S. KOREA SHIPBUILDING: KOREA SHIPBUILDING MONTHLY - JASON KANG
New record for ship price: The Clarkson ship price index gained another point in August and reached 175. We are seeing even higher ship prices in September, as early September prices suggest a ship price index level of 176. Bulk carrier new building pricing led the rise in overall ship prices, up by 27.8% YoY and 3.3% MoM. It is not just tight berth space pushing up prices as building costs are also rising. Korean shipyards and JFE steel agreed to raise heavy plate prices to US$645/ton from US$625/ton (+3.2%), starting this October to March 08.
Robust bulk carrier and containership order: Global new orders were 6.8 mn CGT in August, up 72% YoY.On the back of strong freight rates, bulk carrier and containership new orders soared, up 562% and 93%, respectively. Tanker new orders slowed down by 72% YoY.
Freight rates surge based on shipping demand from China:BDI went up to US$8,270 on September 6, vs. US$6,993 on August 1. Despite recent turmoil in the credit market, demand from China has not shown any sign of weakening yet. While the container freight rate also recovered, tanker rates stayed low. The VLCC Worldscale index for Mid-East to Japan was down 43.2% YoY on August.
Korean yardsplan to add more docks: Major yards came up with new dock plans to leverage the containership new building up-cycle. DSME revealed its plan to purchase a 438m x 84m floating dock and HHI confirmed that it will build a 475m x 175 m new dry dock.
Super Cycle Continues: We expect strong shipping market fundamentals and new orders to continue to drive up ship prices, which should positively contribute to shipbuilders' profitability in 2009E through 2011E. The macro outlook remains as a key risk. We have Overweight rating on three shipbuilders, Hyundai Heavy Industries (TP W480,000), Samsung Heavy Industries (TP W67,000), and Daewoo Shipbuilding Marine Engineering (TP W79,000). Our top pick is Hyundai Heavy Industries.
CHINA A-SHARE STRATEGY: SPECIAL TB FLOATING: UNCONVENTIONAL TIGHTENING - JERRY LOU
Impact on Our Views: Although a Rmb200 bn special treasury bond (TB) issuance to the open market is only roughly equal to China's trade surplus in one month, the MoF's decision to directly float a portion of its Rmb1.55 trillion special TBs is exactly what we expected as part of China's "unconventional tightening" efforts (see our note dated May 2, 2007, "What are the Policy Options to Control Market Mania?"). The domestic A-share market should suffer upon this, and we reiterate our Cautious view, given its demanding valuation, inflated growth by securities investment income and overly speculative nature (see our note dated Sep 3, "1H07 Result:Super Growth or Super Bubble?").
What's New: The Ministry of Finance (MoF) just announced that it will issue Rmb200 bn special TBs to the inter-bank market directly. Rmb100 bn of that amount will be sold within this month starting from Sep 17, and the other half will be issued before the end of this year. The bond sale is part of the MoF's planned special bond issuance of Rmb1.55 trn. The ministry will use the proceeds to buy foreign exchange reserves from the People's Bank of China (PBoC) and fund China's sovereign investment agency. Last month, the ministry issued Rmb600 bn special bonds to the PBoC via the Agricultural Bank of China. PBoC has floated Rmb10 bn of that portion in the market already.
Investment Thesis: The market's myth that China will see no aggressive tightening before the 17th CPC Conference in October is now broke. We believe regulators are now turning more hawkish in fear of inflation and onshore asset speculation.
Impact on Offshore Equities: We also believe this new tightening effort will be a moderate negative to offshore-listed China equities in Hong Kong. However, the major risk for Hong Kong market is a US-centric de-risking, not China's tightening. But we do expect asset price-driven sectors such as financials and prope rties to underperform.
CHINA TFT LCD: TAIWAN PANELS, CHINESE RETAILERS BEST POSITIONED FOR 2008E SUPER-CYCLE - FRANK A. Y. WANG
Conclusion: We reiterate our Attractive view of the Taiwan TFT LCD industry and our Overweight-V ratings on AUO (NT$50.50) and CMO (NT$33.70). Taiwan panel companies are best positioned for the 2008E super-cycle, in our view, on largest share in Gen 3.5 to 7.5 fab capacities for sweet spot demand growth (42”/32” LCD TV, wide format monitor/notebook, emerging small/medium size applications). Chinese TFT makers’ global share will stay marginal at ~5% in 2008, on our estimates, as most growth will come from existing fab expansion, supporting global capital discipline trend. Like in the US two years ago, Chinese retailers are best positioned in China LCD TV foodchain on good margin, high turnover, and long payment terms for the rapid growth.
What's New: We visited China TFT LCD foodchain across components, panels, TV assembly, TV brand, and retailer last week. Given China accounts for over 70% of global TV, monitor, and notebook assembly production, like in semiconductors, China will build TFT fabs on government supports (only 5% global share
today). Chinese TFT fabs are debt heavy with the highest debt/equity ratio globally (for banks, companies are allowed to have debt to equity mix of 2 to 1 on average debt cost of ~7% per annum). For the long term, we view the announced merger between BOE OT, SVA-NEC, IVO as the best outcome for China TFT on scale and global TFT sector on consolidated supply.
The merger will likely be delayed again from the extended September deadline as: 1) participants need to agree on the swap ratio (not easy in upcycle); 2) the new merged entity needs new state capital injection for expansion that is likely only after 17th Party Commission in October. Given 12 months equipment lead time to production, on weak balance sheet, any new fab production will be in 2009 even if the newly merged SMIC equivalent TFT maker starts to operate by end-2007, which would help supply discipline in 2008.
MOTOROLA: QUICK COMMENT: ANALYST DAY PROVIDES NEEDED DETAILS ON IMPROVING RETURNS - SCOTT COLEMAN
Impact on Our Views: We have increased confidence that Q2 marked the bottom for handset operating margin and that sequentially improving profitability results should push MOT shares towards our sum-of-the-parts valuation of around $21.
What's New: Motorola hosted an analyst day in NY on Friday where management provided sufficient detail on (1) how it will improve profitability and instill operational discipline in the handset division; (2) increase overall capital efficiency and returns; and (3) the healthy growth and profitability in the Home & Networks and Enterprise Mobility divisions. Among the areas lacking in detail were how Motorola would gain profitable traction in the 3G/WCDMA and GSM markets where it has lost share over the past few quarters. Motorola did not introduce new handsets but indicated launches would occur within the next 30 days.
Investment Thesis: In a crowded market for telecom equipment restructuring stories, MOT may have the best chance to quickly improve results and drive estimates higher. Longer term, we remain concerned about the lack of 3G presence and the drag on growth and earnings coming from iDEN and wireless infrastructure.
Valuation: Shares trade on 0.9x EV/Sales, an attractive multiple assuming that the company is able to grow the top line at least 6+% that we estimate in 2008. Our updated sum-of-the-parts model implies a $21 per share value (higher on sales multiples; lower on EBIT multiples), and each 100 bps of margin improvement in handset over our 5.4% estimate for 2008 adds around 60¢ in value. We estimate normalized earnings power of $1.25 assuming MOT can consistently deliver 30+¢ quarters on average, which implies a price around $21 using a three-year average P/E of 17x.
