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GROUP$8$RESEARCH$

March$20,$2015$

Roy!Chng!Cheng!Hock! [email protected]$

+65$8127$6970$

Eugene!Chng!Xiong!Hao! [email protected]$

+65$9145$6952$

ASL Marine Holdings Ltd

Cheong!Wei!Jia! [email protected]$

+65$9424$0029$

IniHaHng$coverage$report$

Sandra!Teng!Kah!Yeng! [email protected]$ Muhammad!Hafiz!Bin!Kasman! [email protected]$

Industry$View$ OffGline!

Stock$RaHng$ Underweight!

Price$Target$ $0.26!

We$iniHate$a$ SELL! raHng$for$ASL$Marine$Holdings$(ASL)$on$the$basis$$ of$ strong$ headwinds$ stemming$ from$ low$ crude$ oil$ prices$ and$ a$ weaker$global$demand$for$oil;$affecHng$downstream$parHes$such$as$ ASL.$ Using$ a$ cost$ of$ equity$ of$ 4.89%$ to$ discount$ forecasted$ abnormal$ earnings$ and$ and$ cost$ of$ debt$ of$ 1.97%$ in$ a$ discounted$ cash$ flow$ model,$ we$ arrive$ at$ an$ intrinsic$ fair$ value$ of$ $0.26$ per$ share,$presenHng$an$downside$of$38%$from$its$current$share$price.$$ Shrinking! CAPEX! environment! in! value! chain! troubled! with! oversupply:! Waning$ demand$ from$ the$ low$ oil$ prices$ and$ overcapacity$ in$ the$ shipbuilding$ segment$ have$ lel$ a$ dent$ on$ OSV$ business,$ while$ keeping$ a$ lid$ on$ shipbuilding$ margins.$ Owing$ to$ these$factors,$the$ company's$net$ profit$for$ the$first$ quarter$ended$ September$ 2014$ fell$ 77%$ to$ $3b$ while$ revenue$ slipped$ 54%$ to$ $69m$from$a$year$ago.$We$do$not$expect$the$current$oil$situaHon$to$ rebound$anyHme$soon$given$the$current$macroeconomic$indicators.!

+65$8611$8189$ +65$9633$1500$

!Stock!Profile!(Currency:!SGD)! 52w$Price$Range$:$

0.39$–$0.73$

Free$Float$ Enterprise$Value$(m)$

37.80%$ 582.40$

Market$CapitalizaHon$(m)$

181.47$

Year$To$Date$%$Change$

N10.42%$

Dividend$Yield$

2.33%$

P$/$E$

25.26$

P$/$B$

0.43$

EV$/$EBITDA$ Debt$/$Equity$

9.00$ 1.10$

Beta$

0.77$

!Share!Price!Performance! 0.8$

Disadvantageous!credit!profile!and!high!debt!in!balance!sheet:!ASL$ has$held$relaHvely$high$debt$compared$to$its$peers.!Using$mulHples$$ such$as$gearing$raHo$and$Net$Debt/OCF,$we$find$that$ASL$is$highly$ leveraged$ relaHve$ to$ its$ peers.$ We$ foresee$ this$ to$ be$ a$ risky$ structure$ to$ uptake$ given$ the$ current$ macroeconomic$ situaHon,$ which$we$predict$will$decrease$ASL’s$overall$revenue.$

0.75$ 0.7$ 0.65$ 0.6$ 0.55$ 0.5$ 0.45$ 0.4$ 17N03N14$

Poor!management:!The$shipbuilder's$net$profit$for$the$year$ended$ June$ 2014$ had$ halved$ to$ $22m$ from$ a$ year$ ago$ on$ the$ back$ of$ a$ 9.5%$increase$in$revenue$resulHng$from! the$cancellaHon$of$an$OSV$ contract1$and$delays$in$deliveries$of$two$vessels$in$the$final$quarter$ of$that$fiscal$year.$The$vessels,$to$be$ready$for$operaHon$by$the$end$ of$firstNquarter$2015$and$in$the$third$quarter,$will$have$to$be$sold$or$ else$the$revenues$booked$to$date$would$have$to$be$reversed,$which$ would$ result$ in$ the$ reversal$ of$ $95m$ recognized$ in$ previous$ financial$ years.$ Furthermore$ the$ BTS$ programme$ is$ highly$ suscepHble$ to$ failure$ as$ it$ bleeds$ cash$ through$ inventory$ holding$ costs$if$not$Hmed$properly.!

17N05N14$

17N07N14$

17N09N14$

17N11N14$

ASL$Marine$Holdings$

17N01N15$

17N03N

STI$rebased$

Source:$Bloomberg$as$of$17$Mar$15$

!Key!Financial!Data!(Currency:!SGD)! 2013$

2014$

2015E$

2016E$

Revenue$

505,606$ 753,889$ 1,080,537$ 465,008$

EBITDA$

98,923$ 141,497$ 271,876$

68,311$

Net$Income$

91,556$ 126,977$ 244,637$

56,698$

EBIT$Margin$

13%$

19%$

19%$

25%$

15%$

19%$

Not! the! Kme! to! boMomGfish:! Though$ the$ stock$ is$ trading$ at$ 0.5x$ 20%$ 19%$ CY14$ P/BV,$ we$ believe$ that$ this$ is$ not$ the$ Hme$ to$ bofomNfish.$ EBITDA$Margin$ Uncertainty$surrounding$both$the$cancelled$vessel$and$recogniHon$ Source:$Annual$report,$ASL$Marine$ of$ ship$ conversion$ jobs$ could$ weigh$ on$ its$ share$ price.$ Hold$ maintained.$ We$would$ reNvisit$ the$ stock$ upon$ 1)$ resoluHon$ of$ the$ cancelled$ PSV;$ 2)$ certainty$ in$ the$ recogniHon$ of$ ship$ conversion$ jobs$ and$ 3)$ higherNthanNexpected$ vessel$ sales$ from$ the$ buildNtoN stock$programme.!

Business!Overview! ASL$ Marine$ is$ a$ verHcallyNintegrated$ marine$ services$ group$ principally$ engaged$ in$ shipbuilding,$ship$repair$and$conversion,$marine$vessel$chartering,$marine$engineering$ and$ other$ related$ services,$ catering$ to$ customers$ worldwide.$ Listed$ on$ Singapore$ Stock$Exchange$ since$2003,$ ASL$Marine$ Holdings$Ltd.$ has$over$ the$years$ grown$into$ one$ of$ the$ region’s$ key$ players$ in$ the$ marine$ services$ sector.$ Headquartered$ and$ listed$in$Singapore$since$17$March$2003,$ASL$Marine$owns$and$operates$shipyards$in$ Singapore,$ Batam$ (Indonesia)$ and$ Guangdong$ (China),$ providing$ a$ comprehensive$ range$of$marine$engineering$services$spanning$myriad$sectors/$industries.$$

Gross!Profit!by!OperaKons!($million)!

Revenue!by!OperaKons!($million)!

Business!S ASL$operates$in$the$following$key$business$segments:$ • Shipbuilding$–$The$Group’s$operaHng$five$shipyards$in$Singapore,$Batam,$Indonesia$ and$Guangdong,$China$building$specialized$and$niche$vessels$ranging$from$Offshore$ Support$Vessels,$Dredger,$Tugs,$Barges$and$Tankers$for$customers$globally.$ • ShipGrepair! and! conversion$ –$ The$ Group$ provides$ comprehensive$ range$ of$ repair$ and$conversion$services$including$retroNfiqngs,$lifeNextensions$and$repair$of$various$ types$of$vessels.$The$Group’s$primary$yard$in$Batam$is$one$of$the$few$yards$in$the$ region$that$can$dock$very$large$ships$and$vessels$of$even$the$aframax$size$and$up$to$ the$ capsize$ vessels.$ The$ repair$ capabiliHes$ also$ extend$ to$ the$ offshore$ oil$ and$ gas$ side$like$drilling$rigs$and$other$offshore$vessels.$ • ShipGchartering$ –$ The$ Group$ owns$ a$ reasonably$ young$ fleet$ of$ vessels$ consisHng$ mainly$ Barges,$ Tugs,$ Anchor$ Handling$ Tugs$ (AHT),$ Anchor$ Handling$ Tugs/Supply$ vessels$ (AHTS),$ Plarorm$ Support$ Vessels$ (PSV),$ Diving$ Support$ Vessel$ (DSV),$ LCTs,$ Crane$ Barges$ and$ other$ vessels.$ The$ Group$ charters$ its$ fleet$ to$ customers$ from$ diverse$industries$from$offshore$oil$and$gas$to$marine$infrastructure.! • Engineering!–$ The$ Group's$ engineering$side$consists$mainly$ of$ the$ newly$ acquired$ business$of$VOSTA2.$Its$specializaHon$lies$in$developing$and$manufacturing$dredging$ components.! Key!Industry!Trends! We$ present$ a$ Porter’s$ Five$ analysis$ of$ the$ compeHHve$ landscape$ and$ challenges$ faced$by$ASL.$ Porter’s!5!Diagram! Buyer$ power$

Supplier$ power$

SubsHtu tes$

Degree$ of$ rivalry$

New$ entrant s$

Buyer!power! Moderate$–$Buyers$within$the$industry$are$largely$ corporate$ clients$ who$ use$ the$ array$ of$ marine$ services$ to$ transport$ raw$ materials$ such$ as$ petroleum$ product$ and$ coals$ at$ high$ quanHHes.$ These$ companies$ have$ high$ negoHaHng$ power$ due$ to$ large$ financial$ muscle.$ Furthermore,$ lack$ of$ a$ unique$ product$ and$ limited$ potenHal$ for$ service$ differenHaHon$ strengthens$ buyer$ power$ further.$$

Degree!of!rivalry! High$–$On$top$of$exisHng$local$compeHtors$such$as$ Sembcorp$Marine$and$Yangzijiang$ Shipbuilding,$ other$ mulHnaHonal$ conglomerates$ such$ as$ A.P.$ MollerNMaersk$ and$ CMA$ CGM$ SA$ also$ poses$ a$ large$ threat.$ High$ fixed$ costs$ in$ the$ marine$ services$ industry$ensure$ a$high$ degree$of$ compeHHveness$as$ players$olen$ commit$to$ large$ operaHon$scales$to$remain$profitable.$ $ New!entrants! Moderate$ –$ High$ capital$ expenditures$ involved$ in$ the$ marine$ services$ industry$ is$ likely$to$inHmidate$new$entrants.$There$are$also$extensive$regulaHons$governing$the$ marine$ services$ industry$ such$ as$ the$ InternaHonal$ MariHme$ OrganizaHons$ laws$ on$ top$ of$ domesHc$ and$ regional$ legislaHons.$ New$ entrants$ may$ only$ seem$ likely$ if$ operaHng$in$niche$areas.$ $ SubsKtutes! Low$–$SubsHtutes$for$marine$services$include$air$and$road$freight$–$of$which$they$are$ more$ costly$ and$ has$ limited$ capacity$ respecHvely.$ Marine$ services$ are$ the$ most$ suitable$for$transportaHon$of$nonNperishable$and$bulk$goods.$PotenHal$compeHHon$ may$however$come$in$form$of$the$ChinaNEuropean$rail$proposed$in$20133.$ $ Supplier!power! Low$ –$ The$ mulHple$ value$ chains$ in$ the$ industry$ translate$ to$ large$ amount$ of$ suppliers$ whom$ are$ unlikely$ to$ be$ integrated.$ These$ include$ fuel$ oil$ and$ container$ suppliers$ –$ both$ are$ whom$ are$ typically$ large$ scale$ and$ verHcally$ integrated.$ Port$ holders$are$also$key$suppliers$who$have$large$supplier$power.$ $ Revenue!reversal! $ With$ the$ release$ of$ Q2FY15,$ ASL$ reported$ an$ unprecedented$ negaHve$ revenue$ of$ ! 1.$As$ $21.1m.$This$was$due$to$the$nullificaHon$of$shipbuilding$contracts$for$two$OSVs $ ASL$uses$the$POC$$method$to$recognize$the$revenue$of$the$contracts,$the$Group$has$ ! to$ reverse$ the$ revenues$ recorded$ on$ these$ two$ contracts.$ The$ total$ amount$ is$ $95.0m$according$to$company$disclosures.$$ Weakness!evident!in!all!segments!of!ASL!Marine! Gross!margin!of!ASL! 35.0%$

30.0%$

25.0%$

20.0%$

15.0%$

10.0%$

5.0%$

0.0%$ FY2010A$

FY2011A$ Shipbuilding$

FY2012A$ Shiprepair$and$conversion$

FY2013A$ Shipchartering$

FY2014A$

1QFY15A$

Engineering$

Shipbuilding!revenue$regardless$of$the$revenue$reversals$are$sHll$weak$compared$to$ previous$ years$ with$ the$ excepHon$ of$ FY08,09.$ Even$ by$ excluding$ these$ reversals,$ shipbuilding$revenues$would$have$only$been$$5.8m,$a$hely$91%$ YoY$decrease.$The$ management$has$afributed$this$to$the$POC$method$of$revenue$recogniHon4$–$with$ most$projects$either$being$in$infancy$stage$or$at$its$final$stages.$We$foresee$the$woes$ of$ ASL$ to$ deepen$ even$ further$ with$ the$ possible$ reNnegoHaHon$ iniHated$ by$ customers$to$achieve$lower$prices$$for$exisHng$orders5.$

Ship! repair! and! conversion! also$ saw$ revenues$ dip$ by$ 21.3%$ YoY$ to$ $43.0m.$ The$ management$has$afributed$this$to$lesser$high$NAV$projects$being$completed$in$the$ quarter.$ However$ we$ have$ noted$ that$ ASL$ is$ experiencing$ margin$ compressions$ as$ well$ with$ gross$ margins$ Hghtening$ from$ 29.4%$ in$ FY13$ to$ 18.9%$ in$ FY14.$ Taking$ in$ account$ of$ the$ recent$ Q2FY15$ report$ release,$ we$ note$ that$ gross$ margins$ have$ decreased$even$further$to$13.0%.$ Engineering! was$ badly$ hit$ as$ well$ with$ revenue$ plunging$ 57.4%$ YoY$ to$ $9.5m$ from$ their$Q1FY15$report.$Gross$margins$were$lackluster$as$well,$decreasing$from$44.1%$in$ Q2FY14$ to$ only$ 18.0%$ in$ Q2FY15;$ signifying$ a$ 2.5x$ decrease.$ This$ is$ parHcularly$ worrying$given$the$engineering$segment$(from$the$VOSTA$LMG$business$acquired$in$ 2013)$has$stagnated$in$less$than$three$years$of$operaHon.$Furthermore$Management$ has$forecasted$the$dredging$market$to$remain$lukewarm.$$ Shipchartering! is$ the$ only$ saving$ grace$ for$ ASL,$ with$ revenues$ remaining$ stable,$ declining$ by$ just$ 2%$ to$ $17.7m.$ We$ afribute$ this$ to$ the$ higher$ uHlizaHon$ of$ OSVs$ created$ from$ the$ arHficial$ demand$ $ of$ oil$ traders,$ who$ seek$ to$ store$ their$ oil$ in$ expectaHon$of$a$higher$resale$value$in$the$future6.$Gross$margins$has$also$decreased$ sharply$in$Q1FY15$to$16.2%.,$mainly$due$to$a$higher$depreciaHon$expense$as$a$result$ of$a$higher$number$of$vessels$owned$through$their$BTS$programme$as$well$as$higher$ maintenance$and$operaHons$costs.$$$ Latest!filings!of!gross!margins!

40$ 20$ 0$ N20$ N40$

N60$

Comparison!against!peers! We$ compared$ ASL’s$ quarterly$ results$ against$ its$ peers$ in$ the$ offshore$ marine$ sector$ based$ upon$ a$ October$ to$ December$ calculaHon$ period.$ The$ g r o s s$ m a r g i n s$ a r e$ g r o s s l y$ underperforming$ as$ compared$ to$ its$ p e e r s .$ W e$ n o w$ p r o c e e d$ t o$ undercover$ the$ reasons$ for$ ASL’s$ growth$ decline$ and$ to$ establish$ our$ SELL$call$on$the$security.$$

N80$

Shrinking!CAPEX!environment!in!value!chain!troubled!with!oversupply! Shipbuilding!demand$ The$demand$side$for$shipbuilding$appears$to$look$bleak$as$the$2013/14$upturn$loses$ its$ momentum,$ mainly$ resulHng$ from$ the$ declining$ oil$ prices$ and$ sluggish$ growth$ from$China$and$OECD$economies7.$$ Capex!budgets!2015!vs!actual!capex!2014! (IOCs)! G14.00%!

Capex!budgets!2015!vs!actual!capex!2014! (NOCs)! G12.50%!

G13.00%!

G10.40%!

G10.90%!

G10.30%!

The$ falling$ offshore$ market$ has$ caused$ upstream$ companies$ to$ revise$ future$ 2015$ budgets$and$to$defer$or$renegoHate$orders$at$lower$prices5,$negaHvely$affecHng$ASL$ Marine$ Pte$ Ltd$ and$ companies$ alike.$ The$ capital$ expenditures$ cuts8$ is$ pervasive$ in$ both$ InternaHonal$ Oil$ Companies$ (IOCs)$ as$ well$ as$ Southeast$ Asian$ NaHonal$ Oil$ Companies$(NOCs).$This$does$not$bode$well$with$the$longNstanding$declines$in$global$ order$ books$ as$ well$ as$ declining$ secondNhand$ ship$ prices9$ –$ all$ factors$ puqng$ pressure$on$the$shipbuilding$business.$

SecondGhand!ship!prices!

Orderbook!amounts!

60$

20,000$ 18,000$ 16,000$ 14,000$ 12,000$ 10,000$ 8,000$ 6,000$ 4,000$ 2,000$ 0$ Mar!10! Mar!11! Mar!12! Mar!13! Mar!14! Mar!15!

USD$Million$

55$ 50$ 45$ 40$ 35$ 30$ Jan!12!

Jul!12!

Jan!13!

Jul!13!

AHT$5Nyear$

Jan!14!

Jul!14!

PSV$5Nyear$

Worldwide$

Asia$

Revised$and$renegoHated$values$of$contracts$in$Singapore$yards$potenHally$amounts$ to$ a$ disappoinHng$ USD3.7b5.$ This$ is$ a$ stark$ 49N58%$ dip$ from$ the$ total$ contracted$ SGD9N11b$that$the$market$was$expecHng,$posing$a$large$threat$to$shipbuilders$whom,$ by$its$nature,$are$reliant$on$backlog$momentum$to$keep$stock$prices$afloat.$$ Shipchartering!demand$ The$ above$ macroN$ and$ microNeconomic$ trends$ are$ affecHng$ the$ shipchartering$ business$ as$ well.$ We$ observe$ that$ day$ rates$ and$ day$ uHlizaHon$ rates$ at$ a$ dismal$ £25000N£30000$ day$ rates$ for$ AHTS$ and$ PSVs$ –$ and$ declining$ fast.$ Growth$ for$ the$ latest$recorded$quarter$Q4$2014$are$at$record$low$N9.00%.$ $ Quarterly!growth!for!charter!rates! $ AHTS$

2.00%$

PSV$

0.00%$ N2.00%$ N4.00%$ N6.00%$ N8.00%$ N10.00%$ Oct!13!

Jan!14!

Apr!14!

Jul!14!

Oct!14!

Jan!15!

Supply!glut!in!ship!producing$ Taking$ advantage$ of$ the$ low$ oil$ prices,$ shipbuilding$ companies$ themselves$ are$ stocking$ up$ fleet$ supply$ on$ their$ end.$ The$ orderbook/fleet$ raHo$ of$ many$ offshore$ equipment$stand$above$20%10$leading$to$more$than$5%$growth$per$annum$in$supply.$ This$is$dangerous$play$as$oversupply$will$lead$to$intensified$compeHHon$for$contracts$ in$the$shortNterm$future$as$the$market$will$take$Hme$to$absorb$supply.$$ Orderbook/fleet!raKo!of!offshore!equipment! AHTS$

10%$ 12%$ 12%$

Lilboat$ Semisub$ All$OSVs$ OSCV$

19%$ 22%$ 28%$ 28%$

All$rigs$ Jackups$

29%$

FPSO$ PSV$ AccommodaHon$

33%$ 46%$

Drillship$

65%$ 0%$

10%$

20%$

30%$

40%$

50%$

60%$

70%$

Coupled$with$the$declining$CAPEX$environment$for$its$buyers,$the$outlook$does$not$ seem$bright$for$the$shipbuilding$and$ship$chartering$industry.$$

Disadvantageous!credit!profle!! ASL’s$current$net$gearing$raHo$is$at$a$high$of$112%,$albeit$unchanged$when$compared$ to$the$end$of$FY14.$This$includes$the$issuance$of$bonds$from$its$MTN$debt$program$of$ $50m.$Although$the$earnings$from$this$scheme$was$used$to$cover$approximately$$30m$ in$shortNterm$loans$as$well$as$around$$20m$in$trust$receipt$financing.$This$as$compared$ to$a$92%$net$gearing$raHo$in$FY13.$$This$high$raHo,$we$believe,$is$due$to$ASL’s$business$ model$of$extending$afracHve$payment$terms$to$their$shipbuilding$customers$with$low$ down$ payment$ rates.$ This$ results$ in$ a$ much$ larger$ than$ needed$ financing$ scheme$ to$ support$the$iniHal$stages$of$construcHon$for$shipbuilding.$$ Total!Debt/OCF!against!peers!

ASL!gearing!raKo!

25$

2.00$

20$

1.80$ 1.60$

15$

1.40$

10$

1.20$

5$

1.00$ 0.80$

0$

0.60$ N5$

0.40$

N10$

0.20$ Q1$2013$Q2$2013$Q3$2013$Q4$2013$Q1$2014$Q2$2014$Q3$2014$ ASL$

YZJ$

COSCO$

SWIB$

KEP$

VALLIANZ$

0.00$ FY2010A$

OTTO$

FY2011A$

FY2012A$ FY2013A$

FY2014A$

We$are$criHcal$of$ASL’s$debt$structure$and$its$ability$to$issue$payments$for$them.$Based$ on$net$debt/EBITA$raHo,$ASL$is$in$a$peculiar$posiHon$with$a$high$mulHple$of$9.8x$in$its$ latest$H1FY15$results.$This$as$compared$to$a$value$of$6.4x$could$prove$challenging$for$ ASL$in$the$near$future$in$its$credit$raHng$and$debt$borrowing.$$ Poor!management!! Undercut!by!China!suppliers! China$is$the$main$driver$of$growth$in$the$Asia$Pacific$region.$As$it$is$compeHng$with$ASL$ when$it$comes$to$producing$small$AHTS,$ASL$runs$the$risk$of$being$undercut$by$these$ bigger$players$who$are$offering$a$more$afracHve$payment$structure13.$The$probability$ of$ this$ occurring$ is$ high,$ and$ impact$ would$ be$ high$ given$ that$ shipbuilding$ takes$ up$ about$60%$of$total$revenues$on$average.$$ OSV!Newbuildings!by!country! AHTS!4!G!7.999!BHP! AHTS!8!G!9,999!BHP! AHTS!10!G!15,999!BHP! AHTS!16!G!19,999! AHTS!20,000+!BHP!

Brazil! 0$ 0$ 0$ 0$ 3$

China! 74$ 3$ 3$ 2$ 1$

India! 2$ 0$ 0$ 0$ 2$

Indonesia! 15$ 1$ 8$ 0$ 0$

Malaysia! 7$ 0$ 1$ 0$ 0$

Norway! 0$ 0$ 0$ 0$ 4$

Singapore! 8$ 1$ 1$ 7$ 0$

United!States! 0$ 0$ 1$ 3$ 1$

Others! 8$ 0$ 4$ 1$ 2$

Total! 114$ 5$ 18$ 13$ 13$

AHTS!Total!

3$

83$

4$

24$

8$

4$

17$

5$

15$

163$

PSV!...