 19 16 0 (324) 527 0 486 0 486 0 0 (136) (311) (447) 565 565 1,243 2009F 371 15 6 0 (81) 311 0 0 0 0 0 0 (320) 189 (131) 180 180 1,422 2010F 208 14 11 0 (87) 147 0 0 0 0 0 0 (500) 475 (25) 122 122 1,544
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[ 57 ]

Exposed to the cycle
UNDERPERFORM THB37.75
Downgraded @04/08/08 Target: THB36.00 Dry Bulk Shipping
TTA TB / TTA.BK
Raymond Yap CFA +603 2084 9769 raymond.yap@cimb.com, Kasem Prunratanamala +662 687 0840
TTA remains highly exposed to the vagaries of the dry bulk cycle. TTAs internal policy is to allocate one-third of its capacity to the time charter market, the spot market and the liner service. However, based on the most recent data as at March 2008, TTA had placed only 5.72% of the available bulker capacity in FY09 on period time charters. If dry bulk rates weaken from end-2008 onwards as we expect, TTAs low level of forward contracting will provide it with little defence. Contribution from Mermaid Maritime not enough to offset dry bulk declines. Mermaid Maritime (MMT SP, Not Rated), which is 55%-owned by TTA, is expected to perform better in the next two financial years from higher day rates and more rigs and vessels. However, our estimates suggest that the higher earnings from MMT are unlikely to be sufficient to offset the potentially rapid decline in bulker earnings. Downgrade from Trading Sell to UNDERPERFORM, but with a higher target price of THB36.00 (from THB32). Our target price pegs an unchanged 50% discount to its RNAV, which has been revised up to reflect current second-hand prices. We have reduced earnings forecasts by 27% for FY09 and 36% for FY10 as we are now more negative on the sectors fundamentals as a result of the impending deployment of large numbers of converted tankers. Within the Thai dry bulk sector, we recommend investors to switch to PSL (OUTPERFORM, TP: THB26).
Financial summary
FYE Sep Revenue (THB m) EBITDA (THB m) EBITDA margins (%) Pretax profit (THB m) Net profit (THB m) EPS (THB) EPS growth (%) P/E (x) Core EPS (THB) Core EPS growth (%) Core P/E (x) FD core EPS (THB) FD core P/E (x) Gross DPS (THB) Dividend yield (%) P/BV (x) ROE (%) Net gearing (%) Net cash per share (THB) P/FCFE (x) EV/EBITDA (x) % change in EPS estimates CIMB/Consensus (x)
2006 16,047.3 5,195.5 32.4% 3,930.0 3,544.2 5.5 (41.0%) 6.9 5.4 (42.4%) 7.0 5.4 7.0 1.4 3.6% 2.2 34.9% 63.1% N/A 12.2 6.1
2007 20,357.5 6,718.7 33.0% 5,238.5 4,970.0 7.7 40.2% 4.9 7.7 43.6% 4.9 7.7 4.9 1.7 4.4% 1.6 37.7% 33.2% N/A 9.9 4.4
2008F 31,230.2 10,115.5 32.4% 9,467.2 9,077.2 14.1 82.6% 2.7 13.7 78.1% 2.8 12.0 3.1 3.5 9.3% 1.1 48.9% N/A 2.91 2.9 2.2 0.1% 1.43
2009F 28,885.6 7,139.6 24.7% 6,059.6 5,513.6 8.6 (39.3%) 4.4 8.6 (37.6%) 4.4 7.6 5.0 2.1 5.7% 0.9 22.9% N/A 11.38 3.9 2.5 (27.4%) 0.98
2010F 26,297.5 5,376.9 20.4% 4,075.5 3,341.8 5.2 (39.4%) 7.3 5.2 (39.4%) 7.3 4.7 8.1 1.3 3.4% 0.8 12.2% N/A 16.66 6.1 2.7 (35.8%) 0.74
Price chart
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64.2 59.2 54.2 49.2 44.2 39.2 34.2 29.2 Aug-07

0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00
Jan-08 Jun-08
Market cap 12-mth price range 3-mth avg daily volume # of shares (m) Est. free float (%) Conv. secs (m) Conv. price (THB)
THB24,299m/US$725m THB64.88/THB30.78 9.6m 644 80.0 103.1 58.52
Share price perf. (%) Relative Absolute Major shareholders Thai NVDR Goldman Sachs International State Street Bank
1M 3M 12M 3.9 (8.3) 10.1 0.0 (17.1) (26.2) % held 13.1 6.1 2.6
Source: Bloomberg
[ 58 ]
THAILAND
Still highly exposed to spot rates

Little rate cover for next year TTAs internal policy is to allocate one-third of its capacity to the time charter market, the spot market and the liner service. However, based on the most recent data as at March 2008, TTA had placed only 5.72% of the available bulker capacity in FY09 on period time charters a stark contrast to PSLs 56.27% (Figure 1). If dry bulk rates weaken from end-2008 onwards as we expect, TTAs low level of forward contracting will make it difficult for the company to protect against earnings downside.
Figure 1: Proportion of FY09 days fixed as at 31 March 2008 TTA PSL
Fixed 56.27% Fixed 5.72% Unfixed 94.28% Unfixed 43.73%
Mermaid Maritime contribution relatively small

Mermaid still to small to help Mermaid Maritime (MMT SP, Not Rated), which is 55%-owned by TTA, is expected to perform better in the next two financial years due to higher day rates and more rigs and vessels (Figure 2). However, our estimates suggest that the higher earnings from MMT are unlikely to be sufficient to offset the potentially rapid decline in bulker earnings. For instance, we expect bulk revenue to decline by THB5.4bn in FY09 but MMTs revenue is expected to rise by only THB3.0bn. In FY10, we expect bulk revenue to fall by another THB5.2bn, which again, cannot be fully offset by MMTs THB2.6bn topline growth (Figure 3).
Figure 2: Revenue forecast and assumptions for Mermaid Maritime
2008F Revenue US$ m 36.1 24.5 11.5 106.8 41.5 7.9 4.5 32.4 18.1 2.4 142.9 2009F Revenue US$ m 52.2 29.2 23.1 181.1 51.5 8.7 5.0 38.2 20.0 2.6 28.6 26.4 233.3 2010F Revenue US$ m 96.9 41.0 35.4 20.5 215.3 55.7 9.4 5.4 41.3 21.9 2.9 40.9 37.8 312.2 2008F Utilisation % 69.2% 90.8% 47.5% 80.0% 95.0% 70.0% 75.0% 80.0% 80.0% 80.0% 2009F Utilisation % 94.4% 93.8% 95.0% 80.0% 95.0% 70.0% 75.0% 80.0% 80.0% 80.0% 80.0% 80.0% 2010F Utilisation % 91.3% 95.0% 91.3% 87.5% 80.0% 95.0% 70.0% 75.0% 80.0% 80.0% 80.0% 80.0% 80.0% 2008F Day rate US$/day 62,813 75,000 50,625 58,855 121,246 31,377 16,735 112,652 62,754 8,367 2009F Day rate US$/day 76,875 86,250 67,500 83,716 150,484 34,454 18,375 132,620 69,572 9,188 132,617 122,416 2010F Day rate US$/day 118,958 120,000 106,875 130,000 90,370 162,889 37,294 19,890 143,553 76,023 9,945 142,151 131,217
Tender rig MTR 1 MTR 2 KM1 Subsea fleet Mermaid Commander (DSV) Mermaid Responder (Dive/ROV) Mermaid Supporter (Dive/ROV) Team Siam (Crane + Dive) Bin Minh (Dive/ROV) Mermaid Soverign (AHTS) New ROV New DPSDSV Total revenue
[ 59 ]

THB m, FYE Sep Bulk Offshore oil & gas Others Total revenue 2007 15,866.2 4,025.5 465.8 20,357.5 2008F 25,978.2 4,762.9 489.1 31,230.2 2009F 20,594.7 7,777.3 513.5 28,885.6 2010F 15,350.7 10,407.6 539.2 26,297.5
Bulk Offshore oil & gas Others Total EBITDA

6,594.2 1,311.7 (1,187.2) 6,718.7
10,158.5 1,272.9 (1,315.9) 10,115.5
6,473.4 1,957.6 (1,291.5) 7,139.6
3,861.2 2,781.5 (1,265.8) 5,376.9

Switch to PSL Downgrade from Trading Sell to UNDERPERFORM, but with a higher target price of THB36.00 (THB32 previously). We have reduced our earnings forecasts by 27% for FY09 and 36% for FY10 but have left 2008 EPS essentially unchanged. We are now more negative on the sectors fundamentals as a result of the impending deployment of large numbers of converted tankers. Within the Thai dry bulk sector, we recommend investors to switch to PSL (OUTPERFORM, TP: THB26), which has significant rate protection stretching into next year. Our target price pegs an unchanged 50% discount to its RNAV, which is the sum of the market value of TTAs bulkers and the value of its shares in Mermaid Maritime (MMT SP, Not Rated). Our target price has been increased because we have updated our valuation of its fleet of bulk carriers. We have priced TTA and PSL at a relatively large discount to their RNAVs compared to its peers as the Thai dry bulk sector has typically traded below RNAV even in the most bullish freight environments. This could be due to the discount for the Thai market in general or perhaps because both companies have ageing fleets that would require replacement in the medium term.
Dry bulk fleet second-hand value (US$ m) Baht exchange rate Dry bulk fleet value (THB m) Add: Value of Mermaid Maritime stake (THB m) Add: Net cash/(debt) Mar 08 - holding co only (THB m) Add: Other net assets Mar 08 - holding co only (THB m) Total (THB m) No of TTA shares (m) Per share RNAV (THB) Discount (%) Target price (THB)
1,188 33.50 39,798.0 8,694.7 -2,472.2 436.1 46,456.6

643.7 72.17 50% 36.09
[ 60 ]
Financial tables
PROFIT & LOSS (THB m, FYE Sep) Revenue Operating expenses EBITDA Depreciation & amortisation EBIT Net interest & invt income Associates contribution Exceptional items Others Pretax profit Tax Minority interests Net profit Adj. wt. shares (m) Unadj. year-end shares (m) BALANCE SHEET (THB m, end Sep) Fixed assets Intangible assets Other long-term assets Total non-current assets Cash and equivalents Stocks Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders funds Minority interests NTA/share (THB) CASH FLOW (THB m, FYE Sep) Pretax profit Depreciation & noncash adj. Working capital changes Cash tax paid Others Cash flow from operations Capex Net investments & sale of FA Others Cash flow from investing Debt raised/(repaid) Equity raised/(repaid) Dividends paid Cash interest & others Cash flow from financing Change in cash Change in net cash/(debt) Ending net cash/(debt) 2006 3,930 1,618 (664) (104) (574) 4,207 (936) (947) 12 (1,870) 280 0 (1,384) (1,559) (2,662) (326) (606) (7,590) 2007 5,239 1,781 (160) (96) (148) 6,616 (3,792) 107 0 (3,686) 115 0 (952) 279 (558) 2,373 2,258 (5,332) 2008F 9,467 1,817 (807) (100) (1,169) 9,209 (1,140) 656 0 (483) 0 0 (2,269) 749 (1,521) 7,205 7,205 1,873 2009F 6,060 1,734 285 (100) (654) 7,325 (1,066) 0 0 (1,066) 0 0 (1,378) 574 (804) 5,454 5,454 7,327 2010F 4,076 1,696 239 (100) (395) 5,516 (1,600) 0 0 (1,600) 0 0 (835) 315 (521) 3,396 3,396 10,723 2006 16,943 522 881 18,345 1,373 699 1,827 897 4,795 1,158 1,650 998 3,806 7,312 0 7,312 11,185 839 16.57 2007 18,669 660 950 20,278 3,745 724 2,203 1,186 7,858 1,399 805 1,604 3,808 8,271 0 8,271 15,153 903 22.52 2008F 17,675 660 1,030 19,364 10,950 1,121 3,380 1,186 16,636 2,166 805 1,604 4,575 8,271 0 8,271 21,961 1,193 33.09 2009F 17,007 660 1,110 18,776 16,404 1,154 3,126 1,186 21,870 2,230 805 1,604 4,640 8,271 0 8,271 26,096 1,639 39.52 2010F 16,911 660 1,190 18,760 19,800 1,110 2,846 1,186 24,942 2,146 805 1,604 4,555 8,271 0 8,271 28,603 2,273 43.41 2006 2007 2008F 2009F 16,047 20,358 31,230 28,886 (10,852) (13,639) (21,115) (21,746) 5,196 6,719 10,116 7,140 (1,618) (1,781) (1,817) (1,734) 3,578 4,938 8,298 5,405 (627) (593) (279) (89) 6 9 80 80 128 12 340 0 845 873 1,028 663 3,930 5,239 9,467 6,060 (104) (96) (100) (100) (282) (173) (290) (446) 3,544 4,970 9,077 5,514 644 644 644 644 644 644 644 644 2010F 26,297 (20,921) 5,377 (1,696) 3,681 44 80 0 271 4,076 (100) (634) 3,342 644 644 KEY RATIOS (FYE Sep) Revenue growth (%) EBITDA growth (%) Pretax margins (%) Net profit margins (%) Interest cover (x) Effective tax rates (%) Net dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days) 2006 7.6 (30.5) 24.5 22.1 5.1 2.6 22.1 32.5 14.0 22.9 2007 26.9 29.3 25.7 24.4 7.4 1.8 19.2 36.1 12.8 22.9 2008F 53.4 50.6 30.3 29.1 16.6 1.1 22.5 32.6 10.8 20.8 2009F (7.5) (29.4) 21.0 19.1 10.8 1.7 22.5 41.1 14.4 27.8 2010F (9.0) (24.7) 15.5 12.7 7.4 2.5 22.5 41.4 15.7 30.4
KEY DRIVERS (FYE Sep) Baltic Dry Index (yoy change %) Bulk rates (US$/day) Fleet size (number of vessels) 2007 94.6% 15,469 45 2008F 61.7% 24,837 43 2009F -26.4% 19,457 43 2010F -43.4% 14,666 43
12M - FORWARD FD CORE P/E (X)

6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
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Aug-08
[ 61 ]
Precious Shipping
Sturdy ship in troubled waters
OUTPERFORM THB19.60
Upgraded @04/08/08 Target: THB26.00 Dry Bulk Shipping
PSL TB / PSL.BK
Raymond Yap CFA +603 2084 9769 raymond.yap@cimb.com, Kasem Prunratanamala +662 687 0840
Lowest risk dry bulk stock on aggressive charter-outs. Although dry bulk freight rates should fall in 2009 due to overcapacity, PSLs policy of locking in forward hire days is likely to keep earnings stable next year, against our expectation of earnings declines for other stocks in our dry bulk universe. PSL has already locked in 64% of next years hire days at US$15,540/day, which is marginally lower than 2008s US$16,043 (96% secured). Assuming that PSL secures 80% of 2009 by the end of this year, we forecast the average locked-in rate to rise above US$17,000/day, suggesting earnings stability next year. As for 2010, 28.7% of hire days have already been fixed at US$13,045 but we expect the average locked-in rate to top US$15,000/day by the end of 2009. Upgrade from Neutral to OUTPERFORM; raise target price to THB26.00 from THB22.70. We have increased our EPS forecasts by 2% for 2009 and by 6% for 2010 as we lower our overly aggressive cost inflation assumptions. We have also upped our DPS forecasts from THB2.25 in 2009 and THB2.00 in 2010, to THB2.50 for both years, implying gross dividend yields of 12.8%. Our target, based on a 40% discount to RNAV, has been raised as we revise fleet valuation upwards. Risky near-term BDI outlook unlikely to hurt share price further. The share price has declined significantly, and even though dry bulk freight rates could be weak over the next two months as China enters the Olympic Games period, we think that PSL may not see significant further selldown given its attractive valuations and improved earnings visibility.
Financial summary
FYE Dec Revenue (THB m) EBITDA (THB m) EBITDA margins (%) Pretax profit (THB m) Net profit (THB m) EPS (THB) EPS growth (%) P/E (x) Core EPS (THB) Core EPS growth (%) Core P/E (x) Gross DPS (THB) Dividend yield (%) P/BV (x) ROE (%) Net cash per share (THB) P/FCFE (x) EV/EBITDA (x) % change in EPS estimates CIMB/Consensus (x)
2006 9,076.5 5,784.9 63.7% 3,721.6 3,715.0 3.6 (39.9%) 5.5 3.5 (41.6%) 5.6 2.0 10.2% 1.7 33.8% 1.21 8.8 3.3
2007 7,297.4 5,012.3 68.7% 4,163.7 4,156.2 4.0 11.9% 4.9 3.4 (3.8%) 5.8 2.3 11.5% 1.5 31.9% 1.41 8.8 3.0
2008F 8,519.0 6,011.4 70.6% 4,963.2 4,957.2 4.8 19.3% 4.1 4.8 43.1% 4.1 2.5 12.8% 1.2 32.3% 4.02 4.0 2.1 N/A 1.19
2009F 8,519.0 5,931.0 69.6% 4,907.6 4,901.6 4.7 (1.1%) 4.2 4.8 0.3% 4.1 2.5 12.8% 1.1 27.5% 6.25 4.1 1.7 1.9% 1.23
2010F 6,764.4 4,040.2 59.7% 3,312.9 3,306.9 3.2 (32.5%) 6.2 3.2 (34.0%) 6.2 1.5 7.7% 1.0 17.1% 4.53 25.3 3.0 6.3% 0.99
Price chart
1.40
36.9

1.20 1.00 0.80
31.9
26.9
0.60 0.40 0.20
21.9
16.9 Aug-07
0.00
Jan-08
Jun-08
Precious Shipping
THB20,375m/US$608m THB36.94/THB17.80 1.9m 1,040 38.0 None
Share price perf. (%) Relative Absolute Major shareholders Nishita Shah & family Khalid Hashim & family Thai NVDR
1M 3M 12M 0.3 (24.0) 1.3 (8.0) (20.0) (38.8) % held 42.3 17.5 6.8
Source: Bloomberg
[ 62 ]
THAILAND
Lowest-risk dry bulk stock

Smoothing out the cycle Lagging behind the upturn, but also lagging behind the downturn. PSLs policy of aggressive forward charter-outs is a conservative strategy to average out the peaks and troughs of the dry bulk freight rate cycle. When freight rates were trending upwards, PSLs earnings lagged behind the spot rate increases, but the reverse will probably be true as spot rates start trending lower (Figure 1).
Figure 1: PSLs TCE-equivalent earnings vs. the average BDI movement
19,000 17,000 15,000 13,000 11,000 9,000 7,000 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 08F 09F 10F 2004 2005 2006 2007 2008
PSL's TCE/day (US$)
Avg Baltic Dry Index
11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000
Outlook
FY09 earnings could be stable from FY08 Forward chartering status. Up to 30 June, PSL had already locked in 64% of next years hire days at US$15,540/day, which is marginally lower than 2008s US$16,043 (96% secured). Assuming that PSL secures 80% of 2009 by the end of this year, at incremental charter rates of US$25,000, we forecast the average locked-in rate to rise above US$17,000, suggesting earnings stability in 2009 (Figure 2). As for 2010, 28.7% of hire days have already been fixed at US$13,045/day. Assuming further chartering at US$20,000 for the rest of 2008 and at US$15,000 on average in 2009, we expect the average 2010 locked-in rate to rise above US$15,000/day by the end of next year. For 2011, 14% of days have been secured at a higher rate of US$16,943 this because lucrative five-year time charters have already been secured for four 32,000 dwt newbuildings that will be delivered in March, July and December 2010, and April 2011.
Figure 2: Proportion of hire days fixed and average rates for 2009 and 2010
For 2009 calendar year Proportion Avg cumulative fixed rates % US$/day 48.91% 12,056 56.27% 13,466 64.03% 15,540 72.00% 16,587 80.00% 17,428
As at
End 4Q07 End 1Q08 End 2Q08 End 3Q08F End 4Q08F End 1Q09F End 2Q09F End 3Q09F End 4Q09F
Incremental rates US$/day

22,836 30,579 25,000 25,000
For 2010 calendar year Proportion Avg cumulative fixed rates % US$/day 25.51% 11,617 27.92% 11,502 28.71% 13,045 37.00% 14,603 45.00% 15,563 55.00% 15,460 60.00% 15,422 65.00% 15,390 70.00% 15,362
Incremental rates US$/day

10,285 26,482 20,000 20,000 15,000 15,000 15,000 15,000
Source: Company, CIMB-GK Research Note: Incremental rates refer to the agreed rates for the incremental increase in days fixed between the reference quarter and the immediately preceding quarter.
No new ships until 2010
Newbuilding deliveries not expected until March 2010. PSL has 12 handysize and six supramax vessels on order, with the first handysize to be delivered in 1Q10 and the first supramax at the end of 2010. The company has 25 ships that are more than twenty years old and these will be phased out gradually as the newbuildings arrive. These 25-year-old vessels have a total tonnage of 656,687 dwt, against 708,000 dwt for the 18 newbuilds. Hence, PSL will still see capacity expansion as the average size of its vessels grows. The first four handysize ships have already been committed to an existing customer for a five-year time charter at approximately US$14,000-15,000/day. The EBITDA arising
[ 63 ]
from the five-year contract will come to US$26m-27m per ship, which is commendable since each ship costs only US$30m to buy. TCE-equivalent earnings are estimated to be US$18,000-19,000/day. The same client has options for Handysize # 5 and #6 (exercise date 1 Dec 08), at a slightly lower rate with EBITDA at around US$25m/ship.
Figure 3: Delivery schedule of new ships
Purchase Transactions Date Vessel 20-Jul-07 Handysize #1 20-Jul-07 Handysize #2 20-Jul-07 Handysize #3 11-Oct-07 Supramax #1 20-Jul-07 Handysize #4 11-Oct-07 Supramax #2 20-Jul-07 Handysize #5 20-Jul-07 Handysize #6 11-Oct-07 Supramax #3 20-Jul-07 Handysize #7 20-Jul-07 Handysize #8 20-Jul-07 Handysize #9 20-Jul-07 Handysize #10 20-Jul-07 Handysize #11 20-Jul-07 Handysize #12 11-Feb-08 Supramax #4 11-Feb-08 Supramax #5 11-Feb-08 Supramax #6 Total
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
DWT 32,000 32,000 32,000 54,000 32,000 54,000 32,000 32,000 54,000 32,000 32,000 32,000 32,000 32,000 32,000 54,000 54,000 54,000 708,000
Cost US$ 30 30 30 38 30 38 30 30 38 30 30 30 30 30 30 38 38 38 588
THB 1,033 1,033 1,033 1,300 1,033 1,300 1,033 1,033 1,300 1,033 1,033 1,033 1,033 1,033 1,033 1,300 1,300 1,300 20,196
Delivery 15-Mar-10 31-Jul-10 15-Dec-10 31-Dec-10 30-Apr-11 30-Jun-11 31-Aug-11 31-Dec-11 31-Dec-11 30-Apr-12 31-Aug-12 31-Dec-12 30-Apr-13 31-Aug-13 31-Dec-13 2012 2012 2012

Raising TP because of lower Upgrade to OUTPERFORM from Neutral; raise target price to THB26.00 from risk profile and better THB22.70. We have increased our EPS forecasts by 2% for 2009 and by 6% for 2010 earnings visibility as we lower our overly aggressive cost inflation assumptions. Daily operating costs are expected to rise 20% yoy from US$4,005 in 2007 to US$4,800 in 2008, with the primary reason being the amortisation of dry dock expenditure incurred in 2007. But in 2009 and 2010, daily operating costs should increase at a slower pace. Therefore, we are adjusting down our assumption of 12% annual rate of growth for 2009-10, to 8% p.a. On the back of better earnings visibility, we have also raised our per share dividend estimate from THB2.25 in 2009 and THB2.00 in 2010, to THB2.50 for both years, implying gross dividend yields of 12.8%. Our target price has been increased because we have updated our valuation of individual vessels for current second-hand prices. The basis of the target remains unchanged at a 40% discount to its RNAV. Risky near-term BDI outlook unlikely to hurt share price further. The share price Share price punished enough has declined significantly over the past quarter, and even though dry bulk freight rates could be weak over the next two months as China enters the Olympic Games period, we think that PSL may not see significant further selldown given its attractive valuations and improved earnings outlook.
Dry bulk fleet second-hand value (US$ m) Exchange rate (THB:US$) Dry bulk fleet value (THB m) Add: Net cash (end-2008) (THB m) Add: Other net assets expected by end-2008 (THB m) Add: Value of shipbuilding advances (THB m) Total (THB m) No of PSL shares (m) Per share (THB) Discount (%) Target price (THB)
1,055.3 32.0 33,768.8 4,186.0 3,212.0 4,039.2 45,205.9 1,040.0 43.47 40.0% 26.08
[ 64 ]
Financial tables
PROFIT & LOSS (THB m, FYE Dec) Revenue Operating expenses EBITDA Depreciation & amortisation EBIT Net interest & invt income Associates contribution Exceptional items Others Pretax profit Tax Minority interests Net profit Adj. wt. shares (m) Unadj. year-end shares (m) BALANCE SHEET (THB m, end Dec) Fixed assets Intangible assets Other long-term assets Total non-current assets Cash and equivalents Stocks Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders funds Minority interests NTA/share (THB) CASH FLOW (THB m, FYE Dec) Pretax profit Depreciation & noncash adj. Working capital changes Cash tax paid Others Cash flow from operations Capex Net investments & sale of FA Others Cash flow from investing Debt raised/(repaid) Equity raised/(repaid) Dividends paid Cash interest & others Cash flow from financing Change in cash Change in net cash/(debt) Ending net cash/(debt) 2006 3,722 2,093 60 0 156 6,031 (486) 161 17 (309) (3,294) 0 (1,796) (113) (5,203) 520 3,814 1,259 2007 4,164 1,825 88 0 (1,350) 4,727 (4,031) 1,894 13 (2,124) 0 566 (2,659) (298) (2,391) 212 212 1,470 2008F 4,963 1,078 0 (216) (80) 5,746 (780) 0 0 (780) 0 0 (2,340) 90 (2,250) 2,716 2,716 4,186 2009F 4,908 1,039 2 0 (165) 5,783 (1,033) 0 0 (1,033) 0 0 (2,600) 165 (2,435) 2,315 2,315 6,501 2010F 3,313 900 12 0 (173) 4,052 (3,419) 0 0 (3,419) 0 1 (2,600) 173 (2,426) (1,793) (1,793) 4,708 2006 11,024 0 131 11,155 1,259 44 101 200 1,603 83 0 638 720 0 0 0 12,025 13 11.56 2007 9,570 0 3,686 13,255 1,470 6 35 252 1,763 67 0 722 788 0 165 165 14,052 13 13.51 2008F 9,272 0 3,676 12,947 4,186 6 40 252 4,485 73 0 506 579 0 165 165 16,669 19 16.03 2009F 9,266 0 3,676 12,941 6,501 6 40 252 6,801 75 0 506 582 0 165 165 18,971 25 18.24 2010F 11,785 0 3,676 15,460 4,708 7 32 252 4,999 79 0 506 585 0 165 165 19,679 31 18.92 2006 9,077 (3,292) 5,785 (2,093) 3,692 (116) 20 123 4 3,722 0 (7) 3,715 1,040 520 2007 7,297 (2,285) 5,012 (1,825) 3,188 15 34 925 1 4,164 (3) (5) 4,156 1,040 1,040 2008F 8,519 (2,508) 6,011 (1,078) 4,933 85 (10) (50) 5 4,963 0 (6) 4,957 1,040 1,040 2009F 8,519 (2,588) 5,931 (1,039) 4,892 160 0 (150) 5 4,908 0 (6) 4,902 1,040 1,040 2010F 6,764 (2,724) 4,040 (900) 3,140 168 0 0 5 3,313 0 (6) 3,307 1,040 1,040 KEY RATIOS (FYE Dec) Revenue growth (%) EBITDA growth (%) Pretax margins (%) Net profit margins (%) Interest cover (x) Effective tax rates (%) Net dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days) 2006 (17.7) (31.4) 41.0 40.9 25.6 0.0 50.4 5.6 2.2 4.0 2007 (19.6) (13.4) 57.1 57.0 25.1 0.1 50.7 3.4 1.2 3.7 2008F 16.7 19.9 58.3 58.2 N/A 0.0 47.2 1.6 0.3 3.0 2009F 0.0 (1.3) 57.6 57.5 N/A 0.0 47.7 1.7 0.3 3.2 2010F (20.6) (31.9) 49.0 48.9 N/A 0.0 42.5 2.0 0.4 4.2
KEY DRIVERS (FYE Dec) Baltic Dry Index (yoy change %) Bulk rates (US$/day) Fleet size (number of vessels) 2007 122.0% 13,147 44 2008F 20.0% 16,105 44 2009F -29.0% 17,071 44 2010F -50.0% 13,998 44
12M - FORWARD FD CORE P/E (X)

9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
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Aug-08
[ 65 ]

CIMB Research Report
MISC Bhd
Safe haven
NEUTRAL RM8.85
Maintained @04/08/08 Target: RM10.00 Tanker Shipping
MISC MK / MISC.KL
Diverse portfolio neutralises volatility. MISC has a portfolio of six separate businesses LNG, petroleum tanker, chemical tanker, and container shipping, and offshore and heavy engineering. With the core LNG business expected to be fairly stable, stronger crude tanker shipping, offshore and heavy engineering earnings should offset weakness in chemical and container shipping. We expect MISCs core earnings to remain stable this year and next. Petroleum tanker stronger. The sharp rise in crude tanker freight rates over the past six months courtesy of conversion removals will be enjoyed by AET until rapid newbuilding deliveries push rates down in 2009. However, we do not expect rates to weaken significantly given the pipeline of upcoming conversions. Chemical tanker rates are likely to be moderately weaker in 2008-09 from excess supply while container shipping may suffer from the rapid decline in Asia-Europe spot rates. However, both container and chemical shipping are relatively small contributors. Huge potential in heavy engineering and offshore businesses. The impending completion of the Ramunia acquisition will more than double yard fabrication space, while Petronass offshore field development in Malaysia will provide a stream of new contracts that will boost MISCs recurring earnings stream. Switch to MISC; maintain NEUTRAL and target price of RM10.00. Our EPS forecasts have been increased by 1-3% for various housekeeping adjustments. As the skies over the container and dry bulk shipping sectors start to look threatening, investors should switch to MISC for its defensive earnings profile.
Financial summary
FYE Mar Revenue (RM m) EBITDA (RM m) EBITDA margins (%) Pretax profit (RM m) Net profit (RM m) EPS (sen) EPS growth (%) P/E (x) Core EPS (sen) Core EPS growth (%) Core P/E (x) Gross DPS (sen) Dividend yield (%) P/BV (x) ROE (%) Net gearing (%) P/FCFE (x) EV/EBITDA (x) % change in EPS estimates CIMB/Consensus (x)
2007 11,198.9 3,871.0 34.6% 2,930.3 2,852.0 76.7 1.0% 11.5 64.9 (7.8%) 13.6 41.1 4.6% 1.8 15.5% 24.3% 189.4 9.8
2008 12,957.4 3,763.5 29.0% 2,609.4 2,430.3 65.3 (14.8%) 13.5 59.5 (8.3%) 14.9 47.3 5.3% 1.8 13.1% 29.7% 38.2 10.3
2009F 13,063.7 3,917.0 30.0% 2,366.6 2,186.1 58.8 (10.0%) 15.1 58.8 (1.3%) 15.1 47.3 5.3% 1.7 11.6% 23.5% 14.8 9.7 1.1% 0.92
2010F 12,332.7 3,877.3 31.4% 2,411.8 2,230.4 60.0 2.0% 14.8 60.0 2.0% 14.8 47.3 5.3% 1.6 11.3% 16.5% 13.1 9.5 3.3% 0.83
2011F 12,682.2 4,020.0 31.7% 2,628.7 2,443.0 65.7 9.5% 13.5 65.7 9.5% 13.5 47.3 5.3% 1.5 11.7% 7.0% 10.3 8.7 1.2% 0.85
Price chart
10.4 9.9 9.4

5.00 4.00 3.00
8.9 8.4 7.9 7.4 Aug-07
2.00 1.00 0.00

Jan-08
Jun-08
MISC Bhd
RM32,920m/US$10,074m RM10.15/RM7.80 0.4m 3,720 17.0 None
Share price perf. (%) Relative Absolute Major shareholders Petronas EPF
1M 6.6 7.9
3M 4.0 (6.4)
12M 8.8 (6.4) % held 62.4 10.3
Source: Bloomberg
[ 66 ]
MALAYSIA
Diversification neutralises volatility

Strong crude tanker earnings to help offset weaker container and chemical shipping Portfolio of businesses helps maintain stability. In the ever darkening skies over container and dry bulk shipping stocks, MISC stands out as a cornerstone of stable earnings. We expect core EPS to remain stable in the current and the next financial year, as stronger earnings from some sectors offset weakness in others. While stable earnings do not typically excite investors, MISCs expected performance is a welcome relief from the pressures faced currently from the rapidly deteriorating Asia-Europe container trade environment and anticipated dry bulk freight rate weakness. Crude tanker shipping rates have been very strong this year, a result of the removal of tankers for conversion into bulk carriers and offshore vessels. We expect rates to weaken in 2009 because of newbuilding deliveries, but to remain at historically high levels because of the tanker-to-bulker conversion pipeline. We expect AETs profits to rise 24% yoy in FY09 but fall back 15% in FY10. Weaker container and chemical shipping. The higher crude tanker shipping profits this financial year should help offset the weakness at the container shipping arm, which we expect to register a loss of RM89.2m in FY09 against a profit of RM90.4m last year. MISCs container shipping arm is very vulnerable to the deteriorating fundamentals of the European economies because the majority of its capacity is placed on the AsiaEurope trades and around 80% of its business is based on spot rates, which have almost halved from a year ago. Higher bunker costs add to the woes. Meanwhile, chemical shipping profits should also be lower because rates are declining from vessel oversupply. However, as the majority of the chemical business is on time charters/COAs, the impact of spot rate declines will be moderate. Furthermore, earnings should grow from FY10 when MISC takes delivery of 11 newbuildings, followed by another five in FY11 .
Figure 1: Baltic Dirty Tanker Index projections annual averages
2,500 2,000 1,500 1,000 500 0 2002
Source: Bloomberg, CIMB Research
2,000 1,780 1,349 837 61% 32% -15% -14% -11% 74% -15% -10% 1,510 1,292 1,146 1,700 1,530
2003
2004
2005
2006
2007
2008F
2009F
2010F
Strong potential at heavy engineering and offshore divisions
Lift from offshore and heavy engineering. As a subsidiary of Petronas, MISC is gradually benefiting from more oil and gas related business. The likely completion of the Ramunia purchase by the end of 2008 will increase substantially the available yard fabrication space for wholly-owned Malaysian Marine and Heavy Engineering and pave the way for new contract awards from Petronas and other customers for the fabrication of oil and gas structures. The offshore division is also expected to do better, with the full-year contribution of FPSO Kikeh and FSO Abu Cluster, both of which commenced in 2007, and the upcoming contribution from 49%-owned FPSO Espirito Santo. Further contracts are likely, in our opinion.

Maintain NEUTRAL with unchanged target price of RM10.00. Our forecasts have Switch to MISC for safety from the dark clouds in other adjusted upwards by 1-3% for various housekeeping revisions. Our price objective is shipping sectors based on a composite P/E valuation of the individual businesses. We have revised down our target P/E of 20x for the LNG business to 16x as global delays in the commissioning of new LNG facilities make it increasingly difficult for the division to grow its earnings via third-party contracts. We have also trimmed our 13x P/E multiple for the petroleum and chemical shipping earnings to 12x, to take into account current multiples of shipping companies in the same sectors. However, we have raised our heavy engineering P/E target from 18x to 25x as current
[ 67 ]
earnings do not reflect the significant potential for MMHE. We have retained our 20x valuation for the offshore division, also on account of its growth potential. The liner division is now valued a 50% discount to the market value of its fleet instead of 10x P/E as the business turns in a loss. We recommend investors to switch to MISC as it offers defensive earnings in an otherwise tumultuous shipping environment
Figure 2: Comparison between MMHE and Ramunia
MMHE
Land size (acres) Fabrication area (acres) Outstanding unbilled fabrication orderbook (RM m) 304 100 3,090 (at 31 Mar 08)
Ramunia
170 145 700 (at Dec 07)
MMHE + Ramunia 474 245

3,790
Growth for MMHE (%) 55.9% 145.0%
Profit and loss Turnover (RM m) Pretax profit (RM m) Pretax margin (%) Net profit (RM m) ROE (%)
Source: Companies, CIMB-GK Research
Oct 06 - Sep 07 1,040.8 146.8 14.1% 127.0 24.8%
FYE Oct 07 612.9 24.5 4.0% 21.0 5.7%

RM m, FYE Mar LNG Tanker Container Chemical Offshore Others (mainly Heavy Engineering) Total revenue 2008 2,418.9 3,575.2 4,651.1 608.5 568.4 1,135.3 12,957.4 2009F 2,342.7 4,516.3 3,569.5 534.0 625.2 1,476.0 13,063.7 2010F 2,483.6 3,890.8 3,136.2 573.2 625.2 1,623.6 12,332.7 2011F 2,592.3 3,556.7 3,238.8 720.8 625.2 1,948.3 12,682.2
LNG Tanker Container Chemical Offshore Others (mainly Heavy Engineering) Total profit before exceptionals
1,255.4 744.2 90.4 73.3 210.7 19.5 2,393.5
1,194.8 925.8 (89.2) 58.7 250.1 26.4 2,366.6
1,266.7 778.2 (94.1) 74.5 250.1 136.5 2,411.8
1,322.1 711.3 32.4 93.7 250.1 219.2 2,628.7
Figure 4: RNAV calculation

CY09 Core Net Profit Business segments RM m LNG 1,050.4 Petroleum 729.9 Chemical 63.1 Offshore 210.2 Heavy engineering 223.8 Sub-total 2,277.4 Add: Market value of owned liner vessels @ 50% discount RNAV (RM) No of shares Per share RNAV (RM)
Target P/E x 16 12 12 20 25 16
Target Valuation RM m 16,806.7 8,759.1 757.5 4,203.5 5,594.8 36,121.7 1,118.7 37,240.4 3,719.8 10.01
[ 68 ]
Financial tables
PROFIT & LOSS (RM m, FYE Mar) Revenue Operating expenses EBITDA Depreciation & amortisation EBIT Net interest & invt income Associates contribution Exceptional items Others Pretax profit Tax Minority interests Net profit Adj. wt. shares (m) Unadj. year-end shares (m) BALANCE SHEET (RM m, end Mar) Fixed assets Intangible assets Other long-term assets Total non-current assets Cash and equivalents Stocks Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders funds Minority interests NTA/share (RM) CASH FLOW (RM m, FYE Mar) Pretax profit Depreciation & noncash adj. Working capital changes Cash tax paid Others Cash flow from operations Capex Net investments & sale of FA Others Cash flow from investing Debt raised/(repaid) Equity raised/(repaid) Dividends paid Cash interest & others Cash flow from financing Change in cash Change in net cash/(debt) Ending net cash/(debt)
KEY RATIOS 2007 11,199 (7,328) 3,871 (1,361) 2,510 (237) 28 437 193 2,930 (34) (45) 2,852 3,720 3,720 2008 12,957 (9,194) 3,764 (1,437) 2,327 (249) 17 216 299 2,609 (71) (108) 2,430 3,720 3,720 2009F 13,064 (9,147) 3,917 (1,488) 2,429 (267) 25 0 180 2,367 (47) (133) 2,186 3,720 3,720 2010F 12,333 (8,455) 3,877 (1,523) 2,354 (219) 97 0 180 2,412 (48) (133) 2,230 3,720 3,720 2011F 12,682 (8,662) 4,020 (1,530) 2,490 (149) 108 0 180 2,629 (53) (133) 2,443 3,720 3,720 (FYE Mar) Revenue growth (%) EBITDA growth (%) Pretax margins (%) Net profit margins (%) Interest cover (x) Effective tax rates (%) Net dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days) 2007 4.2 (4.7) 26.2 25.5 7.2 1.1 39.1 55.4 8.3 76.8 2008 15.7 (2.8) 20.1 18.8 6.7 2.7 53.6 55.7 9.3 68.3 2009F 0.8 4.1 18.1 16.7 6.5 2.0 59.6 62.6 11.1 73.6 2010F (5.6) (1.0) 19.6 18.1 6.3 2.0 58.4 64.7 11.3 74.8 2011F 2.8 3.7 20.7 19.3 6.6 2.0 53.3 62.0 10.7 70.7
KEY DRIVERS 2007 21,927 1,044 742 23,714 2,218 263 1,722 39 4,241 2,206 495 0 2,701 6,309 64 6,373 18,639 241 4.73 2008 21,869 967 1,421 24,257 1,964 400 2,231 191 4,786 2,640 959 99 3,699 6,569 48 6,616 18,454 274 4.70 2009F 21,904 967 1,446 24,318 2,891 398 2,249 191 5,729 2,627 959 99 3,685 6,569 48 6,616 19,339 407 4.94 2010F 21,614 967 1,543 24,124 4,104 368 2,124 191 6,786 2,428 959 99 3,486 6,569 48 6,616 20,267 540 5.19 2011F 20,883 967 1,651 23,501 5,991 376 2,184 191 8,743 2,488 959 99 3,546 6,569 48 6,616 21,408 674 5.50 (FYE Mar) Fleet size (number of vessels) No of LNG tankers No of petroleum tankers No of chemical tankers No of container ships No of offshore vessels Petroleum TCE rate (yoy chg %) Chemical TCE rate (yoy chg %) Liner rates (yoy change %) 2008 156 27 70 14 35 6 1.3% 13.4% 16.5% 2009F 162 29 73 14 35 7 35.0% -5.0% -20.0% 2010F 174 29 75 24 35 7 -12.0% -5.0% -5.0% 2011F 191 29 84 32 35 7 -11.0% 5.0% 10.0%
12M - FORWARD FD CORE P/E (X) 2007 2,930 1,361 (364) (33) (204) 3,690 (4,399) 652 26 (3,721) 441 (24) (1,115) (236) (934) (965) (1,405) (4,587) 2008 2,609 1,437 (211) (71) (631) 3,132 (3,647) 605 0 (3,043) 724 0 (1,116) 49 (343) (253) (977) (5,564) 2009F 2,367 1,488 (30) (47) 62 3,840 (1,524) 0 0 (1,524) 0 0 (1,302) (87) (1,389) 927 927 (4,637) 2010F 2,412 1,523 (43) (48) (58) 3,786 (1,233) 0 0 (1,233) 0 0 (1,302) (39) (1,341) 1,213 1,213 (3,424) 2011F 2,629 1,530 (10) (53) (139) 3,958 (799) 0 0 (799) 0 0 (1,302) 31 (1,271) 1,887 1,887 (1,537)
17.0
16.0
15.0
14.0
13.0
12.0
11.0 Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
[ 69 ]
APPENDICES
[ 70 ]
1: List of actual / potential tanker conversions

Figure 1: Tanker sales and purchases from 2007 onwards (SH tankers and/or intended dry bulk/FPSO conversions only)
Date of S&P
Jan-07 Jan-07 Jan-07 Feb-07 Feb-07 Feb-07 Mar-07 Mar-07 Mar-07 Apr-07 Apr-07 Apr-07 Apr-07 Apr-07 Apr-07 Apr-07 May-07 May-07 May-07 May-07 Jun-07 Jun-07 Jun-07 Jun-07 Jun-07 Jul-07 Jul-07 Jul-07 Jul-07 Aug-07 Aug-07 Aug-07 Aug-07
Vessel name
Front Transporter (Heavy Lift Hawk) Knock Stocks Global Bright Apollo Shouju Nuri (Renata N) Sea Cat Kanayama (L Elephant) Front Vanadis Satsuma (Dasman) Suzuka (Stella Cosmo) Bright Artemis (Sino Carrier) Sunrise V Titan Taurus (K Cosmos) Errorless (Sea Max) Eagle Memphis South View (Destiny King) Tataki (Hebei Success) Butron (Globe Unity) Arteaga (Ocean Energy) Rich Duchess Ruby III (Hebei Warrior) Eastern Fortune (Margot N) Front Horizon (African Horizon) Kapsali Regent Sebu Yahiko Maru (D Elephant) Okinoshima (Hebei Winner) Azuma Enterprise (Rebekka N) Titan Virgo New Frontier (Renata N) Han-Ei (Golden Jewel) Sunrise
DWT
149,999 138,105 97,078 258,034 285,933 89,696 258,094 285,872 258,019 269,581 262,000 258,096 255,000 147,000 104,000 64,035 244,275 147,067 147,067 81,279 243,850 225,028 151,445 84,600 81,279 279,986 258,091 258,079 255,226 299,999 285,933 259,999 258,096
Built Owner
1989 1992 1992 1986 1992 1985 1992 1990 1993 1992 1992 1991 1992 1993 1987 1983 1993 1991 1990 1986 1990 1989 1988 1983 1986 1993 1991 1993 1990 1993 1992 1994 1993 Frontline First Olsen Tankers Phoenix Energy Idemitsu General Ore Carrier Genmar Shinwa Frontline NYK World Marine Mitsui OSK Nippon Oil Titan Top Tankers MISC South View Shipping Dynacom Ondimar Ondimar Groton Pacific Altomare Honam Frontline Centrofin Group Groton BW Daiichi Chuo Idemitsu Transmed Titan Transmed NYK Dynacom
Buyer
Blystad Undisclosed Koreans Modec Transmed Frontline TMT TMT FAL TMT Sinokor Sanko Kisen Korea Line Norwegian Greeks Undisclosed HOSCO Arpeni Patama Arpeni Patama Chinese HOSCO Neu Seeschiffahrt Undisclosed Tomini Chinese BW Bulk TMT HOSCO Neu Seeschiffahrts Petro-Med Oils General Ore Zodiac Maritime Undisclosed
Price Original (US$ m) vessel type

38.0 32.8 30.0 39.5 39.0 n.a. 39.0 42.0 40.0 39.0 43.0 40.0 41.0 52.5 13.1 6.5 42.0 54.0 13.0 41.0 40.0 28.0 10.5 13.0 n.a. 38.5 48.0 n.a. 90.0 46.0 49.0 48.0 Suezmax Suezmax Aframax VLCC VLCC Aframax VLCC VLCC VLCC VLCC VLCC VLCC VLCC Suezmax Aframax Panamax VLCC Suezmax Suezmax Aframax VLCC VLCC Suezmax Post Panamax Post Panamax VLCC VLCC VLCC VLCC VLCC VLCC VLCC VLCC
Hull type
SH SH DS SH SH DB SH SH SH SH SH SH SH DH DS SH SH SH SH SH SH SH SH SH SH SH SH SH SH DH DH DH DH
Purpose of buyer
For conversion to heavy lift by Aug 08 For conversion Unknown For conversion to FPSO For conversion to VLOC by 2008 Unknown For conversion to VLOC by 2008 Unknown Unknown For conversion to VLOC in 2008 For conversion by Aug 2007 Unknown For conversion to VLOC by June 2008 For conversion Unknown Unknown For conversion to VLOC by 2Q08 For conversion to capesize by 1Q08 For conversion to capesize by 1Q08 For conversion to heavy lift in 2008 For conversion to VLOC by 2H08 For conversion to VLOC (from Jun 07) Unknown Unknown Unknown Unknown For conversion to DH VLCC by Jun 08 For conversion to VLOC For conversion to VLOC in 1Q08 For conversion to FPSO For conversion to VLOC in 2008 For conversion to VLOC in Feb 08 Unknown
Source: Clarkson Research Services, Poten and Partners, CIMB/CIMB-GK estimates Notes: SH: Single Hull, DB: Single Bottom, DS: Double Side, DH: Double Hull. DB, DS and SH are all considered non-DH vessels.
[ 71 ]
Figure 2: Tanker sales and purchases from 2007 onwards (SH tankers and/or intended dry bulk/FPSO conversions only) continued
Date of S&P Aug-07 Aug-07 Aug-07 Sep-07 Sep-07 Oct-07 Oct-07 Oct-07 Oct-07 Oct-07 Oct-07 Oct-07 Oct-07 Oct-07 Oct-07 Oct-07 Oct-07 Oct-07 Oct-07 Oct-07 Oct-07 Oct-07 Nov-07 Nov-07 Nov-07 Dec-07 Dec-07 Dec-07 Dec-07 Dec-07 Dec-07 Jan-08 Feb-08 Feb-08 Feb-08 Feb-08 Feb-08 Feb-08 Vessel name Navarino Shinyo Clipper (Hebei General) Anand Sea (Taurus) Lucky Sailor Kudam Front Duchess Grand Lady Triwati (Hebei Pride) Simba United Gallant (Hebei Genius) Esperanza Morning Lady Spirit II Thistle (Iron Monger 5) Poppy (Iron Monger 3) Archangelos R Tassels Jag Labh (Taiglory) Arietis (Iron Monger 7) Emerald Sky Emerald Hill Emerald Bay (Qinfa 9) Tribuana (Iron Monger 10) CE-Dragon Frixos Shinyo Sawako Shinyo Mariner Shinyo Alliance Shinyo Jubilee Front Birch Front Maple Ishwari Welsh Venture Diamond Hope Sunrise IV Histria Crown China Sea Red Sea DWT 248,965 243,870 224,737 146,387 101,832 284,480 281,794 147,253 146,270 140,554 120,880 100,486 100,336 100,289 100,031 97,019 97,000 96,551 91,717 70,894 70,887 69,999 147,500 96,759 94,287 275,616 271,208 248,034 240,401 151,680 151,680 145,200 280,491 264,340 259,530 164,000 84,841 84,841 Built Owner 1986 1992 1981 1989 1981 1993 1991 1991 1989 1990 1993 1991 1991 1991 1990 1992 1990 1988 1989 1988 1991 1990 1989 1990 1987 1995 1991 1991 1998 1991 1991 1991 1991 1995 1991 1984 1988 1989 Avin Shinyo Chemoil Eastmed Dynacom Frontline Eastmed BLTA Dynacom Marine Management Tankrederi Byzantine Maritime Dynacom Dynacom Dynacom AK Shipping Dynacom Great Eastern Eurotankers Tanker Pacific Tanker Pacific Tanker Pacific Berlian Laju Tanker Centrofin Group Liquimar Tankers Vanships Vanships Vanships Vanships Frontline Frontline Essar Shipping Mitsui OSK Mitsui OSK Nippon Petromin Tanker Pacific Tanker Pacific Buyer Koreans HOSCO Undisclosed Chinese Prosafe General Ore TMT HOSCO TMT HOSCO Chinese TMT TMT TMT TMT TMT TMT COSCO Shanghai TMT Qinfa Shipping Qinfa Shipping Qinfa Shipping TMT Chinese Undisclosed EIA EIA EIA Fred Cheng Sinokor Sinokor Nexus Energy Petrobras Saipem Japanese Undisclosed Shanghai Zhenhua Shanghai Zhenhua Price Original (US$ m) vessel type 30.5 48.0 26.5 30.0 n.a. 56.0 56.5 30.0 36.0 30.2 31.0 n.a. 30.0 30.0 28.0 30.5 29.0 16.0 30.0 20.0 26.0 26.0 34.0 28.0 15.5 n.a. n.a. n.a. n.a. 40.0 40.0 51.0 n.a. 52.5 42.0 22.0 20.0 20.0 VLCC VLCC VLCC Suezmax Aframax VLCC VLCC Suezmax Suezmax Suezmax Suezmax Aframax Product LR II Product LR II Product LR II Aframax Aframax Aframax Aframax Product LR I Product LR I Product LR I Suezmax Aframax Aframax VLCC VLCC VLCC VLCC Suezmax Suezmax Suezmax VLCC VLCC VLCC Suezmax Post Panamax Post Panamax Hull type SH SH SH SH SH SH SH SH SH SH SH SH SH SH SH SH SH SH SH SH SH SH SH SH DS SH SH SH SH DS DS DH SH SH SH SH DS DS Purpose of buyer Unknown For conversion to VLOC (potential) For conversion (potential) For conversion to capesize in 1H08 For conversion to FPSO by 4Q08 For conversion to VLOC by 4Q08 For conversion to VLOC by 1Q08 Unknown For conversion to capesize by 1H08 Unknown Unknown For conversion to offshore in 2008 Unknown For conversion to DH tanker in 2008 For conversion to DH tanker in 2008 For conversion to offshore in 2008 For conversion to capesize in 1Q08 (confirmed) For conversion to DH tanker in 2008 For conversion to bulker Unknown For conversion to panamax in 2Q08 (confirmed) For conversion to panamax in 2Q08 (confirmed) For conversion to capesize in 2008 Unknown For conversion Unknown Unknown Unknown Unknown For conversion to capesize in 2008 For conversion to capesize in 2008 For conversion to FPSO For conversion to storage For conversion to VLOC Unknown Unknown For conversion to heavy lift Unknown
[ 72 ]
Date of S&P Feb-08 Feb-08 Mar-08 Mar-08 Mar-08 Mar-08 Mar-08 Mar-08 Mar-08 Mar-08 Mar-08 Mar-08 Mar-08 Apr-08 Apr-08 Apr-08 May-08 May-08 Jun-08 Jun-08 Jun-08 Jun-08 Vessel name Yellow Sea Anette Sentosa Spirit Seraya Spirit Seletar Spirit Sea Tiger Sea Panther Sea Leopard Sea Jaguar Grand Explorer (Phyllis N) Front Sabang Tohdoh Piemonte Titan Venus Titan Leo Aegean Tiger Grand Mountain Barunawati Kriti Episkopi Causeway Meandros Borga DWT 84,841 63,098 97,161 97,019 94,998 94,995 97,112 83,970 89,601 285,768 285,715 261,212 113,957 250,267 245,653 88,950 260,995 111,689 145,242 146,184 91,680 123,665 Built Owner 1988 1989 1989 1992 1988 1989 1990 1986 1985 1990 1990 1991 1987 1986 1988 1990 1993 1991 1992 1989 1988 1992 Tanker Pacific Blystad Phoenix Energy Phoenix Energy Phoenix Energy Frontline Frontline Frontline Frontline Sinotrans Frontline NYK Southern Shipping Titan Titan Aegean Marine Mitsui OSK BLTA Avin Tanker Pacific Livanos J Ludwig Buyer Shanghai Zhenhua Undisclosed Chinese Chinese Chinese Heng Lian Shipping Chinese Undisclosed Chinese Neu Shipping TMT Modec Chinese Avin Avin Chinese Undisclosed Chang Yang Chinese Chinese Chinese Ningbo Price Original (US$ m) vessel type 20.0 15.0 19.7 23.0 17.5 21.0 20.0 20.0 15.6 37.0 n.a. 42.5 19.0 59.0 20.0 40.5 29.0 32.0 30.0 17.0 33.5 Post Panamax Panamax Aframax Aframax Aframax Aframax Aframax Aframax Aframax VLCC VLCC VLCC Aframax VLCC VLCC Aframax VLCC Aframax Suezmax Suezmax Aframax Suezmax Hull type DS SH DS DS DS DS DS DS DS SH SH SH DS SH SH DS SH DB SH SH SH DB Purpose of buyer Unknown For conversion to FPSO For conversion to DH tanker in 2008 For conversion to DH tanker in 2008 For conversion to DH tanker in 2008 For conversion (potential) For conversion to DH tanker in 2008 For conversion to DH tanker in 2008 For conversion to offshore in 2008 For conversion to VLOC Unknown Unknown For conversion For conversion to storage For conversion to storage Unknown For conversion For conversion to DH tanker in 2008 Unknown Unknown Unknown Unknown
Additional conversion candidates reported by Clarkson and other sources Dec-07 Mediterranean 214,860 1986 N.A. Grigoroussa I 96,967 1987 N.A. Shourong 255,396 N.A. BW Kibo 279,989 N.A. BW Bureya 279,986 1993 N.A. Pacific Ruby 260,988 1993 N.A. New Shanghai 94,941 1986 N.A. Hebei Ambition 285,640 1990 N.A. Front Tobago 258,096 1992 N.A. Pacific Amber 264,512 1993 N.A. Tohzan (Cosmo Astrea) 255,396 1992 N.A. Takayama 259,991 1993
Seariver Maritime Chinese A.K. Shipping and Trading N.A. BW Ltd BW Ltd Unknown COSCO Shanghai HOSCO Cido Cido NYK MOL
32.0 VLCC Aframax VLCC VLCC VLCC VLCC Aframax VLCC VLCC VLCC VLCC VLCC
SH DH SH SH SH SH SH SH SH SH SH
For conversion to VLOC For conversion For conversion to VLOC For conversion to VLOC For conversion to VLOC For conversion to VLOC For conversion For conversion to VLOC For conversion to VLOC in 2008 For conversion to VLOC in 2008 For conversion to VLOC in Jun 2008 For conversion to VLOC in Dec 2008
[ 73 ]
Date of S&P N.A. N.A. Total Vessel name BW Nile BW Noto DWT 285,739 286,006 19,634,849 Built Owner 1991 BW Group 1992 BW Group Buyer Price Original (US$ m) vessel type VLCC VLCC Hull type SH SH Purpose of buyer For conversion to VLOC by 1H08 For conversion to VLOC by 2H08
[ 74 ]
2: Chinese shipyards dry bulk orderbook

Figure: Chinese shipyards dry bulk orderbook
Shipbuilder Shanghai Waigaoqiao Dalian Shipbuilding NACKS New Times COSCO Dayang Binjiang Zhoushan Jinhaiwan Jiangsu Rongsheng Bohai Shipbuilding Jiangnan Changxing Heavy Hudong-Zhonghua Qingdao Beihai Jiangsu Eastern Guangzhou Longxue Jiangnan Shipbuilding Yangzijiang Shipbuilding Jinling Shipyard Jiangsu Hantong Jiangnan Changxing Shipbuilding Taizhou Kouan Guangzhou Huangpu China Shipping Industry (Jiangsu) Penglai Zhongbai Qingshan Shipyard Taizhou Sanfu Samjin Shipbuilding Zhejiang Yangfan Shanhaiguan Shipbuilding China Hengfu New Century Yangzhou Guoyu Fujian Guanhai Zhoushan Wuzhou Weihai Shipyard Nantong Mingde Mindong Congmao Jiangmen Nanyang Nantong Changqingsha Zhejiang Zhenghe Jiangdong Shipyard Tianjin Xingang Wuhan Huaxia Nanjing Wujiazui Nantong Huigang Zhejiang Jingang Fujian Mawei Taizhou Maple Leaf Jiangsu Xiangshui Nantong Daoda Heavy Zhejiang Friendship Shandong Huahai Ningbo Xinle Shandong Baibuting Zhejiang Jiantiao Zhejiang Shipbuilding Fujian Shenglong Wuhu Shipyard (Chery) Nanjing Dongze Total
Source: Worldyards
Ownership National (CSSC) National (CSIC) National Private National Private Private Private National (CSIC) National (CSSC) National (CSSC) National (CSIC) Private National (CSSC) National (CSSC) Private National (SBIC) Private National (CSSC) Private National (CSSC) National Private National (SBIC) Private Private Private National (CSIC) Private Private Private Private Private National Private Private Private Private Private National (SBIC) National (CSIC) Private Private Private Private National Private Private Private Private Private Private Private Private Private Private Private Private
No of ships 51 41 34 40 78 71 33 28 24 30 39 18 44 12 36 36 34 38 10 26 26 22 14 19 24 30 9 15 12 4 14 13 13 12 9 8 13 12 8 6 8 10 4 8 8 8 8 4 6 4 5 6 16 2 2 2 3 2 1,187
Total DWT 9,011,000 8,420,000 6,217,000 6,046,000 5,057,600 4,727,770 4,656,000 3,818,000 3,398,200 3,371,000 3,286,000 3,113,700 2,775,400 2,760,000 2,730,000 2,686,000 2,506,000 2,166,000 1,770,000 1,617,600 1,276,000 1,259,400 1,203,200 1,083,000 1,048,000 1,005,000 832,500 826,800 757,200 704,000 673,000 665,500 623,300 610,000 599,000 528,000 429,900 422,400 360,000 342,000 301,180 292,000 274,000 269,200 268,000 259,200 243,100 228,000 204,000 200,000 186,500 150,000 139,400 110,606 106,100 90,000 90,000 65,000 103,467,281
2H08 883,000 0 300,000 0 570,000 588,500 0 150,000 0 0 373,000 0 255,400 0 0 0 0 228,000 0 53,800 0 57,300 0 0 0 0 0 0 0 0 87,000 0 623,300 0 67,000 0 65,100 0 171,000 0 75,200 29,200 0 0 0 0 0 0 0 100,000 0 0 0 55,303 106,100 0 0 32,500 5,312,668
Original Delivery Schedule 2009 2010 1,767,000 4,243,000 2,160,000 2,520,000 1,340,000 1,981,000 0 2,988,000 1,738,000 2,015,800 876,780 1,639,820 1,744,000 2,080,000 1,457,000 1,859,000 693,900 1,097,100 0 920,000 224,000 948,000 360,000 1,493,700 556,800 1,097,100 230,000 690,000 531,100 454,200 1,183,600 830,700 484,000 1,317,500 570,000 627,000 354,000 1,416,000 509,800 627,000 64,000 526,500 229,200 286,500 300,800 902,400 513,000 570,000 399,000 513,000 402,000 435,500 370,000 462,500 119,800 275,400 285,000 472,200 0 528,000 90,000 228,000 179,300 259,600 0 0 90,000 275,000 72,000 230,000 264,000 264,000 166,500 198,300 140,800 140,800 156,000 33,000 57,000 228,000 112,990 75,390 116,800 116,800 57,000 137,000 67,300 201,900 33,500 234,500 32,400 97,200 178,100 65,000 57,000 171,000 137,600 66,400 50,000 0 186,500 0 0 100,000 34,000 59,300 55,303 0 0 0 0 45,000 90,000 0 32,500 0 23,054,633 40,543,410
2011 1,766,000 3,430,000 1,400,000 3,058,000 733,800 1,225,820 832,000 352,000 1,022,500 2,030,500 871,000 1,260,000 798,800 1,840,000 758,200 461,500 704,500 513,000 0 427,000 619,500 401,100 0 0 85,000 167,500 0 431,600 0 176,000 228,000 226,600 0 245,000 230,000 0 0 140,800 0 57,000 0 0 80,000 0 0 129,600 0 0 0 0 0 50,000 46,100 0 0 45,000 0 0 27,919,420
Beyond 352,000 310,000 1,196,000 0 0 396,850 0 0 584,700 420,500 870,000 0 67,300 0 986,500 210,200 0 228,000 0 0 66,000 285,300 0 0 51,000 0 0 0 0 0 40,000 0 0 0 0 0 0 0 0 0 37,600 29,200 0 0 0 0 0 0 0 50,000 0 0 0 0 0 0 0 0 6,637,150
[ 75 ]
3: Profile of selected Chinese yards

Figure: Profile of selected Chinese shipyards
Shipbuilder Bohai Shipbuilding Chengxi Shipyard Wuhu Shipyard (Chery) China Hengfu - Blue Sky - Hengfu Shipbuilding and Repair - Yisida Shipyard China Shipping Ind. (Jiangsu) COSCO - Cosco Dalian - Cosco Nantong - COSCO Guangdong - COSCO Shanghai - COSCO Zhoushan Dalian Shipbuilding - No 1 Production Yard - No 2 Production Yard Dayang Binjiang Fujian Guanhai Fujian Mawei Fujian Shenglong Guangzhou Huangpu - 1st shipyard - 2nd shipyard Guangzhou Longxue Hudong-Zhonghua - 1st shipyard (3rd shipbuilding dept) - 2nd shipyard (2nd shipbuilding dept) Jiangdong Shipyard - Jiangdong shipyard - Jiangdong shipyard (new) Jiangmen Nanyang Jiangnan Shipbuilding Jiangnan Changxing Heavy Jiangnan Changxing Shipbuilding Jiangsu Eastern Jiangsu Hantong Jiangsu Rongsheng Jiangsu Xiangshui
Source: Worldyards, CIMB/CIMB-GK estimates
Ownership National (CSIC) National (CSSC) Private Private
As at 1 July 2008 Location Huludao, Liaoning Jiangyin City, Jiangsu Wuhu, Anhui
Facilities Area (sq m) 3,600,000 1,000,000 550,000
Quay (m) na 1,180 200
Bulk Orders (dwt) 3,398,200 2,325,525 90,000 757,200
Ningbo, Zhejiang Ningbo, Zhejiang Ningbo, Zhejiang National National Dalian, Liaoning Nantong, Jiangsu Guangzhou, Guangdong Shanghai Zhoushan, Zhejiang National (CSIC) Dalian, Liaoning Dalian, Liaoning Private Private Other state-owned Private National (CSSC) Guangzhou, Guangdong Guangzhou, Guangdong National (CSSC) National (CSSC) Shanghai Shanghai National (SBIC) Wuhu, Anhui Wuhu, Anhui Private National (CSSC) National (CSSC) National (CSSC) Private Private Private Private Jiangmen, Guangdong Shanghai, Guangdong Shanghai Shanghai Shanghai Tongzhou, Jiangsu Nantong, Jiangsu Xiangshui, Jiangsu Longxue, Guangzhou Yangzhou, Jiangsu Fuzhou, Fujian Fuzhou, Fujian Fu'an, Fujian Jiangdu, Jiangsu
na na na 530,000
na na na 440 1,259,400 5,057,600
1,200,000 400,000 200,000 na 2,000,000 > 1,100,000 na 1,100,000 1,200,000 na 334,000 na
na na 1,200 360 750 3,724 1,600 2,124 na na 345 na 8,420,000
4,727,770 665,500 259,200 90,000 1,276,000
615,000 2,500,000 2,530,000
3,000 4,500 1,300 2,760,000 3,286,000
270,000 na
2,000 na 342,000
270,000 30,000 370,000 na na 5,300,000 167,000 350,000 na na
500 na 750 na na 8,000 720 na na na 429,900 3,371,000 1,770,000 2,730,000 2,775,400 2,166,000 3,818,000 228,000
[ 76 ]
Bulk 24 43 3 12 8 4 0 22 78 25 0 11 0 42 41 8 33 71 13 8 2 26 26 0 14 39 39 0 6 0 6 13 36 30 10 44 38 28 4
Oil 30 0 0 2 2 0 0 4 2 0 2 0 0 0 51 18 33 0 0 0 1 2 2 0 4 16 16 0 0 0 0 0 13 0 11 3 0 36 0
Orderbook composition (num) Gas Cont. FPSO Main type of ships 4 0 0 MR, Supramax 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 0 0 0 0 0 0 4 0 0 0 0 4 37 16 21 3 0 24 0 0 0 0 0 41 16 25 18 18 0 0 0 22 8 1 0 4 0 0 4 0 0 0 0 0 5 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 0 0 Supramax Handysize, heavy lift
Bulk 31 11 0 1 1 0 0 4 0 0 0 0 0 0 0 0 0 21 0 2 0 0 0 0 0 112 14 98 0 0 0 2 1 0 0 3 3 1 0
Oil 26 0 0 2 2 0 0 6 0 0 0 0 0 0 41 24 17 1 0 2 1 0 0 0 0 55 0 55 2 2 0 0 1 0 0 2 0 0 0
Gas 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Past deliveries (num) Cont. FPSO Main type of ships 5 0 Handysize, MR 0 0 1 1 0 0 4 0 0 0 0 0 0 27 11 16 8 0 52 0 0 0 0 0 57 6 51 28 28 0 2 0 0 0 15 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 0 3 3 0 0 5 0 5 0 0 0 0 0 0 0 0 0 0 0 Containership, MPP Supramax, handysize Panamax Bulker Containership Product/chemical Handysize, MPP Supramax, Handysize
Supramax Panamax
Supramax
Panamax, Heavy Lift Shuttle tanker Supramax Supramax, PCTC
VLOC, LR I, LR II, Handysize c/s Cape, VLCC, Panamax c/s Supramax, Handy Capesize Post panamax bulker, handysize Containership Handymax, product/chemical
Panamax c/s, LR II Panamax c/s, VLCC, Afra Supramax, containership
Panamax bulker, handysize
Other service/Misc vessel
VLOC, VLCC, Panamax Bulker
Post panamax bulker, container MPP, MPP Heavy Lift
Panamax bulker Panamax bulker, handysize, product tanker MPP, Containership
Containership Supramax Handysize Panamax bulker, Chemical, LPG Handy capesize, panamax c/s VLCC, Capesize, Panamax c/s Panamax bulker, handysize Supramax Suezmax Handymax
Handysize, containership Panamax Bulker, chemical
[ 77 ]
[ continued on the following page ]
Shipbuilder Jinling Shipyard - Jinling Shipyard - Jiangsu Jinling Shipbuilding Mindong Congmao Nanjing Dongze Nanjing Wujiazui Nantong Changqingsha Nantong Daoda Heavy Nantong Huigang Nantong Mingde NACKS - Nantong Cosco-KHI Ship - Dalian Cosco Shipbuilding New Century New Times Ningbo Xinle - Ningbo Xinle - Ningbo Xinle New Yard Penglai Zhongbai Qingdao Beihai - Qingdao Beihai Newbuilding Yard Qingshan Shipyard Samjin Shipbuilding Shandong Baibuting Shandong Huahai Shanghai Shipyard - Chong Ming Shipbuilding Base - Puxi Factory Shanghai Waigaoqiao Shanhaiguan Shipbuilding Taizhou Kouan Taizhou Maple Leaf Taizhou Sanfu - South Yard (new site) - North Yard (old site) Tianjin Xingang - Tianjin Xingang - Tianjin Lingang Base
Ownership National (SBIC)
As at 1 July 2008 Location Nanjing, Jiangsu Yinzheng
Facilities Area (sq m) Quay (m) 300,000 Under construction na na 140,000 160,000 540,000 880,000 533,333 372
Bulk Orders (dwt) 2,506,000
Private Private Private Private Private Private Private Other state-owned
Ningde, Fujian Nanjing, Jiangsu Nanjing, Jiangsu Nantong, Jiangsu Nantong, Jiangsu Nantong, Jiangsu Nantong, Jiangsu
na na 150 960 600 1,800 500
528,000 6,217,000 65,000 274,000 422,400 204,000 269,200 599,000
Nantong, Jiangsu Dalian, Liaoning Private Private Private Ningbo, Zhejiang Zhoushan, Zhejiang Private National (CSIC) Qingdao, Shandong National (SBIC) Private Private Private National (CSSC) Shanghai Shanghai National (CSSC) National (CSIC) Private Private Private Taizhou, Jiangsu Taizhou, Jiangsu National (CSIC) Tianjin Tianjin Shanghai Qinhuangdao, Hebei Taizhou, Jiangsu Taizhou, Zhejiang Wuhan, Hubei Shandong Rongcheng, Shandong na Penglai, Shandon Jingjiang, Jiangsu Jiangyin, Jiangsu
560,000 Under construction 610,000 10,000,000
646
120 1,200
704,000 6,046,000 150,000
na na na
na na na 1,203,200 3,113,700
na 1,000,000 80,000 na na
na 2,200 170 na na 1,083,000 1,005,000 139,400 186,500 2,284,000
1,500,000 na 1,460,000 1,360,000 650,000 270,000
na na 1,569 2,018 2,000 1,300 243,100 1,048,000 9,011,000 826,800
na na
na na 301,180
560,000 na 3,500,000 Under construction
[ 78 ]
Orderbook composition (num) Bulk Oil Gas Cont. FPSO 8 12 0 33 0 8 12 0 33 0 0 0 0 0 0 8 2 4 12 6 8 9 34 26 8 4 40 6 0 6 16 0 0 0 0 0 0 17 4 4 0 20 31 3 3 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 13 0 0 0 18 11 11 0 0 0 6 6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Main type of ships Containership
Bulk 0 0 0 1 0 0 0 0 0 2 36 36 0 31 0 11 0 11 0
Oil 24 24 0 1 0 0 0 0 0 2 11 11 0 39 1 5 5 0 0
Gas 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Past deliveries (num) Cont. FPSO Main type of ships 67 6 67 6 Containership 0 0 0 0 3 0 0 0 0 6 6 0 6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Handysize, chemical Containership Handysize, product
Panamax bulker Handysize Containership Handysize Handysize Handysize PCC, Chemical
Supramax, VLOC, Containship VLOC, Capesize LR 1, LR 11, Capesize Capesize, LR 11, Handy Capesize
Supramax, handymax
LR 1, Supramax, Handysize LR 1
MPP, Product/Chemical Handysize Panamax Bulker, Product
Chemical Bulker
18 19 30 16 5 32 16 16 51 15
0 10 0 0 0 0 0 0 32 0
0 0 0 0 0 0 0 0 0 0
0 13 2 0 0 30 12 18 0 0
0 0 0 0 0 0 0 0 0 0
Capesize, Supramax Supramax, Chemical Handysize Handysize, bulker < 10000 dwt Handysize
0 1 0 0 0 0 0 0 54 5
1 13 0 0 0 0 0 0 13 0
0 1 0 0 0 0 0 0 0 0
0 50 0 0 0 10 8 2 0 0
0 0 0 0 0 0 0 0 3 1
Drillship Containership, MPP, Heavy Lift
Supramax, Containership Containership, Supramax Cape, VLCC, LR II Handysize, Post Panamax
Containership Containership Cape, LR II Handysize
8 24 24 0 8 8 0
1 8 8 0 0 0 0
0 0 0 0 0 0 0
0 19 19 0 5 5 0
0 0 0 0 0 0 0
Handysize
0 0 0 0 36 36 0
2 2 2 0 3 3 0
0 0 0 0 0 0 0
0 9 3 6 71 71 0
0 0 0 0 10 10 0
Product/Chemical
MPP, Supramax
MPP MPP
Handysize
MPP Heavy Lift, MPP
[ 79 ]
[ continued on the following page ]
Shipbuilder Weihai Shipyard - Weihai Shipyard - Shandong New Shipbuilding Heavy Wuhan Huaxia Yangzhou Guoyu Yangzijiang Shipbuilding - Jiangsu Yangzijiang - Jiangsu New Yangzijiang Zhejiang Friendship Zhejiang Jiantiao Zhejiang Jingang - Zhejiang Jingang - Zhejiang Jingang New Shipbuilding Base Zhejiang Shipbuilding Zhejiang Yangfan - Zhoushan Shipyard - Jiangwan Shipyard - Zhejiang Yangfan Zhejiang Zhenghe Zhoushan Jinhaiwan Zhoushan Wuzhou TOTAL
Source: Worldyards, CIMB/CIMB-GK estimates
Ownership Other state-owned
As at 1 July 2008 Location Weihai, Shandong Weihai, Shandong
Facilities Area (sq m) Quay (m) 240,000 Under construction na na na
Bulk Orders (dwt) 610,000
Private Private Private
na Yangzhou, Jiangsu
na na
292,000 673,000 2,686,000
Jiangyin, Jiangsu Jingjiang, Jiangsu Private Private Private Wenling, Zhejiang Wenling, Zhejiang Private Private Zhoushan, Zhejiang Zhoushan, Zhejiang Zhoushan, Zhejiang Private Private Private Zhejiang Zhoushan, Zhejiang Zhoushan, Zhejiang Ningbo, Zhejiang Taizhou, Zhejiang Zhejiang
322,000 1,070,000 170,000 80,000
1,000 1,300 338 na 200,000 110,606 268,000
128,122 na 660,000 Under construction na na 106,100 832,500 na na na na 1,300,000 300,000 na na na na 7,000 3,000 360,000 4,656,000 623,300 101,849,681
[ 80 ]
Bulk 12 0 12 10 14 36 8 28 4 2 8 0 8 2 9 0 0 9 8 33 13 1,518
Oil 2 2 0 0 0 0 0 0 2 0 9 9 0 0 4 0 0 4 0 6 0 453
Orderbook composition (num) Gas Cont. FPSO Main type of ships 0 4 0 0 4 0 Containership 0 0 0 Post panamax bulker, handysize 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 11 0 0 105 60 45 0 0 0 0 0 14 20 4 0 16 0 0 3 791 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 16 Handysize Supramax
Bulk 2 2 0 0 0 10 10 0 0 0 0 0 0 10 0 0 0 0 0 0 3 602
Oil 2 2 0 0 0 1 1 0 1 0 3 3 0 8 1 1 0 0 0 0 0 424
Gas 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 4
Past deliveries (num) Cont. FPSO Main type of ships 41 0 41 0 MPP, containership 0 0 0 0 71 67 4 0 0 0 0 0 24 55 44 0 11 0 0 1 1056 0 0 5 5 0 0 0 0 0 0 7 1 1 0 0 0 0 0 73 Handysize
MPP, containership Panamx containership Supramax, Product/chemical Supramax
MPP, containership Containership Product tanker
Product/Chemical Handysize Panamax containership
Product/Chemical
MPP, Supramax
Containership Containership Supramax, handysize Capesize, Panamax bulker Supramax
Containership Containership
[ 81 ]
4: Failed/cancelled orders (2007)

Figure: Failed orders (2007)
Order Date 23-Apr-2007 23-Apr-2007 23-Apr-2007 23-Apr-2007 17-May-2007 17-May-2007 17-May-2007 17-May-2007 17-May-2007 17-May-2007 31-May-2007 31-May-2007 31-May-2007 31-May-2007 13-Jun-2007 13-Jun-2007 15-Jun-2007 15-Jun-2007 15-Jun-2007 15-Jun-2007 06-Jul-2007 06-Jul-2007 06-Jul-2007 06-Jul-2007 06-Jul-2007 06-Jul-2007 06-Jul-2007 06-Jul-2007 27-Jul-2007 27-Jul-2007 27-Jul-2007 27-Jul-2007 22-Aug-2007 22-Aug-2007 22-Aug-2007 02-Sep-2007 02-Sep-2007 02-Sep-2007 02-Sep-2007 02-Sep-2007 02-Sep-2007 10-Oct-2007 10-Oct-2007 15-Oct-2007 15-Oct-2007 22-Oct-2007 22-Oct-2007 23-Nov-2007 23-Nov-2007 11-Dec-2007 11-Dec-2007 11-Dec-2007 11-Dec-2007 17-Dec-2007 17-Dec-2007 17-Dec-2007 17-Dec-2007 17-Dec-2007 17-Dec-2007 Delivery Sep-2009 Dec-2009 Jan-2010 Mar-2010 May-2009 Aug-2009 Oct-2009 Dec-2009 Mar-2010 Jun-2010 Sep-2010 Oct-2010 Jan-2011 Mar-2011 Aug-2010 Dec-2010 H2-2010 H2-2010 H1-2011 H1-2011 May-2009 Jul-2009 Aug-2009 Aug-2009 Oct-2009 Dec-2009 Feb-2010 Apr-2010 Dec-2009 Feb-2010 May-2010 Jun-2010 Mar-2010 Jun-2010 Sep-2010 Nov-2009 Jan-2010 Mar-2010 May-2010 Jul-2010 Sep-2010 Jul-2009 Sep-2009 Jun-2011 Sep-2011 Oct-2009 Oct-2009 Jun-2011 Dec-2011 Apr-2010 Aug-2010 Dec-2010 Apr-2011 May-2011 Jul-2011 Aug-2011 Oct-2011 Dec-2011 Jan-2012 Beneficial Owner Genel Denizcilik Nakliyati AS (GEDEN Lines) Genel Denizcilik Nakliyati AS (GEDEN Lines) Genel Denizcilik Nakliyati AS (GEDEN Lines) Genel Denizcilik Nakliyati AS (GEDEN Lines) Romeo Shipping Co Ltd Romeo Shipping Co Ltd Romeo Shipping Co Ltd Romeo Shipping Co Ltd Romeo Shipping Co Ltd Romeo Shipping Co Ltd Brave Maritime Corp Inc Brave Maritime Corp Inc Brave Maritime Corp Inc Brave Maritime Corp Inc Trans Pacific Carriers Co Ltd Trans Pacific Carriers Co Ltd Van-Clipper Van-Clipper Van-Clipper Van-Clipper Aktif Denizcilik Bilgisayar Form Navimar SA Navimar SA Aktif Denizcilik Bilgisayar Form Aktif Denizcilik Bilgisayar Form Aktif Denizcilik Bilgisayar Form Aktif Denizcilik Bilgisayar Form Aktif Denizcilik Bilgisayar Form Vanship Holdings Ltd. Vanship Holdings Ltd. Vanship Holdings Ltd. Vanship Holdings Ltd. Zhejiang Haixi Shipping Zhejiang Haixi Shipping Zhejiang Haixi Shipping Ibramar Schiffahrts GmbH Ibramar Schiffahrts GmbH Ibramar Schiffahrts GmbH Ibramar Schiffahrts GmbH Ibramar Schiffahrts GmbH Ibramar Schiffahrts GmbH Masters' Ship Management SA Masters' Ship Management SA Medcare Shipping SA Medcare Shipping SA Pola Shipping Pola Shipping Jinhui Shipping & Transportation Ltd Jinhui Shipping & Transportation Ltd Genel Denizcilik Nakliyati AS (GEDEN Lines) Genel Denizcilik Nakliyati AS (GEDEN Lines) Genel Denizcilik Nakliyati AS (GEDEN Lines) Genel Denizcilik Nakliyati AS (GEDEN Lines) n/a n/a n/a n/a n/a n/a Total DWT 180,000 180,000 180,000 180,000 34,000 34,000 34,000 34,000 34,000 34,000 92,100 92,100 92,100 92,100 35,000 35,000 75,200 75,200 75,200 75,200 33,500 33,500 33,500 33,500 33,500 33,500 33,500 33,500 80,400 80,400 80,400 80,400 92,500 92,500 92,500 57,000 57,000 57,000 57,000 57,000 57,000 181,000 181,000 92,500 92,500 34,000 34,000 300,000 300,000 80,000 80,000 80,000 80,000 32,000 32,000 32,000 32,000 32,000 32,000 4,599,300 Price (US$ m) 77.7 77.7 77.7 77.7 32.0 32.0 32.0 32.0 32.0 32.0 48.0 48.0 48.0 48.0 29.8 29.8 39.0 39.0 39.0 39.0 34.0 34.9 34.9 34.0 34.0 34.0 34.0 34.0 42.0 42.0 42.0 42.0 47.0 47.0 47.0 41.5 41.5 41.5 41.5 41.5 41.5 88.7 88.7 n/a n/a 38.0 38.0 122.5 122.5 52.0 52.0 52.0 52.0 37.3 37.3 37.3 37.3 37.3 37.3 Shipbuilder Korea Shipyard Korea Shipyard Korea Shipyard Korea Shipyard Wonyoung Shipbuilding Wonyoung Shipbuilding Wonyoung Shipbuilding Wonyoung Shipbuilding Wonyoung Shipbuilding Wonyoung Shipbuilding Qingdao Jimo Mastek Qingdao Jimo Mastek Qingdao Jimo Mastek Qingdao Jimo Mastek Nanjing Dongze Nanjing Dongze Penglai Zhongbai Penglai Zhongbai Penglai Zhongbai Penglai Zhongbai Dhumi Heavy Industries Dhumi Heavy Industries Dhumi Heavy Industries Dhumi Heavy Industries Dhumi Heavy Industries Dhumi Heavy Industries Dhumi Heavy Industries Dhumi Heavy Industries Nanjing Wujiazui Nanjing Wujiazui Nanjing Wujiazui Nanjing Wujiazui Zhejiang Yangfan Zhejiang Yangfan Zhejiang Yangfan Jiangdong Shipyard Jiangdong Shipyard Jiangdong Shipyard Jiangdong Shipyard Jiangdong Shipyard Jiangdong Shipyard STX STX Kouan Shipbuilding Kouan Shipbuilding Brother Shipbuilding Brother Shipbuilding Dalian Shipbuilding, DSIC Dalian Shipbuilding, DSIC Nanjing Wujiazui Nanjing Wujiazui Nanjing Wujiazui Nanjing Wujiazui Dae Sun Dae Sun Dae Sun Dae Sun Dae Sun Dae Sun
Source: Worldyards
[ 82 ]
5: Dry bulk fleet development

Figure 1: Dry bulk fleet development
TOTAL Bulk No of vessels 6,691 144 7 0 6,842 267 36 0 7,145 792 26 -268 7,695 1,066 3 -403 8,361 DWT 392,560,000 9,987,146 1,132,854 0 403,680,000 18,196,004 7,718,013 0 429,594,017 62,125,705 4,669,410 -11,530,000 484,859,132 100,695,742 607,551 -17,295,000 568,867,425 Capesize/VLOC (> 100k dwt) No of vessels DWT 768 131,440,000 18 3,426,451 5 1,013,549 0 0 791 135,880,000 26 5,241,000 30 7,131,487 0 0 847 148,252,487 155 28,872,544 17 3,875,808 -15 -2,540,000 1,004 178,460,839 334 59,089,688 2 484,942 -23 -3,810,000 1,317 234,225,469 Panamax (60-100k dwt) No of vessels DWT 1,479 108,260,000 36 2,862,847 1 57,153 0 0 1,516 111,180,000 62 4,838,700 7 648,678 0 0 1,585 116,667,378 135 11,175,843 9 793,602 -36 -2,410,000 1,693 126,226,823 235 19,335,400 1 122,609 -54 -3,615,000 1,875 142,069,832 Handymax (40-60k dwt) No of vessels DWT 1,598 76,900,000 46 2,517,279 1 52,721 0 0 1,645 79,470,000 106 5,731,900 -1 -52,721 0 0 1,750 85,149,179 268 14,915,490 0 0 -40 -1,810,000 1,978 98,254,669 264 14,815,280 0 0 -61 -2,715,000 2,181 110,354,949 Handysize (10-40k dwt) No of vessels DWT 2,846 75,960,000 44 1,180,569 0 9,431 0 0 2,890 77,150,000 73 2,384,404 0 -9,431 0 0 2,963 79,524,973 234 7,161,828 0 0 -177 -4,770,000 3,020 81,916,801 233 7,455,374 0 0 -265 -7,155,000 2,988 82,217,175
End 2007 + Deliveries (1H08) + Conversions (1H08) - Scrapping (1H08) End Jun 2008 + Deliveries (2H08) + Conversions (2H08) - Scrapping (2H08) End Dec 2008 + 2009 deliveries + 2009 conversions - 2009 scrapping End 2009F + 2010 deliveries +2010 conversions - 2010 scrapping End 2010F
[ 83 ]
Figure 2: Dry bulk fleet development (no of ships)
Capesize Panamax Handymax Handysize-32 -500 0
768
79 157 1,479 1,598
313 106 108 182 152 2,846 228 203 117 57 2000 2500 3000 3500
500 End 2007
1000 2008 net additions
1500 2009 net additions
2010 net additions
Figure 3: Dry bulk fleet development (m dwt)
Capesize Panamax Handymax Handysize 0.0 77 76 50.0 108
131 8.4 9.6 8.2 13.1 3.6 2.4 0.3 100.0 End 2007 2008 net additions 12.1
16.8 15.8
30.2
55.8
150.0 2009 net additions
200.0 2010 net additions
250.0
[ 84 ]
6: Crude tanker fleet development

Figure 1: Crude tanker fleet development
Aggregate crude tanker fleet No of vessels DWT 1,603 274,120,000 45 8,342,197 -11 -1,463,991 -30 -4,788,206 1,607 276,210,000 71 12,368,112 -11 -1,486,009 -23 -5,498,174 1,644 281,593,930 207 38,576,934 -5,762,905 -33 -38 -6,856,601 1,781 307,551,358 169 33,497,978 -140 -24,544,734 1,810 316,504,603 VLCC/ULCC (200-320k/>320k dwt) No of vessels DWT 504 148,320,000 16 4,910,035 -3 -738,075 -11 -2,871,960 506 149,620,000 21 6,406,459 -3 -761,925 -18 -4,652,354 507 150,612,180 68 20,926,081 -16 -3,957,209 -18 -4,744,295 541 162,836,758 64 19,732,507 -67 -16,818,137 538 165,751,128 Suezmax (120-200k dwt) No of vessels DWT 361 54,670,000 8 1,262,578 -1 -153,741 -4 -558,837 364 55,220,000 12 1,873,912 -1 -146,259 -6 -908,879 369 56,038,774 58 9,167,972 -6 -877,855 -7 -999,917 414 63,328,974 50 7,908,661 -26 -3,730,884 438 67,506,751 Aframax (80-120k dwt) No of vessels DWT 593 61,230,000 18 1,950,908 -5 -443,315 -13 -1,227,593 593 61,510,000 37 4,017,741 -5 -456,685 2 141,594 627 65,212,650 71 7,740,035 -8 -742,938 -11 -981,827 679 71,227,920 50 5,478,810 -35 -3,157,485 694 73,549,245 Panamax (60-80k dwt) No of vessels DWT 145 9,900,000 3 218,676 -2 -128,860 -2 -129,816 144 9,860,000 1 70,000 -2 -121,140 -1 -78,535 142 9,730,326 10 742,846 -3 -184,903 -2 -130,563 147 10,157,706 5 378,000 -12 -838,227 140 9,697,479
End 2007 + Deliveries (1H08) - Scrapping (1H08) - Conversions (1H08) End Jun 2008 + Deliveries (2H08) - Scrapping (2H08) - Conversions (2H08) End Dec 2008 + 2009 deliveries - 2009 scrapping - 2009 conversions End 2009F + 2010 deliveries - 2010 scrapping / conversio End 2010F
Figure 2: Double hull crude tanker fleet development

Total DH only No of vessels 1,282 45 71 1,398 207 1,605 169 1,774 DWT 215,607,656 8,342,197 12,368,112 236,317,965 38,576,934 274,894,899 33,497,978 308,392,877 VLCC/ULCC DH No of vessels DWT 356 108,170,000 16 4,910,035 21 6,406,459 393 119,486,494 68 20,926,081 461 140,412,575 64 19,732,507 525 160,145,082 Suexmax DH No of vessels 302 8 12 322 58 380 50 430 DWT 46,050,000 1,262,578 1,873,912 49,186,490 9,167,972 58,354,462 7,908,661 66,263,123 Aframax DH No of vessels 506 18 37 561 71 632 50 682 DWT 53,309,256 1,950,908 4,017,741 59,277,905 7,740,035 67,017,940 5,478,810 72,496,750 Panamax DH No of vessels 118 3 1 122 10 132 5 137 DWT 8,078,400 218,676 70,000 8,367,076 742,846 9,109,922 378,000 9,487,922
End 2007 + 2008 deliveries (1H08) + 2008 deliveries (2H08) End 2008F + 2009 deliveries End 2009F + 2010 deliveries End 2010F
[ 85 ]
Figure 3: Single hull crude tanker fleet development

Total SH only No of vessels DWT 321 58,512,344 -53 -10,286,380 -2,950,000 -22 246 45,275,965 -38 -6,856,601 -33 -5,762,905 176 32,656,459 -140 -24,544,734 36 8,111,726 VLCC/ULCC SH No of vessels DWT 148 40,150,000 -29 -7,524,314 -6 -1,500,000 114 31,125,686 -18 -4,744,295 -16 -3,957,209 80 22,424,183 -67 -16,818,137 13 5,606,046 Suexmax SH No of vessels 59 -10 -2 47 -7 -6 34 -26 8 DWT 8,620,000 -1,467,716 -300,000 6,852,284 -999,917 -877,855 4,974,512 -3,730,884 1,243,628 Aframax SH No of vessels 87 -12 -10 66 -11 -8 47 -35 12 DWT 7,920,744 -1,085,999 -900,000 5,934,745 -981,827 -742,938 4,209,980 -3,157,485 1,052,495 Panamax SH No of vessels 27 -3 -4 20 -2 -3 15 -12 3 DWT 1,821,600 -208,351 -250,000 1,363,250 -130,563 -184,903 1,047,784 -838,227 209,557
End 2007 - 2008 conversions - 2008 scrapping End 2008F - 2009 conversions - 2009 scrapping End 2009F - 2010 scrapping/conversion End 2010F
Figure 4: Crude tanker fleet development (no of ships)
VLCC/ULCC-3
504
3 34
Suezmax
361
45
24
Aframax -100 0 100 End 2007

593 200 2008 net additions 300 2009 net additions 400 500 2010 net additions
34 600
53
15 700
[ 86 ]
Figure 5: Crude tanker fleet development (m dwt)
VLCC/ULCC
148
12
Suezmax
55
1 7
Aframax 0 20
61 40 End 2007 60
6 2 80 100 2009 net additions 120 140 160 180
2008 net additions
2010 net additions
[ 87 ]
Notes:
[ 88 ]
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If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMB has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only to clients of CIMB. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB. New Zealand: In New Zealand, this report is for distribution only to persons whose principal business is the investment of money or who, in the course of, and for the purposes of their business, habitually invest money pursuant to Section 3(2)(a)(ii) of the Securities Act 1978.
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Singapore: This report is issued and distributed by CIMB-GK Research Pte Ltd (CIMB-GKR). Recipients of this report are to contact CIMB-GKR in Singapore in respect of any matters arising from, or in connection with, this report. The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMB-GKR has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only. If the recipient of this research report is not an accredited investor, expert investor or institutional investor, CIMB-GKR accepts legal responsibility for the contents of the report without any disclaimer limiting or otherwise curtailing such legal responsibility. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB-GKR.
As of 5 August 2008 CIMB-GK Research Pte Ltd does not have a proprietary position in the recommended securities in this report.
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RECOMMENDATION FRAMEWORK #1* STOCK RECOMMENDATIONS

OUTPERFORM: The stock's total return is expected to exceed a relevant benchmark's total return by 5% or more over the next 12 months. NEUTRAL: The stock's total return is expected to be within +/-5% of a relevant benchmark's total return. UNDERPERFORM: The stock's total return is expected to be below a relevant benchmark's total return by 5% or more over the next 12 months. TRADING BUY: The stock's total return is expected to exceed a relevant benchmark's total return by 5% or more over the next 3 months. TRADING SELL: The stock's total return is expected to be below a relevant benchmark's total return by 5% or more over the next 3 months.
* This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand and Jakarta Stock Exchange.
SECTOR RECOMMENDATIONS
OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index over the next 12 months. NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months. UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index over the next 12 months.
CIMB-GK Research Pte Ltd (Co. Reg. No. 198701620M)
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RECOMMENDATION FRAMEWORK #2 ** STOCK RECOMMENDATIONS

OUTPERFORM: Expected positive total returns of 15% or more over the next 12 months. NEUTRAL: Expected total returns of between -15% and +15% over the next 12 months. UNDERPERFORM: Expected negative total returns of 15% or more over the next 12 months. TRADING BUY: Expected positive total returns of 15% or more over the next 3 months. TRADING SELL: Expected negative total returns of 15% or more over the next 3 months.
** This framework only applies to stocks listed on the Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange.
SECTOR RECOMMENDATIONS
OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index over the next 12 months. NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months. UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index over the next 12 months
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SECTOR UPDATE 6 August 2008

Bulk and Tanker Shipping

Raymond Yap CFA - raymond.yap@cimb.com / David Y.K. Lee davidyk.lee@cimb.com

MICA (P) 006/03/2008

Bulk and Tanker Shipping 6 August 2008

Bulk and Tanker Shipping 6 August 2008

Dry bulk shipping

Sell aggressively into postOlympic rebound

Demand under pressure from raw material shortages

Staggering conversion orderbook

Baltic Dry Index revisions

Bulk and Tanker Shipping 6 August 2008

Crude tanker shipping

Strong Middle East output growth to increase demand for tankers

Baltic Dirty Tanker Index revisions

Bulk and Tanker Shipping 6 August 2008

Dry bulk shipping

Tanker to FPSO / Heavy Lift 38

Tanker to FPSO / Heavy Lift 5,437,069

Tanker to Bulker 14,494,259

Source: Worldyards, CIMB/CIMB-GK Research

Tanker sales and purchase reports provide clues

The trickle of conversions will turn into a torrent

Figure 3: Dry bulk fleet movement schedule

Source: Poten and Partners, Clarkson Research Services, CIMB/CIMB-GK Research

Bulk and Tanker Shipping 6 August 2008

Worldyards has an even more aggressive conversions estimate

Delivery 2008 Delivery 2009 Total

Source: Worldyards, CIMB/CIMB-GK Research

Conversions make very good commercial sense

Bulk and Tanker Shipping 6 August 2008

Figure 6: Calculation of 10-year breakeven TCE/day

13.8 39,431 Breakeven in 10 years

a b c = b x 350 d e=axd f=c/e g h=f+g p q r=pxq s=h+r

Bulk and Tanker Shipping 6 August 2008

Chinese shipyard delivery delays?

Source: Worldyards, CIMB/CIMB-GK Research

Shipyard delays wont redress the oversupply

Bulk and Tanker Shipping 6 August 2008

National yards should perform well

Source: Worldyards, CIMB/CIMB-GK Research

Not all greenfield yards are problematic

Bulk and Tanker Shipping 6 August 2008

Figure 13: Greenfield yards bulk orderbook and delivery schedule

Minimal cancellations or failures

Demolitions not likely until 2009-10

Source: Clarkson Research Services, CIMB/CIMB-GK Research

Bulk and Tanker Shipping 6 August 2008

10-19 years old

5-9 years old

0-4 years old

All Bulkers Handysize Handymax Panamax

10 - 14 years 11.7% 15 - 19 years 4.4%

Bulk and Tanker Shipping 6 August 2008

Panamax tonnage grow th (dw t) Grow th (%)

60.0 50.0 40.0 30.0 20.0 10.0 0.0

Capesize tonnage grow th (dw t) Grow th (%)

35% 30% 25% 20% 15% 10% 5% 0%

Source: Clarkson Research Services, CIMB/CIMB-GK Research

Demand outlook weakens

Slowing Chinese economic growth

Source: CEIC, CIMB/CIMB-GK Research

FAI (RMB bn, RHS)