This document summarizes recent trends in the global shipbuilding industry and analyzes the outlook for China. It finds that while China leads in shipbuilding output, its market share and orders have declined in recent years due to overcapacity, increased competition, and a technology gap. However, China's "One Belt, One Road" initiative and "Made in China 2025" plan aim to boost infrastructure investment and technological upgrading, positioning China to regain market share. The document also profiles major Chinese shipbuilders like CSSC and CSIC and finds that while their revenues have grown, profits have been volatile depending on market conditions.

1. 1 Source: http://www.statista.com/statistics/263895/shipbuilding-nations-worldwide-by-cgt/
2 Source: http://www.reuters.com/article/research-and-markets-idUSnBw086074a+100+BSW20150908
3 Source: http://fairplay.ihs.com/ship-construction/article/4261571/dry-bulk-gloom-hits-china-s-shipbuilding-industry
RECENT TRENDS
Shipbuilding sector is dominated by Asian
regions. The three main world players are
China, Japan and South Korea, respectively
accounting for 22,682, 22,455 and 13,421
thousands of completions (in terms of gross
tonnage) in 2014FY.
Leading shipbuilding nations in 20141
, gross
tonnage in thousands
According to Reuters, in 2014 China’s export
declined to USD 23.78 B, a drop of 14.1%
YoY, while import totaled USD 1.2 B, down
of 37.1% YoY2
.
Even if China has led the sector in recent
years, several changes are occurring. From a
survey carried out by Banchero Costa, an
Italian shipbuilding Company, we notice the
sudden shift occurred in China’s industry3
.
In 2015, only 37 individual shipyards
reported orders, a decline of 30% respect to
2014. This dragged down country’s market
share to 39%, far from the bright results of
both 2013 and 2014 (48%).
Bulk carriers (non-liquid cargoes) registered
another negative result. In 2015, the amount
of orders sharply declined to 102 from 377 in
2014 and 620 in 2013. In addition only 22
Chinese yards signed new contracts, a drop of
more than 50% compared to 2013 and 2014
results. Even more alarming are the data come
from bulk carriers’ market share. In 2015, it
bottomed at 33.8%, a decline of more than
40% compared to 2014(54.6%) and
2013(64.2%)
0
5,000
10,000
15,000
20,000
25,000
China
South Korea
Japan
Philippines
Taiwan
Germany
Vietnam
Romania
Italy
U.S.
Brazil
MARKET UPWARDS
• One-Belt-One-Road (OBOR):
focus on European investments
• Made in 2025: renovation towards
high tech vessels
• Goal: to expand its market share to
40% in short term and 50% in long
run
MARKET DOWNWARDS
• Oversupply
• Increase in competition
• Technology gap
SHIPBUILDING INDUSTRY: STILL FLOATING?
A research by China Global Analysis

2. 4 Source: FRED website, Federal Reserve of St. Louis
5 Source: http://thewire.in/2015/10/09/what-chinas-one-belt-and-one-road-strategy-means-for-india-asia-and-the-world-
12532/)
6 Ibidem
If we look at recent performance of
shipbuilding industry, China will unlikely be
in the position to boast itself as the first
worldwide shipbuilder in the future. We
identified two main factors that undermined
the growth of this sector.
1) Oversupply. The constant disproportion
between supply and demand in global
shipping will lead to further drop in prices for
the latest ships built.
2) Competition. The weaker currencies in
Japan and South Korea opened wide horizons
for the future growth of both competitors.
From 2012 to 2015, the JPY depreciated 50%
against USD, while the CNY lost only 5%4
.
3) Technology gap. China is competing with
Singapore in the low-end market where profit
margins keep shrinking, while Korean
companies - due to their advanced
technologies - dominate the high-end sector.
Despite we are bearish on the short-term,
China has still chances to revitalize its
domestic shipbuilding market. Favorable
opportunities come from One-Belt-One-Road
(OBOR) project and the “Made in 2025” plan.
FUTURE CHANCES
One-Belt-One-Road (OBOR).
In 2013, Chinese central government
announced the ambition to establish a trade
and infrastructure network. The latter
incorporates the Silk Road Economic Belt and
the 21st Century Maritime Silk Road with the
aim to develop closer relationships among
over sixty nations in three continents (Asia,
Africa and Europe).
The document states: “The initiative to jointly
build the Belt and the Road enhancing the
trend towards a multi-polar world, economic
globalization, cultural diversity and greater IT
application, is designed to uphold the global
free trade regime and the open world
economy in the spirit of open regionalism”.
In particular, in order to identify clear
opportunities for China’s shipbuilding
industry growth, we focus our attention
towards Europe. In the Old Continent China
has built a basis for its future, as investments
in Greece, Netherland and the European Fund
for strategic investment reveal.
The strategic port of Piraeus represents the
key to boost the transports in the
Mediterranean Sea. Recently a Chinese
Shipping Company, COSCO, which has a 35-
year concession to enhance the hub by
building two new container terminals, is
likely to bid for the 67% Greek government
stake in the port5
.
The Dutch port of Rotterdam has also
attracted China’s attention. The country has
planned to transform it into a strategic logistic
node in northern Europe.
In addition, during Premier Li Keqiang’s visit
to Brussels, China declared its willingness to
invest in Europe’s new infrastructure by
contributing to fund the Junker-sponsored €
315 Billion European Fund for Strategic
Investment6
. It is clear that this operation is
tied to the OBOR aims to transform the
European country into the major hub for both
sea and land transport. In view of this, we
firmly believe that the Chinese shipbuilding
industry will manage to cope with the
difficulties registered in recent years,
identified in the paragraph above, and will
shift the negative trend.

3. 7 Source: https://www.gepowerconversion.com/inspire/shipbuilding-china-bringing-shipyards-21st-century
8 Source: http://worldmaritimenews.com/archives/179186/11-more-shipbuilders-make-it-to-chinas-white-list/
9 Source: http://www.seatrade-maritime.com/news/asia/the-meaning-behind-chinas-white-list-shipyards.html).
10 Source: http://www.globalsecurity.org/military/world/china/cssc.htm
11 Source: Morningstar and Bloomberg websites
Made in 2025
One of the buzzwords from the most recent
Lianghui (March 2015), is “Made in China
2025”. It is a 10-year action plan that wishes
to confer China’s manufacturing sector,
usually regarded as a low-cost factory of the
world, a significant renovation.
To fulfill Made in 2025 ambitions, the
Ministry of Industry and IT has implemented
a new legislation, the Issue 557
, which reflects
government’s aim to reshape China’s
shipbuilding industry. New sector guidance
along with stricter environmental and
employment supervision, will mainly affect
small and medium sized shipyards. Any of
these are exposed to the risk of having their
license revoked if they are unable to conform
to Issue 55 standards.
Before the new directive, China had much
lower costs compared to its fierce rivals (i.e.
South Korea and Japan). However, the current
focus is on producing high-tech vessels.
To achieve this goal, the so-called “White
list” has been drafted. The list incorporates
preferred yards8
(71 at present) with the
capabilities to produce platforms and rigs, and
with a required commitment to technology
investment. These selected companies will
benefit from policy support and a fast lane for
financial support by Chinese banks9
.
Therefore, with “Made in China 2025” and
the Issue 55, China has set the goal to expand
its market share in shipbuilding output at
over 40% in the short-term and 50% in the
long run. In addition, China is committed to
reach a 30% share in the worldwide business
of high-tech vessels and marine engineering
equipment.
MARKET ANALYSIS
China State Shipbuilding Co.
This company is a large SOE conglomerate
made of 58 enterprises. Among the others,
Shanghai Waigaqiao Ship. and Hudong-
Zhonghua Shipbuilding. CSSC was split in
1999 by State Council, its spinoff is
Shipbuilding Industry Corporation. Major
workforce is located in East and South China.
The range of products is wide: main are
commercial ships, special vessels and
offshore units. CSSC is technologically
advanced, being supplier for Chinese Navy
for many years. Military products include
nuclear submarines, frigates, and missile
destroyers10
.
Cssc Holdings Ltd (600150: Shanghai)
The company is a subsidiary of CSSC.
Key financials reveal swinging revenues
(CNY M 29,461 TTM) and lowering net
income (CNY M 76 TTM) in last 5 Years.
Revenue graph is the following (CNY M):
Drop in 2013FY revenues caused a plummet
in net income, due to the high fixed costs. We
estimated a 2016E TP of 27.67 CNY vs
current price CNY 24.96 (as of 02 Apr 16),
year ended. Past stock performance plotted
below11
(Share price in CNY):
0
5000
10000
15000
20000
25000
30000
35000
2011 2012 2013 2014 TTM 2016E

4. 12 Source: http://www.csic.com.cn/en/
13 Source: Company’s profile on Morningstar website
14 Source: Company 2013 presentation, company’s website
China Shipbuilding Industry Co.
(601989: Shanghai)
CSIC was born in 1999 from some large
enterprises that split from CSSC. It is a big
SOE, among the leaders in Chinese
shipbuilding market. Among its controlled
operating companies, we find Bohai Ship.Co.
and Dalian Ship.Co. Some subsidiaries are
instead specialized in marine/offshore R&D
or related business, among them: China Ship.
& Offshore International Co and CSIC
Finance Co. Moreover, CSIC is specialized in
marine engine production. Future aim of
CSIC group is to become leading provider of
warships12
.
CSIC Corp showed its potential in last 5Y,
having always reached more than CNY
50,000 Million, a slightly increasing trend
during last 2Y (CNY M 61,237 TTM vs
60972 2014FY). Revenue chart below (CNY
M):
Stock performance is very similar to CSSC.
Since they are both large SOEs focused on
shipbuilding industry, we can expect some
correlation between the two stocks (as graph
below shows, share price in CNY):
We believe CSIC has acquired enough
expertise to reach its future target of being
main provider for Navy warships. We expect
future sales to increase 5%, forecasting a
2016E TP of 7.70 CNY vs current price CNY
7.11 (as of 02 Apr 16)13
.
China Huarong Energy Co Ltd
(01101: Hong Kong)
The company (also known as China
Rongsheng Heavy Industries Group) is
mainly engaged in shipbuilding business and
energy exploration/production, marine engine
production and offshore engineering. Main
operations take place in PRC, especially in
Nantong (Jiangsu) and Hefei (Anhui). In
2013, Rongsheng focused on offshore
engineering, in a struggle to differentiate its
capabilities as industry rebounds14
.
Present situation of China Huarong is
unstable: in last 2Y revenues are even
negative.
We know the company underwent financial
problems already during 2014, when it
changed name from China Ronghsheng to the
actual Huarong. The company sought
financial help, being overdue on payments,
and tried to restructure. Huarong wanted to
focus on energy business. It is possible that
the company is planning an exit from
shipbuilding industry also. As of today, the
company is still blocked and its share price is
0
20000
40000
60000
80000
2011 2012 2013 2014 TTM 2016E

5. 15 Source: Company’s profile on Morningstar website
16 Source: http://www.yzjship.com/en/about.asp?sid=1
17 Source: Company’s profile on Morningstar website
18 Source: Companies profiles on Morningstar
close to zero (HKD 0.21 as of 02 Apr 16).
Uncertainty is very high, and target price is
unpredictable, as bankruptcy is possible
(Share prices in HKD)15
.
Jiangsu Yangzijiang Ship. Group
(YZJSGD: Singapore)
Yangzijiang is a large group, with
shipbuilding and offshore engineering as core
business. The company listed in Singapore
stock market in 200716
. In last 2Y revenue
grown 7.08% and 4.30% respectively,
reaching CNY M 16,014 in 2015FY. Graph
below shows revenue trend (CNY M):
The company has continuously being noticed
for its good performance and projects. We
believe in their future. We expect a 2016E TP
1.0728 SGD, supported by a forecasted
growth in revenue around 12%. Current price
is SGD 0.97 (as of 02 Apr 16). Historical
stock price is plotted below (price in SG$):
BRIEF PERFORMANCE ANALYSIS
Business environment for shipbuilding
industry has been negative over last 5Y.
Almost every company operating in this
segment had a deep worsening of its
financials. Best companies managed to keep
revenues at modest level, whereas their
profitability kept worsening anyway.
Measuring profitability as Return on Invested
Capital, we saw a decreasing trend over 2010-
2015 (TTM) period. ROIC for CSSC and
CSIC, the two big SOEs, was pushed to zero.
Huarong has a negative ROIC of -22.7% in
2015FY, being close to bankruptcy. The only
company who successfully managed to keep
its profitability high was the Singapore-listed
Jiangsu Yiangzijiang, with a 2015 FY ROIC
around 9.4%. Historical ROIC graph below18
:
30.98
18.82
12.27 12.58
9.4
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
2010 2011 2012 2013 2014 TTM
CSSC CSIC
Huarong Yangzijiang
China Global Analysis
Industry Analysis Team
Enrico Astegiano, Lead Analyst
enrico.astegiano@yahoo.com
Filippo Cattabiani, Analyst
Andrea D’Oro, Analyst
For professional/institutional investors only.
Copyright China Global Analysis © 2016, Hong Kong.