20082311526187

Please read carefully the important disclosures at the end of this publication.

SECTOR UPDATE

6 August 2008

UNDERWEIGHT Maintained Bulk and Tanker Shipping

Is the party over?

REG

ION

AL

PP14048/11/2008(006841) Raymond Yap CFA - [email protected] / David Y.K. Lee – [email protected] MICA (P) 006/03/2008

Bulk and Tanker Shipping – 6 August 2008 [ 2 ]

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


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 China’s slowing GDP expansion. The shortage of coking coal is also constraining growth in steel production, which could affect the pace of China’s 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 TTA’s 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 year’s rates only moderately lower from this year’s 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 Target Core 3-yr EPS P/BV ROE Div Bloomberg Price price Mkt cap P/E (x) CAGR (x) (%) yield (%) ticker Recom. (Local) (Local) (US$ m) CY2008 CY2009 (%) CY2008 CY2008 CY2008 STX Pan Ocean STX SP U 2.50 2.06 3,750 3.9 6.1 (14.7) 1.3 41.7 1.3 Pacific Basin 2343 HK U 10.80 8.33 2,415 4.1 6.2 (10.8) 1.6 51.5 13.8 TTA TTA TB U 37.75 36.00 726 3.0 4.9 (15.4) 1.1 41.0 8.4 Precious Shipping PSL TB O 19.60 26.00 608 4.1 4.1 (1.8) 1.2 32.3 12.8 Maybulk MBC MK U 3.68 3.00 1,126 7.0 10.4 (18.1) 1.9 42.8 18.4 MISC MISC MK N 8.85 10.00 10,074 15.0 14.8 3.3 1.7 11.9 5.3 Simple average 6.2 7.8 (9.4) 1.5 36.9 9.9 O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy and TS = Trading Sell Source: Company, CIMB/CIMB-GK Research


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.

Sell aggressively into post-Olympic rebound

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.

Demand under pressure from raw material shortages

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 country’s 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 Chalco’s 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.

Staggering conversion orderbook

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.

Baltic Dry Index revisions 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.

Derating catalysts 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.


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 single-hull 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 world’s 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 long-term 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.

Strong Middle East output growth to increase demand for tankers

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.

Baltic Dirty Tanker Index revisions

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.


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 most common type

What are conversions? A conversion involves turning one type of vessel into 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 By DWT

Tanker to Bulker 61

SH to DH Tanker 34

Tanker to FPSO /

Heavy Lift 38

Tanker to Bulker

14,494,259

SH to DH Tanker

3,299,635

Tanker to FPSO /

Heavy Lift 5,437,069

Source: Worldyards, CIMB/CIMB-GK Research

Capesize displacement could pressure rates globally

The deployment of VLOCs would displace capes out of Brazil-China ore trades.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.


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.

Tanker sales and purchase reports provide clues

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.

The trickle of conversions will turn into a torrent

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 No of vessels DWT No of vessels DWT No of vessels DWT1H08 7 1,132,854 5 1,013,549 1 57,1532H08 36 7,718,013 30 7,131,487 7 648,678

2008 43 8,850,867 35 8,145,036 8 705,8312009 26 4,669,410 17 3,875,808 9 793,6022010 3 607,551 2 484,942 1 122,609Total (2008-2010) 72 14,127,828 54 12,505,786 18 1,622,042

Total bulk Capesize/VLOC (> 100k dwt) Panamax (60-100k dwt)

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

No of vessels DWT Growth (%) - hohEnd 2007 6,691 392,560,000

+ Deliveries (1H08) 144 9,987,146+ Conversions (1H08) 7 1,132,854- Scrapping (1H08) 0 0

End Jun 2008 6,842 403,680,000 2.8%+ Deliveries (2H08) 267 18,196,004+ Conversions (2H08) 36 7,718,013- Scrapping (2H08) 0 0

End Dec 2008 7,145 429,594,017 6.4%+ 2009 deliveries 792 62,125,705+ 2009 conversions 26 4,669,410- 2009 scrapping -268 -11,530,000

End 2009F 7,695 484,859,132+ 2010 deliveries 1,066 100,695,742+2010 conversions 3 607,551- 2010 scrapping -403 -17,295,000

End 2010F 8,361 568,867,425

Aggregate dry bulk fleet

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


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

No of ships DWT No of ships DWT No of ships DWTDelivery 2008 57 13,437,133 38 8,573,515 19 4,863,618Delivery 2009 4 1,057,126 4 1,057,126 0 0Total 61 14,494,259 42 9,630,641 19 4,863,618

TOTAL Confirmed Not confirmed


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) 45Cost of conversion to VLOC (US$ m) 40Total capital cost (US$ m) 85

Vessel operating cost (US$/day) 8,000Bunker cost (US$/tonne) 714

Calculation of scrap valueTotal LDT 31,000Scrap value/LDT (US$) 500Scrap value (US$ m) 15.5Remaining useful life (no of years) 10

Calculation of WACCDebt financing percentage (%) 80%Interest rate (%) 5%Equity financing percentage (%) 20%Cost of equity (%) 12%WACC (%) 6.4%

Source: Poten and Partners, Clarkson Research Services, DNV, STX Pan Ocean, Mercator Lines, CIMB/CIMB-GK Research


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

Discounted Cash Flow 0 1 2 3 4 5 6 7 8 9 10Capital cost (US$ m) -85.0 - - - - - - - - - - Scrap value (US$ m) - - - - - - - - - - 15.5TCE earnings p.a. (US$ m) - 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8Vessel operating costs p.a. (US$ m) - -2.9 -2.9 -2.9 -2.9 -2.9 -2.9 -2.9 -2.9 -2.9 -2.9Total cash flow (US$ m) -85.0 10.9 10.9 10.9 10.9 10.9 10.9 10.9 10.9 10.9 26.4

WACC (%) 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4%PVF 1.00 0.94 0.88 0.82 0.77 0.72 0.67 0.63 0.59 0.55 0.52Discounted cash flow (US$ m) -85.0 10.2 9.5 8.9 8.4 7.8 7.3 6.8 6.4 6.0 13.6NPV (US$ m) 0.0

TCE earnings p.a. (US$ m) 13.8TCE earnings (US$/day) 39,431 Breakeven in 10 years


VLOC can reduce Brazilian iron ore costs by around 30% compared to capesize

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.

Conversions will continue until current capesize spot rates fall 65%

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 5-yr b/eTCE Spot rate Spot rateBrazil-China Brazil-China Brazil-China Aust-China

Brazil to China VLOC VLOC Capesize CapesizeSize (dwt) a 250,000 250,000 165,000 167,500TCE rate (US$/day) b 39,431 59,590 210,978 129,119Charter costs p.a. (US$ m) c = b x 350 13.8 20.9 73.8 45.2No of trips/year d 4 4 6 12Total cargo carried p.a. e = a x d 1,000,000 1,000,000 990,000 2,010,000Freight cost (US$/tonne) - ex bunker f = c / e 13.8 20.9 74.6 22.5Add: Bunker cost (US$/tonne) g 17.0 17.0 12.4 8.5Current freight cost (US$/tonne) h = f + g 30.8 37.8 87.0 31.0

Fob cost of iron ore (US cents/dmtu) p 118.98 118.98 118.98 144.66Fe content (assumed) q 67% 67% 67% 62%Fob cost of iron ore (US$/tonne) r = p x q 79.7 79.7 79.7 89.7

Cfr price to Chinese buyer (US$/tonne) s = h + r 110.5 117.6 166.7 120.7



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

Share (%)No of ships Total DWT No of ships Total DWT

Chinese yards 1,187 103,467,281 40.5% 40.2%Japanese yards 835 73,355,949 28.5% 28.5%Korean yards 546 56,217,480 18.6% 21.9%Other yards 361 24,031,749 12.3% 9.3%Total bulk orderbook 2,929 257,072,459 100.0% 100.0%


Shipyard delays won’t 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 2010Total DWT Total DWT

Scheduled deliveries from Chinese yards A 23,054,633 40,543,410Delivery delays required to bring market balance B 36,902,129 77,430,489Difference B - A 13,847,496 36,887,079


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


Delivery delays required to bring market balance A 36,902,129 77,430,489

Original delivery schedule x 23,054,633 40,543,410Revised schedule on six month delay y 12,780,171 34,478,030Delays B = x - y 10,274,462 6,065,380

Remaining oversupply A - B 26,627,667 71,365,109



Figure 11: Six-month delay scenario for national yards and 50% failure rate for private yards


Delivery delays required to bring market balance A 36,902,129 77,430,489

Original delivery schedule x 23,054,633 40,543,410Revised schedule on this scenario y 10,022,498 26,703,155Delays B = x - y 13,032,135 13,840,255

Remaining oversupply A - B 23,869,994 63,590,234


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. National yards should perform well

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

No of ships Total DWT 2H08 2009 2010 2011National 598 62,207,605 2,700,465 12,235,650 22,930,590 18,776,300Private 589 41,259,676 2,612,203 10,818,983 17,612,820 9,143,120Total 1,187 103,467,281 5,312,668 23,054,633 40,543,410 27,919,420

Share (%)National 50.4% 60.1% 50.8% 53.1% 56.6% 67.3%Private 49.6% 39.9% 49.2% 46.9% 43.4% 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 yardswhich 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 China’s 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.


Figure 13: Greenfield yards’ bulk orderbook and delivery schedule

2009 2010 2011Shipyard Ownership DWT DWT DWTZhoushan Jinhaiwan Private 1,744,000 2,080,000 832,000COSCO National 1,738,000 2,015,800 733,800Samjin Shipbuilding Private 402,000 435,500 167,500Jiangnan Changxing Shipbuilding National (CSSC) 354,000 1,416,000 0Penglai Zhongbai Private 300,800 902,400 0Guangzhou Longxue National (CSSC) 230,000 690,000 1,840,000Shandong Huahai Private 186,500 0 0Fujian Guanhai Private 179,300 259,600 226,600Zhejiang Zhenghe Private 156,000 33,000 0Nantong Changqingsha Private 140,800 140,800 140,800Nantong Daoda Heavy Private 137,600 66,400 0Wuhan Huaxia Private 116,800 116,800 0Wuhu Shipyard (Chery) Private 90,000 0 0Yangzhou Guoyu Private 90,000 228,000 228,000Nantong Huigang Private 67,300 201,900 0Jiangsu Xiangshui Private 57,000 171,000 0Zhejiang Jiantiao Private 55,303 0 0Shandong Baibuting Private 34,000 59,300 46,100Nanjing Dongze Private 32,500 0 0Jiangnan Changxing Heavy National (CSSC) 0 920,000 2,030,500

6,111,903 9,736,500 6,245,300

Total Chinese yards' bulk orderbook 23,054,633 40,543,410 27,919,420Greenfield yards' share (%) 26.5% 24.0% 22.4%


Minimal cancellations or failures

Cancellations of current year orders unlikely

Cancellation of current year orders unlikely as capital has been committed by owners. In a Marine Money conference held in early March, some observers 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.


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 canredeploy vessels to South America, Africa or Asia where port restrictions less severe. Meanwhile, according to Lloyd’s 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 five-year 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

4,094,094

330,373942,290

1,837,221

392,8450

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

2003 2004 2005 2006 2007 1H08

0

20

40

60

80

100

120Total DWT (LHS) No of ships (RHS)

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 lion’s 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.


Figure 15: Ageing profile of bulk carriers by age category (dwt)

More than 20 years old 10-19 years old

115.2

47.7

18.1 24.1 25.4

0

20

40

60

80

100

120

140

All Bulkers Handysize Handymax Panamax Capesize

108.3

12.421.0

29.8

45.2

0

20

40

60

80

100

120


5-9 years old 0-4 years old

71.7

7.916.8

25.0 21.9

0

10

20

30

40

50

60

70

80


108.5

9.2

23.632.3

43.4

0

20

40

60

80

100

120



Figure 16: Ageing profile of bulk carriers by ship category (% of dwt)

Handysize Handymax

> 20 years 61.8%

5 - 9 years 10.2%

0 - 4 years 11.9%

10 - 14 years 11.7%

15 - 19 years 4.4%

5 - 9 years 21.1%

> 20 years 22.8%

15 - 19 years 6.3%

10 - 14 years 20.1%

0 - 4 years 29.7%

Panamax Capesize

5 - 9 years 22.5%

0 - 4 years 29.0%

10 - 14 years 19.7%

15 - 19 years 7.1%

> 20 years 21.7%

5 - 9 years 16.1%

> 20 years 18.7%

15 - 19 years 13.1%

10 - 14 years 20.2%

0 - 4 years 31.9%



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 Handymax

0.00.51.01.52.02.53.03.54.0

2007 2008F 2009F 2010F

Mill

ions

0%

1%

2%

3%

4%

5%Handy size tonnage grow th (dw t)Grow th (%)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2007 2008F 2009F 2010FM

illio

ns0%2%4%6%8%10%12%14%16%18%Handy max tonnage grow th (dw t)

Grow th (%)

Panamax Capesize

0.02.04.06.08.0

10.012.014.016.018.0

2007 2008F 2009F 2010F

Mill

ions

0%

2%

4%

6%

8%

10%

12%

14%Panamax tonnage grow th (dw t)Grow th (%)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2007 2008F 2009F 2010F

Mill

ions

0%

5%

10%

15%

20%

25%

30%

35%Capesize tonnage grow th (dw t)Grow th (%)


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.

Slowing Chinese economic growth

Economic growth in China has slowed down for two consecutive quarters.China’s 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 China’s 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, China’s demand for commodities is likely to moderate, in line with reduced demand for manufactured goods. China’s 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


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: China’s GDP growth (%)

11.9%

10.6%

10.1%

6%

7%

8%

9%

10%

11%

12%

1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08

Source: CEIC, CIMB/CIMB-GK Research

Iron ore import growth could slow if demand for industrial or machinery steel also slow

Pace of iron ore import growth potentially at risk. Fixed asset investment growth of 26.8% yoy in 1H08 and a 22.7% yoy expansion in floor space under construction suggest that demand for steel from the China’s 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. China’s 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: China’s fixed asset investment (Rmb bn)

20%

22%

24%

26%

28%

30%

32%

J06

F M A M J J A S O C D J07

F M A M J J A S O C D J08

F M A M J02004006008001,0001,2001,4001,6001,8002,000FAI (RMB bn, RHS) FAI: YTD (%YoY, LHS)



Figure 20: China’s floor space under construction (million square metres)

0500

1,0001,5002,0002,5003,0003,5004,0004,500

J04

F M A M J J A S O N D J05




F M A M J0%

5%

10%

15%

20%

25%

30%

35%Floor space under construction - ytd (m sq m) Growth (%)


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 China’s steel production growth to just 10% yoy in 1H08, against 20% yoy in 1H07 and 15.8% yoy for 2007 (Figure 21). The country’s 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 Chalco’s aluminium smelting facilities in Shanxi. China’s 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: China’s steel production

10,000

20,000

30,000

40,000

50,000

J03

FMAMJ J ASOND J04

FMAMJ J ASOND J05

FMAMJ J ASOND J06

FMAMJ J ASOND J07

FMAMJ J ASOND J08

FMAMJ5%

15%

25%

35%China's steel production (000 mt) YTD growth (RHS)


Figure 22: China’s coke production

15,000

17,500

20,000

22,500

25,000

27,500

30,000

J05




F M A M J0%

10%

20%

30%

40%Coke production (000 tonnes) Growth (%)



Figure 23: China’s electricity production

100

150

200

250

300

J03

FMAM J J ASOND J04

FMAM J J ASOND J05

FMAM J J ASOND J06

FMAMJ J ASOND J07

FMAM J J ASOND J08

FMAM J0%

10%

20%

30%Electricity production (bn kwh) Growth (%)



Figure 24: Crude steel production and consumption (m tonnes) 2005A 2006A 2007A 2008F 2009F 2010F 2011F 2012F 2013FCrude steel 1,126 1,239 1,322 1,398 1,474 1,543 1,616 1,692 1,769consumptionEU27 182 213 218 222 223 224 224 224 225United States 113 129 123 123 125 127 128 129 129Brazil 19 21 22 23 24 25 26 28 29Russia 36 43 46 50 53 57 61 64 67China 350 384 438 482 528 570 616 665 715Japan 83 83 83 84 84 84 84 84 85Korea 49 52 53 56 58 60 62 64 67Taiwan 24 24 25 25 27 28 29 30 30India 41 49 54 59 65 70 76 81 87Others 229 241 260 274 287 298 310 323 335

Change +113 +83 +76 +76 +69 +73 +76 +77EU27 +31 +5 +4 +1 +1 +0 +0 +1United States +16 -6 +0 +2 +2 +1 +1 +0Brazil +2 +1 +1 +1 +1 +1 +2 +1Russia +7 +3 +4 +3 +4 +4 +3 +3China +34 +54 +44 +46 +42 +46 +49 +50Japan +0 +0 +1 +0 +0 +0 +0 +1Korea +3 +1 +3 +2 +2 +2 +2 +3Taiwan +0 +1 +0 +2 +1 +1 +1 +0India +8 +5 +5 +6 +5 +6 +5 +6Others +12 +19 +14 +13 +11 +12 +13 +12

(m tonnes) 2005A 2006A 2007A 2008F 2009F 2010F 2011F 2012F 2013FCrude steel 1,140 1,250 1,344 1,415 1,492 1,554 1,626 1,700 1,779productionEU27 196 207 211 214 216 216 217 218 220United States 95 99 97 100 101 99 100 100 101Brazil 32 31 34 35 37 39 41 43 45Russia 66 71 72 76 80 81 84 88 91China 356 423 489 533 586 633 684 735 790Japan 112 116 120 121 121 121 122 122 122Korea 48 48 51 53 54 55 56 57 58Taiwan 19 20 21 21 22 22 23 23 24India 38 49 53 57 61 66 71 76 81Others 178 186 196 205 214 222 228 238 247

Change +110 +94 +71 +77 +62 +72 +74 +79EU27 +11 +4 +3 +2 +0 +1 +1 +2United States +4 -2 +3 +1 -2 +1 +0 +1Brazil -1 +3 +1 +2 +2 +2 +2 +2Russia +5 +1 +4 +4 +1 +3 +4 +3China +67 +66 +44 +53 +47 +51 +51 +55Japan +4 +4 +1 +0 +0 +1 +0 +0Korea +0 +3 +2 +1 +1 +1 +1 +1Taiwan +1 +1 +0 +1 +0 +1 +0 +1India +11 +4 +4 +4 +5 +5 +5 +5Others +8 +10 +9 +9 +8 +6 +10 +9

Excess of production +14 +11 +22 +17 +18 +11 +10 +8 +10over consumption

Source: ABARE, CIMB/CIMB-GK estimates

ABARE revised down China’s 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 China’s 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 China’s steel mills, there is a growing possibility that China may not be able to absorb this year’s record mining production increases from Rio Tinto, BHP Billiton, Fortescue Metals Group and Vale.


The Australian Bureau of Agricultural and Resource Economics (ABARE) in its Jun quarter report on Australian commodities revised down China’s 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 China’s 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-than-expected domestic iron ore production. China’s 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) 2005A 2006A 2007A 2008F 2009F 2010F 2011F 2012F 2013FIron ore imports 744 765 835 924 999 1,069 1,148 1,227 1,310EU27 160 170 174 177 179 179 180 180 182Japan 132 134 139 143 143 144 145 146 147China 275 326 384 435 487 555 617 684 761Korea 43 44 44 48 49 49 50 51 52Taiwan 15 15 16 16 16 17 17 18 18Others 119 76 78 105 125 125 139 148 150

Change in imports +21 +70 +89 +75 +70 +79 +79 +83EU27 +10 +4 +3 +2 +0 +1 +0 +2Japan +2 +5 +4 +0 +1 +1 +1 +1China +51 +58 +51 +52 +68 +62 +67 +77Korea +1 +0 +4 +1 +0 +1 +1 +1Taiwan +0 +1 +0 +0 +1 +0 +1 +0Others -43 +2 +27 +20 +0 +14 +9 +2

(m tonnes) 2005A 2006A 2007A 2008F 2009F 2010F 2011F 2012F 2013FIron ore exports 744 765 835 924 999 1,069 1,148 1,227 1,310Australia 239 247 267 328 377 389 432 471 506Brazil 223 247 269 306 345 395 432 468 502India 81 86 93 100 94 89 89 88 88Canada 28 28 28 30 30 30 31 32 33South Africa 27 27 32 35 39 42 43 45 46Sweden 18 18 20 22 24 25 26 28 29Others 128 112 126 103 90 99 95 95 106

Change in exports +21 +70 +89 +75 +70 +79 +79 +83Australia +8 +20 +61 +49 +12 +43 +39 +35Brazil +24 +22 +37 +39 +50 +37 +36 +34India +5 +7 +7 -6 -5 +0 -1 +0Canada +0 +0 +2 +0 +0 +1 +1 +1South Africa +0 +5 +3 +4 +3 +1 +2 +1


Figure 26: China’s iron ore production (million tonnes)

15,000

25,000

35,000

45,000

55,000

65,000

75,000

85,000

J05




F M A M J0%

10%

20%

30%

40%

50%

60%

70%Iron ore production (000 tonnes) Growth (%)



Iron ore inventories remain high

China’s 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 China’s iron ore imports could weaken in August and September, and may not see rebound until 4Q08.

Figure 27: China’s iron ore inventories at various ports vs. monthly steel production

30,000

40,000

50,000

60,000

70,000

80,000

J06

A S O N D J07


F M A M J J-1W

J-2W

J-3W

J-4W

A-1W

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60Iron ore inventories (000 tonnes)

Inventory:Monthly Steel Production

Source: Bloomberg, CIMB/CIMB-GK Research

Note: The last three readings are weekly data for the month of July

Figure 28: China’s iron ore imports (million tonnes)

15,000

20,000

25,000

30,000

35,000

40,000

45,000

J05




F M A M J-10%

0%

10%

20%

30%

40%

50%Iron ore imports (000 tonnes) Growth (%)


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 Queensland’s 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.


Figure 29: Coking coal trade (m tonnes) 2005A 2006A 2007A 2008F 2009F 2010F 2011F 2012F 2013FCoking coal imports 206 219 229 236 253 248 258 270 280EU27 51 53 55 57 58 59 60 62 64Japan 63 60 64 65 65 66 66 66 67China 7 9 10 12 13 15 16 17 18Korea 21 20 22 22 23 23 23 23 24Taiwan 5 6 7 7 7 7 7 7 7India 20 19 22 25 29 30 32 35 37Brazil 15 13 15 16 17 18 19 20 21Others 24 39 34 32 41 30 35 40 42

Change in imports +13 +10 +7 +17 -5 +10 +12 +10EU27 +2 +2 +2 +1 +1 +1 +2 +2Japan -3 +4 +1 +0 +1 +0 +0 +1China +2 +1 +2 +1 +2 +1 +1 +1Korea -1 +2 +0 +1 +0 +0 +0 +1Taiwan +1 +1 +0 +0 +0 +0 +0 +0India -1 +3 +3 +4 +1 +2 +3 +2Brazil -2 +2 +1 +1 +1 +1 +1 +1

(m tonnes) 2005A 2006A 2007A 2008F 2009F 2010F 2011F 2012F 2013FCoking coal exports 206 219 229 236 253 248 258 270 280Australia 125 124 138 135 149 146 153 163 173Canada 26 25 27 29 31 26 27 28 29United States 26 25 29 32 35 30 30 31 31Russia 12 10 13 15 16 16 17 19 21Others 17 35 22 25 22 30 31 29 26

Change in exports +13 +10 +7 +17 -5 +10 +12 +10Australia -1 +14 -3 +14 -3 +7 +10 +10Canada -1 +2 +2 +2 -5 +1 +1 +1United States -1 +4 +3 +3 -5 +0 +1 +0Russia -2 +3 +2 +1 +0 +1 +2 +2Others +18 -13 +3 -3 +8 +1 -2 -3


Thermal coal trade driven by Indonesian output

Growth in steam coal trade to continue with strong Indonesian production. 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 India’s 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 China’s exports could fall 4m tonnes or 8%. Weaker Chinese exports and stronger Indonesian exports will contribute to higher tonne mile demand.


Figure 30: Thermal coal trade (m tonnes) 2006A 2007A 2008F 2009F 2010F 2011F 2012F 2013FThermal coal imports 635 683 705 731 737 752 769 792EU27 181 173 171 174 173 174 174 174Japan 118 124 131 132 123 123 124 124Korea 60 67 75 80 78 78 79 83Taiwan 58 60 63 64 65 65 66 68China 34 45 41 43 56 59 62 65India 24 29 33 39 47 52 60 70Others 162 186 191 199 196 200 204 208

Change in imports +48 +22 +26 +6 +15 +17 +24EU27 -8 -2 +2 -1 +1 +0 +0Japan +6 +7 +1 -9 +0 +0 +0Korea +7 +8 +5 -3 +1 +1 +4Taiwan +3 +3 +1 +1 +1 +1 +2China +11 -4 +2 +13 +3 +3 +3India +5 +4 +6 +8 +5 +8 +10Others +24 +5 +8 -3 +4 +4 +4

(m tonnes) 2006A 2007A 2008F 2009F 2010F 2011F 2012F 2013FThermal coal exports 635 683 705 731 737 752 769 792Australia 112 112 120 125 135 155 165 172China 59 51 47 40 31 29 27 25Columbia 60 65 69 73 78 83 88 93Indonesia 170 188 203 217 215 222 229 232Russia 77 75 72 73 79 80 81 82South Africa 68 68 67 69 78 81 83 85United States 20 24 26 26 24 23 22 22Others 70 101 101 108 97 79 73 81

Change in exports +48 +22 +26 +6 +15 +17 +24Australia +1 +8 +5 +10 +20 +10 +7China -8 -4 -7 -9 -2 -2 -2Columbia +5 +4 +4 +5 +5 +5 +5Indonesia +18 +15 +14 -2 +7 +7 +3Russia -2 -3 +1 +6 +1 +1 +1South Africa +0 -1 +2 +9 +3 +2 +2United States +4 +2 +0 -2 -1 -1 -1Others +31 -0 +7 -11 -18 -6 +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.


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

3,000

1,145

2,639

4,505

3,378 3,188

7,076

8,500

6,000

20%122%

71% -50%-29%130% -25% -6%

01,0002,0003,0004,0005,0006,0007,0008,0009,000

2002 2003 2004 2005 2006 2007 2008F 2009F 2010F


Figure 32: Baltic Dry Index

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FMAMJ J ASOND J04

FMAMJ J ASOND J05

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FMAMJ J A

Baltic Dry Index Quarterly average


Figure 33: Baltic Capesize, Panamax, Supramax and Handysize indices

0

5,000

10,000

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20,000

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FMAMJ J ASOND J04

FMAMJ J ASOND J05

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FMAM J J ASOND J07

FMAMJ J ASOND J08

FMAMJ J

Baltic Capesize IndexBaltic Panamax IndexBaltic Supramax IndexBaltic Handysize Index



Figure 34: Capesize Time Charter Equivalent Rates (US$/day) – Tubarao, Brazil to Beilun, China

0

50,000

100,000

150,000

200,000

250,000

1Q03

2Q 3Q 4Q 1Q04

2Q 3Q 4Q 1Q05

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2Q 3Q 4Q 1Q07

2Q 3Q 4Q 1Q08

2Q 3QQTD

-100%

0%

100%

200%

300%

400%

500%Capesize ore (Tubarao-Beilun) Growth (%)


Figure 35: Panamax Time Charter Equivalent Rates (US$/day) – Newcastle, Australia to Japan

0

20,000

40,000

60,000

80,000

100,000

1Q03

2Q 3Q 4Q 1Q04

2Q 3Q 4Q 1Q05

2Q 3Q 4Q 1Q06

2Q 3Q 4Q 1Q07

2Q 3Q 4Q 1Q08

2Q 3QQTD

-100%

0%

100%

200%

300%

400%

500%

600%Panamax coal (Newcastle-Japan) Growth (%)


Figure 36: Share prices against the Baltic Dry Index

Precious Shipping vs. BDI Thoresen Thai Agencies vs. BDI

1,0003,0005,0007,0009,000

11,00013,000

J06

FMAMJ JASOND J07

FMAMJ J ASONDJ08

FMAMJ JA

0510152025303540

Baltic Dry IndexPSL TB Equity

1,0003,0005,0007,0009,000

11,00013,000

J06

FMAMJ JASOND J07

FMAMJ J ASONDJ08

FMAMJ JA

010203040506070

Baltic Dry IndexTTA TB Equity

Malaysian Bulk Carriers vs. BDI STX Pan Ocean vs. BDI

1,0003,0005,0007,0009,000

11,00013,000

J06

FMAMJJASONDJ07

FMAMJ JASONDJ08

FMAMJJA

0.001.002.003.004.005.006.00

Baltic Dry IndexMBC MK Equity

1,0003,0005,0007,000

9,00011,00013,000

J06

FMAMJJASONDJ07

FMAMJJASONDJ08

FMAMJJA

0.00

1.00

2.00

3.00

4.00

5.00Baltic Dry IndexSTX SP Equity


Pacific Basin vs. BDI China Shipping Development vs. BDI

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J06

FMAMJ JASONDJ07

FMAMJ JASONDJ08

FMAMJ JA

0.00

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10.00

15.00

20.00Baltic Dry Index2343 HK Equity

1,000

3,0005,000

7,000

9,00011,000

13,000

J06

FMAMJ JASONDJ07

FMAMJJASONDJ08

FMAMJJA

0.00

5.0010.00

15.00

20.0025.00

30.00Baltic Dry Index1138 HK Equity


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.

Yards may delay on conversion jobs

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.

FMG output to kick in second half 2008

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 second half 2008

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.


Figure 37: Supply-demand balance in the dry bulk sector

Trade growth (m mt) m mt yoy % m mt yoy % m mt yoy % m mt yoy %Iron ore 37 7.7% 79 15.3% 65 10.9% 61 9.1%Coking coal 6 3.5% 1 0.6% 2 1.1% 8 0.5%Steam coal 46 11.3% 21 4.6% 24 5.1% 46 4.2%Grain -6 -2.2% 10 3.8% -3 -1.1% 20 3.7%Minor bulk (incl. alumina/bauxite/phosphate) 37 4.2% 138 5.9% 17 1.6% 61 1.6%Bulk demand growth 120 5.4% 249 7.1% 105 4.2% 196 4.2%

Fleet at year-end (m dwt)m dwt yoy % m dwt yoy % m dwt yoy % m dwt yoy %

Handysize 71.2 -1.2% 72.6 2.0% 73.6 1.4% 73.9 0.4%Handymax 57.3 5.1% 61.2 6.8% 66.6 8.8% 71.3 7.1%Panamax inc Combo 82.8 1.4% 89.1 7.6% 96.1 7.9% 103.8 8.0%Capesize inc Combo 98.2 4.5% 105.6 7.5% 114.1 8.0% 124.1 8.8%Available vessels 309.5 2.4% 328.5 6.1% 350.4 6.7% 373.1 6.5%

Average fleet capacity (m dwt) 305.8 4.5% 319.0 4.3% 339.5 6.4% 361.8 6.6%

Panamax-vessel equivalent growth 2003 2004 2005 2006(number of ships)Demand growth 364 755 318 594Supply growth 168 203 315 343Change in Supply-Demand balance -196 -551 -4 -251Freight rates stronger… stronger… softer… softer…Average change in Baltic Dry Index (%) +130.4% +70.7% -25.0% -5.6%

Notes:1. Supply and demand growth is in terms of Panamax equivalents2. Demand growth = trade growth converted into Panamax vessels based on: 55,000t cargoes x 6 trips a year3. 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: Clarkson2003 2004 2005 2006

Source: Clarkson Source: Clarkson Source: Clarkson

2003 2004 2005 2006

Trade growth (m mt) m mt yoy % m mt yoy % m mt yoy % m mt yoy %Iron ore 65 9.0% 90 11.4% 92 10.5% 98 10.1%Coking coal 14 7.4% 7 3.4% 12 5.5% 11 5.0%Steam coal 22 4.0% 22 3.9% 29 5.0% 6 1.0%Grain 3 1.0% 7 2.4% 11 3.7% 13 4.3%Minor bulk (incl. alumina/bauxite/phosphate) 54 4.9% 41 3.6% 40 3.4% 41 3.4%Bulk demand growth 158 5.6% 167 5.6% 184 5.8% 170 5.1%

Fleet at year-end (m dwt)m dwt yoy % m dwt yoy % m dwt yoy % m dwt yoy %

Handysize 76.0 2.8% 79.5 4.7% 81.9 3.0% 82.2 0.4%Handymax 76.9 7.9% 85.1 10.7% 98.3 15.4% 110.4 12.3%Panamax inc Combo 108.3 4.3% 116.7 7.8% 126.2 8.2% 142.1 12.6%Capesize inc Combo 131.4 5.9% 148.3 12.8% 178.5 20.4% 234.2 31.2%Available vessels 392.6 5.2% 429.6 9.4% 484.9 12.9% 568.9 17.3%

Average fleet capacity (m dwt) 382.8 5.8% 411.1 7.4% 457.2 11.2% 526.9 15.2%Effective capacity (m dwt) 367.5 1.6% 398.7 8.5% 448.1 12.4% 521.6 16.4%

Panamax-vessel equivalent growth 2007 2008F 2009F 2010F(number of ships)Demand growth 479 506 558 515Supply growth 89 480 759 1,131Change in Supply-Demand balance -390 -26 201 616Freight rates stronger stronger softer? softer?Average change in Baltic Dry Index (%) 122.0% 0.0% 0.0% 0.0%

Source: CIMB forecast2007 2008F 2009F 2010F

Source: Ciarkson Source: CIMB forecast Source: CIMB forecast

2007 2008F 2009F 2010F

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


Figure 38: Selected events in the dry bulk sector

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F M A M J J A

Baltic Dry Index

Quarterly av erage

Sep 06Australian coal miners decide to abandon the capacity balancing sy stem, w hich increased v esel queues off New castle.

Feb 07Vesel queues off New castle rise to 73 ships

May 07Vesel queues off New castle fall to 56 after Aussie miners decide to reimpose ex port quotas, but rises back to 74 in Jun due to storms.

1Q03China'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

4Q04China's economic grow th breaches the 10% mark in 4Q04 and stay s around those lev els for the nex t six quarters

1Q07China's GDP grow th breaches 11%

4Q05China's steel mills slow dow n import of iron ore in order to influence on-going price negotiations, causing BDI to remain w eak until May 06

May 06China's steel mills return to buy iron ore after reluctantly agreeingto a 19.5% price hike for iron orefor the Apr 06 - Mar 07 period. This is the key ev ent that marked the start of the BDI rally .

1H04BDI corrects ov er fears about China's macroeconomic tightening measures and w hether it w ill cause hard landing

2005BDI trends low er all through 2005 as demand for commoditiesmoderate from 2004 lev els, and v essel deliv eries accelerateAug 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.

Dec 06China's Baosteel agrees to a 9.5% price hike for iron ore for the Apr 07 - Mar 08 period.

Feb 05Nippon 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.

Jan 07China becomes a net importer of coal for the first time

Dec 07 - Jan 08Vale 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 08Steel mills agree w ith Vale for 65% increase in iron ore contract price. China begins stockpiling iron ore.

May 08China raises port charges for storage of iron ore. China orders steel mills in Hebei to control pollution during Oly mpics. FortescueMetals Group loads its first iron ore cargo bound for China.

Mar 08China 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.

Jun 08Baosteel agrees to an 85% price hike w ith Rio Tinto and BHP Billiton.Jul 08Factory 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 08Beijing Oly mpics from 8-24 Aug.Sep 08Paraly mpic Games from 6-17 Sep.

Source: CIMB/CIMB-GK estimates



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 world’s 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 the fastest

Demand still growing despite high oil price. Although demand growth has been 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)

82

83

84

85

86

87

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89

2004 2005 2006 2007 2008F 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08F 3Q08F 4Q08F0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%2.0%Total demand (m bpd) Growth (%)

Source: IEA, CIMB/CIMB-GK Research


Figure 40: Forecast growth in oil demand for 2008

5.5% 5.1%4.3%

2.1%1.3%

0.6%0.0%

-1.9%-3.0%

-1.5%

0.0%

1.5%

3.0%

4.5%

6.0%

China Middle East LatinAmerica

FSU Asia ex -China, ex -

Japan

OECD Asia OECDEurope

NorthAmerica


Figure 41: Global production of crude oil (m bpd)

82

83

84

85

86

87

88

'04 '05 J06



F M A M J-2%

-1%

0%

1%

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3%Total production (m bpd) Growth (%)


Greater reliance on Middle East oil increases shipping distances

Higher tonne mile demand. Tanker rates have also been strong because the world’s 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 former’s 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 Change (m bpd)

21.0

21.5

22.0

22.5

23.0

23.5

24.0

'04'05J06

F MAM J J A S ON D J07

F MAM J J A S ON D J08

F MAM J-8%-6%-4%-2%0%2%4%6%8%Middle East production (m bpd)

Growth (%)

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F M A M J

Saudi Arabia Iraq


West African production – growing Change (m bpd)

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3.6

3.8

4.0

4.2

'04'05J06

F M AM J J AS ON D J07


F M AM J

-6%-4%-2%0%2%4%6%8%10%West African production (m bpd)

Grow th (%)

-0.6

-0.4

-0.2

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0.2

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F M A M J

Nigeria Angola

North African production – growth faltering Change (m bpd)

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3.6

3.8

4.0

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F M AM J

-3%

-2%

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Liby a Algeria

Latin/South American production – falling Change (m bpd)

9.69.8

10.010.210.410.610.811.0

'04'05J06

FM AM J J A S ON D J07

F MAM J J A SOND J08

FM AM J

-7%-6%-5%-4%-3%-2%-1%0%Latin/South American production (m bpd)

Grow th (%)

-0.6-0.5-0.4-0.3-0.2-0.10.00.10.20.3

J07


F M A M J

Mex ico Venezuela Brazil

European production – falling Change (m bpd)

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FM AM J J A SON D J07

FM AM J J A SON D J08

FM AM J

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-8%

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0%

European production (m bpd)Grow th (%)

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F M A M J

UK Norw ay



Figure 43: Share of global oil production (m bpd, %)

June 2007 June 2008

Europe, 4.66,

10.5%

Middle East, 21.85, 49.1%

North Africa,

3.70, 8.3%

Latin/South America,

10.41, 23.4%

West Africa,

3.85, 8.7%

Middle East, 23.43, 51.3%

Europe, 4.46, 9.8%

West Africa,

3.99, 8.7%

Latin/South America,

10.08, 22.1%

North Africa,

3.74, 8.2%


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

No of vessels DWT Growth (%) - hohEnd 2007 1,603 274,120,000

+ Deliveries (1H08) 45 8,342,197- Scrapping (1H08) -11 -1,463,991- Conversions (1H08) -30 -4,788,206

End Jun 2008 1,607 276,210,000 0.8%+ Deliveries (2H08) 71 12,368,112- Scrapping (2H08) -11 -1,486,009- Conversions (2H08) -23 -5,498,174

End Dec 2008 1,644 281,593,930 1.9%+ 2009 deliveries 207 38,576,934- 2009 scrapping -33 -5,762,905- 2009 conversions -38 -6,856,601

End 2009F 1,781 307,551,358+ 2010 deliveries 169 33,497,978- 2010 scrapping / conversion -140 -24,544,734

End 2010F 1,810 316,504,603

Aggregate crude tanker fleet



Figure 45: Tanker fleet movement schedule – Double hull only

No of vessels DWTEnd 2007 1,282 215,607,656

+ 2008 deliveries (YTD) 45 8,342,197+ 2008 deliveries (remaining) 71 12,368,112

End 2008F 1,398 236,317,965+ 2009 deliveries 207 38,576,934

End 2009F 1,605 274,894,899+ 2010 deliveries 169 33,497,978

End 2010F 1,774 308,392,877

Aggregate DH crude tanker fleet


Figure 46: Tanker fleet movement schedule – Single hull only

No of vessels DWTEnd 2007 321 58,512,344

- 2008 conversions -53 -10,286,380- 2008 scrapping -22 -2,950,000

End 2008F 246 45,275,965- 2009 conversions -38 -6,856,601- 2009 scrapping -33 -5,762,905

End 2009F 176 32,656,459- 2010 scrapping / conversion -140 -24,544,734

End 2010F 36 8,111,726

Aggregate SH crude tanker fleet


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 By country of discharge

44.8%

93.8%

69.2%

30.4%

88.1%

60.6%

0%

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40%

60%

80%

100%

AG-FE Non AG-FE Total World

Jan-Apr 08Jan-Apr 07

65.2%

37.9%

79.4%

24.6% 21.7%

67.6%

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Japan Korea China

Jan-Apr 08Jan-Apr 07

Source: Tankers International, OSG, CIMB/CIMB-GK Research


Reduced preference for sour crude force Iran to store oil

Floating crude oil storage in Iran. In May and June, Iran was reported to be using 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 year’s 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

Share (%)No of ships Total DWT No of ships Total DWT

Chinese yards 153 31,180,119 26.4% 26.8%Japanese yards 111 20,269,163 19.1% 17.4%Korean yards 272 54,578,103 46.9% 46.9%Other yards 44 10,329,180 7.6% 8.9%Total crude orderbook 580 116,356,565 100.0% 100.0%


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.


Large increases in Saudi Arabian production in 2008 and 2009

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 help keep rates elevated

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, 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 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. 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.

2010 rates to be lower on average

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, end-2010 rates could still head lower.



VLCCs to benefit most from Middle East oil and from conversion removals

VLCCs are the preferred exposure. The change in the patterns of trade has affected the relative fortunes of the various vessel classes. While VLCCs, suezmaxes, 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.


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

1,377

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Figure 50: Baltic Dirty Tanker Index

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Figure 51: VLCC Time Charter Equivalent Rates (US$/day) – Ras Tanura, Saudi Arabia to Chiba, Japan

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-100%0%100%200%300%400%500%600%700%VLCC TCE earnings (AG-FE) Grow th (%)


Notes: AG – Arabian Gulf, FE – Far East


Figure 52: Suezmax Time Charter Equivalent Rates (US$/day) – Sidi Kerir, Egypt to Lavera, France

020,00040,00060,00080,000

100,000120,000140,000160,000

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Figure 53: Aframax Time Charter Equivalent Rates (US$/day) – Sidi Kerir, Egypt to Trieste, Italy

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-100%-50%0%50%100%150%200%250%300%350%Aframax TCE earnings (MED-MED) Grow th (%)


Notes: MED – Mediterranean

Figure 54: Aframax Time Charter Equivalent Rates (US$/day) – Curacao, Venezuela to Texas City, USA

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Figure 55: Supply-demand balance in the crude tanker sector Source: Clarkson Source: Clarkson Source: Clarkson Source: Clarkson

2003 2004 2005 2006m dwt yoy % m dwt yoy % m dwt yoy % m dwt yoy %

Crude Tanker Demand 211.6 5.2% 227.4 7.5% 231.4 1.8% 236 2.0%- VLCC/ULCC 114.8 6.6% 124.5 8.4% 125.6 0.9% 128.4 2.2%- Suezmax 46.8 6.4% 49.5 5.8% 50.8 2.6% 49.8 -2.0%- Aframax 41.1 3.5% 45.5 10.7% 47.5 4.4% 50.3 5.9%- Panamax 8.9 -8.2% 7.9 -11.2% 7.5 -5.1% 7.5 0.0%

2003 2004 2005 2006m dwt yoy % m dwt yoy % m dwt yoy % m dwt yoy %

Avg Crude Tanker Fleet 214.6 -2.2% 231.0 7.6% 243.2 5.3% 256.5 5.5%- VLCC/ULCC 124.7 0.1% 127.8 2.5% 134.1 5.0% 140.0 4.4%- Suezmax 42.7 4.0% 44.3 3.9% 47.1 6.2% 50.6 7.4%- Aframax 47.2 6.0% 50.0 5.9% 53.0 5.9% 56.2 6.0%- Panamax 9.3 -0.8% 8.8 -4.8% 9.0 1.8% 9.7 8.3%

2003 2004 2005 2006m dwt m dwt m dwt m dwt

Growth in Tanker Demand 211.6 15.8 4.0 4.6Growth in Avg Tanker Fleet 214.6 16.3 12.2 13.3

Change in Market Balance 15.4 0.5 8.2 8.7- VLCC/ULCC 7.0 -6.6 5.2 3.1- Suezmax 1.1 -1.0 1.5 4.5- Aframax -1.3 -1.6 1.0 0.4- Panamax -0.7 0.6 0.6 0.7

Avg Baltic Dirty Tanker Index 1,347.2 60.9% 1,785.9 32.6% 1,510.7 -15.4% 1,291.9 -14.5%

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.

Source: Clarkson Source: CIMB forecast Source: CIMB forecast Source: CIMB forecast2007 2008F 2009F 2010F

m dwt yoy % m dwt yoy % m dwt yoy % m dwt yoy %Crude Tanker Demand 241.1 2.2% 252.5 4.7% 263.2 4.2% 274.3 4.2%- VLCC/ULCC 129.7 1.0% 136.2 5.0% 143.0 5.0% 150.1 5.0%- Suezmax 50.5 1.4% 52.7 4.4% 54.8 4.0% 57.0 4.0%- Aframax 53.5 6.4% 56.1 4.9% 57.8 3.0% 59.5 3.0%- Panamax 7.4 -1.3% 7.5 1.4% 7.6 1.0% 7.7 1.0%

2007 2008F 2009F 2010Fm dwt yoy % m dwt yoy % m dwt yoy % m dwt yoy %

Avg Crude Tanker Fleet 268.0 4.5% 277.9 3.7% 294.6 6.0% 312.0 5.9%- VLCC/ULCC 145.3 3.8% 149.5 2.8% 156.7 4.9% 164.3 4.8%- Suezmax 53.5 5.7% 55.4 3.5% 59.7 7.8% 65.4 9.6%- Aframax 59.2 5.5% 63.2 6.7% 68.2 7.9% 72.4 6.1%- Panamax 10.0 2.9% 9.8 -1.8% 9.9 1.3% 9.9 -0.2%

2007 2008F 2009F 2010Fm dwt m dwt m dwt m dwt

Growth in Tanker Demand 5.1 11.4 10.7 11.2Growth in Avg Tanker Fleet 11.6 9.8 16.7 17.5

Change in Market Balance 6.5 -1.6 6.0 6.3- VLCC/ULCC 4.0 -2.3 0.4 0.4- Suezmax 2.2 -0.3 2.2 3.5- Aframax -0.1 1.4 3.3 2.4- Panamax 0.4 -0.3 0.1 -0.1

Avg Baltic Dirty Tanker Index 1,146.2 -11.3% 1,700.0 48.3% 1,530.0 -10.0% 1,377.0 -10.0%



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 China’s 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 tanker-to-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.

Baltic Dry Index revisions 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.

Derating catalysts 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.

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.


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 use of chartered-in capacity

We downgrade STXPO from Trading Sell to UNDERPERFORM, with an unchanged target price of S$2.06. We are leaving forecasts unchanged pending therelease 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 STXPO’s 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, management’s 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 company’s 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 Maybulk’s 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.


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 TTA’s 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 sector’s 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 year’s 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 year’s 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, PSL’s 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.


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 STX Pan Ocean

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Thoresen Thai Agencies Precious Shipping

Malaysian Bulk Carriers China Shipping Development




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 single-hull 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 spilloverimpact 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.



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 MISC’s 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.


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.

Ramunia purchase important medium-term contributor

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


COMPANY BRIEFS…


INITIATING COVERAGE

6 August 2008

UNDERPERFORM Maintained Pacific Basin Shipping Ltd HK$10.80 @04/08/08 Rough seas ahead Target: HK$8.33

Dry Bulk Shipping

CH

INA

/ HO

NG

KO

NG

2343 HK / 2343.HK David Y.K. Lee +852 2532 1112 – [email protected], Raymond Yap +603 2084 9769 – [email protected]

• 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 world’s leading dry bulk shipping companies, Pacific Basin will not be spared and is set for earnings declines from next year onwards. We expect the company’s ROE to fall from last year’s 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 2006 2007 2008F 2009F 2010F Revenue (US$ m) 620.4 1,177.3 1,502.6 1,288.7 1,050.0 EBITDA (US$ m) 148.8 402.4 621.4 438.2 312.9 EBITDA margins (%) 24.0% 34.2% 41.4% 34.0% 29.8% Pretax profit (US$ m) 111.4 473.0 604.8 392.4 262.6 Net profit (US$ m) 110.3 472.1 601.8 390.4 261.3 EPS (HK cts) 65.0 234.5 277.7 174.6 116.9 EPS growth (%) (28.2%) 260.5% 18.4% (37.1%) (33.1%) P/E (x) 16.6 4.6 3.9 6.2 9.2 Core EPS (HK cts) 46.3 154.7 265.1 174.6 116.9 Core EPS growth (%) (34.9%) 234.4% 71.3% (34.1%) (33.1%) Core P/E (x) 23.3 7.0 4.1 6.2 9.2 FD core EPS (HK cts) 46.0 154.5 234.3 161.0 109.5 FD core P/E (x) 23.5 7.0 4.6 6.7 9.9 Gross DPS (HK cts) 60.2 144.2 148.6 88.3 60.4 Dividend yield (%) 5.6% 13.4% 13.8% 8.2% 5.6% P/BV (x) 4.4 2.5 1.6 1.4 1.3 ROE (%) 22.7% 69.8% 51.5% 24.7% 14.8% Net gearing (%) 59.2% 1.2% N/A N/A N/A Net cash per share (HK$) N/A N/A 1.73 2.14 2.32 P/FCFE (x) (21.6) 3.0 5.9 9.4 15.6 EV/EBITDA (x) 14.2 5.4 3.1 4.4 6.1 CIMB/Consensus (x) 1.08 0.84 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 Market capitalisation & share price info Market cap HK$18,844m/US$2,415m Share price perf. (%) 1M 3M 12M 12-mth price range HK$18.40/HK$9.20 Relative (7.4) (12.2) (5.7) 3-mth avg daily volume 15.8m Absolute (3.6) (25.8) (9.6) # of shares (m) 1,745 Major shareholders % held Est. free float (%) 100.0 BNP Paribas Jersey Trust Corp. 9.7 Conv. secs (m) 157.4 JP Morgan Chase 6.4 Conv. price (HK$) 19.28 Morgan Stanley 5.7

8.7

10.7

12.7

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16.7

18.7

Aug-07 Jan-08 Jun-08

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Volume 100m (R.H.Scale) Pacific Basin Shipping Ltd

Source: Bloomberg Source: Company, CIMB-GK Research, Bloomberg


Background A leader in dry bulk shipping in Asia-Pacific region

Pacific Basin Shipping is one of the world’s leading dry bulk shipping companies, operating principally in the Asia-Pacific region. It operates mainly handy 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 Basin’s cargoes carried and fleet types

Dry bulk cargo mix for handysize Current fleet profile (no of ships)

Other Bulks33%

Cement12%Fertilisers

11%

Steel & Scrap11%

Grains9%

Forest Products

8%

Petcoke / Coal7%

Concentrate9%

Handysize, 66, 71%

Handymax, 17, 18%

Tugs, 9, 10%

Barge, 1, 1%

Source: Company, CIMB-GK Research Focus on transporting minor bulk commodities

Tied to Asia’s growing need for commodities. Pacific Basin specialises in 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 company’s 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.

Gains from sales and leaseback of vessels boosted earnings

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.

New investments mostly allocated to non-core operations

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.


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.

Non-core earnings not material until 2010

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.

Valuation and recommendation 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 US$ m

Market value of owned fleet 1,300.4Add: Market value of finance lease vessels 650.0Less Finance lease purchase option cost (237.9)Add: To date progressive payments for newbuildings (US$ m) 141.4Add: Valuation of operating lease earnings (FY09E 4x P/E) 530.5Add: Net cash 281.7Add: Other net current assets (2.8)Total (US$ m) 2,663.3

No of shares (m) 1,744.6

Per share value (US$) 1.53Exchange rate (HK$:US$) 7.80Per share value (HK$) 11.91Discount ratio 30%Targe price (HK$) 8.33

Source: Company, CIMB-GK Research


Financial tables PROFIT & LOSS KEY RATIOS

(US$ m, FYE Dec) 2006 2007 2008F 2009F 2010F (FYE Dec) 2006 2007 2008F 2009F 2010F Revenue 620 1,177 1,503 1,289 1,050 Revenue growth (%) 43.1 89.7 27.6 (14.2) (18.5) Operating expenses (472) (775) (881) (850) (737) EBITDA growth (%) (10.6) 170.3 54.4 (29.5) (28.6) EBITDA 149 402 621 438 313 Pretax margins (%) 18.0 40.2 40.3 30.4 25.0 Depreciation & amortisation (32) (36) (42) (50) (56) Net profit margins (%) 17.8 40.1 40.1 30.3 24.9 EBIT 117 366 579 388 257 Interest cover (x) 4.3 15.2 17.5 11.8 7.8 Net interest & invt income (24) (18) (12) (6) (4) Effective tax rates (%) 1.0 0.2 0.5 0.5 0.5 Associates’ contribution 3 8 10 10 10 Net dividend payout (%) 77.7 51.7 44.9 42.5 43.4 Exceptional items 24 137 28 0 0 Debtors turnover (days) 26.8 22.3 27.2 33.0 33.9 Others (8) (21) 0 0 0 Stock turnover (days) 0.0 3.1 5.2 6.3 7.1 Pretax profit 111 473 605 392 263 Creditors turnover (days) 41.1 25.8 25.0 30.5 34.3 Tax (1) (1) (3) (2) (1) Minority interests 0 0 0 0 0 Net profit 110 472 602 390 261 Adj. wt. shares (m) 1,323 1,571 1,691 1,745 1,745 Unadj. year-end shares (m) 1,558 1,584 1,745 1,745 1,745 BALANCE SHEET KEY DRIVERS (US$ m, end Dec) 2006 2007 2008F 2009F 2010F (FYE Dec) 2007 2008F 2009F 2010FFixed assets 741 756 935 1,072 1,178 Baltic Dry Index (yoy change %) 122.0% 20.1% -29.4% -50.0% Intangible assets 25 36 36 36 36 Bulk rates (US$/day) 23,200 32,480 25,984 19,488 Other long-term assets 28 42 52 62 72 Fleet size (number of vessels) 80 84 84 84 Total non-current assets 794 834 1,023 1,170 1,286 Cash and equivalents 63 650 1,046 1,138 1,180 Stocks 0 20 23 22 19 Trade debtors 46 98 125 108 88 Other current assets 17 53 53 53 53 Total current assets 126 821 1,247 1,321 1,339 Trade creditors 70 96 110 106 92 Short-term borrowings 24 24 24 24 24 Other current liabilities 13 30 30 30 30 Total current liabilities 107 150 163 160 145 Long-term borrowings 327 637 637 637 637 Other long-term liabilities 2 0 0 0 0 Total long-term liabilities 328 637 637 637 637 Shareholders’ funds 485 867 1,470 1,694 1,842 Minority interests 0 0 0 0 0 NTA/share (HK$) 2.30 4.09 6.41 7.42 8.08 CASH FLOW 12M - FORWARD FD CORE P/E (X) (US$ m, FYE Dec) 2006 2007 2008F 2009F 2010F Pretax profit 111 473 605 392 263 Depreciation & non–cash adj. 32 36 42 50 56 Working capital changes (5) (51) (17) 15 9 Cash tax paid (1) (1) (3) (2) (1) Others 10 (143) (26) (4) (6)Cash flow from operations 148 314 602 451 320 Capex (287) (259) (283) (188) (162) Net investments & sale of FA 40 353 89 0 0 Others 6 8 0 0 0 Cash flow from investing (241) 102 (194) (188) (162) Debt raised/(repaid) 34 310 0 0 0 Equity raised/(repaid) 157 6 271 0 0 Dividends paid (92) (136) (270) (166) (113) Cash interest & others (25) (9) (12) (6) (4) Cash flow from financing 74 170 (11) (171) (117) Change in cash (19) 586 397 92 41 Change in net cash/(debt) (52) 277 397 92 41 Ending net cash/(debt) (287) (11) 386 478 519

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Source: Company, CIMB-GK Research, Bloomberg


COMPANY UPDATE

6 August 2008

UNDERPERFORM Downgraded STX Pan Ocean S$2.50 @04/08/08 Thin margins, risky earnings Target: S$2.06

Dry Bulk Shipping

SIN

GA

POR

E

STX SP / STXP.SI Raymond Yap CFA +603 2084 9769 – [email protected]

• 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 company’s dry bulk earnings almost quadrupled last year as the BDI more than doubled. The volatility has also been accentuated by STXPO’s 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 2006 2007 2008F 2009F 2010F Revenue (US$ m) 2,947.8 5,818.7 8,538.4 7,926.3 6,591.7 EBITDA (US$ m) 241.9 596.5 1,071.9 727.3 492.9 EBITDA margins (%) 8.2% 10.3% 12.6% 9.2% 7.5% Pretax profit (US$ m) 152.1 537.6 991.7 628.7 368.6 Net profit (US$ m) 154.2 527.3 971.9 616.1 361.2 EPS (S cts) 12.3 38.3 64.8 41.1 24.1 EPS growth (%) (43.3%) 210.9% 69.0% (36.6%) (41.4%) P/E (x) 21.2 6.8 4.0 6.4 10.9 Core EPS (S cts) 15.0 38.8 64.8 41.1 24.1 Core EPS growth (%) (26.6%) 159.3% 67.1% (36.6%) (41.4%) Core P/E (x) 17.5 6.8 4.0 6.4 10.9 Gross DPS (S cts) 3.2 7.3 3.2 3.2 3.2 Dividend yield (%) 1.2% 2.8% 1.2% 1.2% 1.2% P/BV (x) 4.0 2.1 1.4 1.2 1.1 ROE (%) 19.9% 39.3% 41.7% 20.0% 10.2% Net gearing (%) 34.7% N/A N/A N/A N/A Net cash per share (S$) N/A 0.08 0.20 0.18 0.14 P/FCFE (x) (33.1) (82.6) 18.6 190.4 (193.5) EV/EBITDA (x) 13.7 5.3 3.1 4.6 6.9 % change in EPS estimates N/A N/A N/A CIMB/Consensus (x) 1.28 1.00 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 Market capitalisation & share price info Market cap S$5,393m/US$3,930m Share price perf. (%) 1M 3M 12M 12-mth price range S$3.99/S$1.69 Relative 6.2 (26.6) 26.9 3-mth avg daily volume 4.6m Absolute 7.3 (34.6) 7.3 # of shares (m) 2,059 Major shareholders % held Est. free float (%) 40.0 STX Shipbuilding Co Ltd 38.9 Conv. secs (m) N/A Korea Development Bank 18.7

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Volume 100m (R.H.Scale) STX Pan Ocean



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 STXPO’s 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, STXPO’s 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

24.4%28.4%

44.3%

58.5%

8.6%

0%

10%

20%

30%

40%

50%

60%

STX Pan Ocean TTA Pacific Basin PSL Maybulk

Source: Companies, CIMB-GK Research

Figure 2: Gross profit margins of owned vs. chartered-in fleet (group-wide)

48%41%

28% 25%22%

26% 29%

37% 35%

44%40% 39%

48%

6%9% 11%

1% 3% 5% 5%8% 7% 7% 7% 9%

12%

0%

10%

20%

30%

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1QFY05 2QFY05 3QFY05 4QFY05 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07 2QFY07 3QFY07 4QFY07 1QFY08

Ow ned v essels Chartered-in v essels


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 operator’s 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


weakness and lower business volumes. V

Figure 3: Segmental breakdown US$ m, FYE Dec 2007 2008F 2009F 2010F Bulk 5,289.6 7,934.4 7,193.9 5,732.6 Tanker 181.0 219.9 235.5 255.3 Car carrier 67.3 67.3 101.0 168.3 Container 277.2 316.8 396.0 435.6 Others 3.6 0.0 0.0 0.0 Total revenue 5,818.7 8,538.4 7,926.3 6,591.7

Bulk 510.1 952.1 575.5 286.6 Tanker 27.1 28.6 25.9 33.2 Car carrier 16.2 16.2 24.2 40.4 Container (27.4) (25.3) (19.8) (13.1) Others 18.8 20.0 20.0 20.0

Total EBIT 544.8 991.5 625.8 367.1 Source: Company, CIMB-GK Research

Valuation and recommendation 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 may be weaker

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, management’s chartering plans may change quickly. STXPO also does not disclose average time charter rates or charter-in costs.

Diversification into non-shipping businesses

Diversification to non-shipping businesses could pose risks. The company’s 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)Market value of owned fleet (US$ m) 2,548.0Add: To-date progressive payments for newbuildings (US$ m) 935.3Add: Valuation of charter-in earnings (at 4x 2009 P/E) 1,945.0Add: Market value of Korea Express (US$ m) 234.1Add: Net cash FY08F (US$ m) 297.0Add: Other net assets FY08F (excluding cash/debt) (US$ m) 236.1Total (US$ m) 6,195.6

No of shares (m) 2,058.6Per share value (US$) 3.01Exchange rate (S$:US$) 1.37Per share value (S$) 4.12Discount (%) 50%Target price (S$) 2.06

Source: Company, CIMB/CIMB-GK Research



(US$ m, FYE Dec) 2006 2007 2008F 2009F 2010F (FYE Dec) 2006 2007 2008F 2009F 2010F Revenue 2,948 5,819 8,538 7,926 6,592 Revenue growth (%) 8.3 97.4 46.7 (7.2) (16.8) Operating expenses (2,706) (5,222) (7,467) (7,199) (6,099) EBITDA growth (%) (19.2) 146.6 79.7 (32.2) (32.2) EBITDA 242 597 1,072 727 493 Pretax margins (%) 5.2 9.2 11.6 7.9 5.6 Depreciation & amortisation (44) (52) (80) (101) (126) Net profit margins (%) 5.2 9.1 11.4 7.8 5.5 EBIT 198 545 992 626 367 Interest cover (x) 10.7 34.7 36.2 22.8 13.4 Net interest & invt income (13) (2) (1) 2 0 Effective tax rates (%) N/A 1.9 2.0 2.0 2.0 Associates’ contribution 0 1 1 1 1 Net dividend payout (%) 21.8 16.3 4.1 6.5 11.1 Exceptional items (33) (6) 0 0 0 Debtors turnover (days) 33.1 33.1 39.6 48.9 N/A Others 0 0 0 0 0 Stock turnover (days) 2.7 1.7 1.7 2.1 N/A Pretax profit 152 538 992 629 369 Creditors turnover (days) 23.9 24.8 30.6 38.1 N/A Tax 2 (10) (20) (13) (7) Minority interests 0 0 0 0 0 Net profit 154 527 972 616 361 Adj. wt. shares (m) 1,715 1,887 2,059 2,059 2,059 Unadj. year-end shares (m) 1,715 2,059 2,059 2,059 2,059 BALANCE SHEET KEY DRIVERS (US$ m, end Dec) 2006 2007 2008F 2009F 2010F (FYE Dec) 2007 2008F 2009F 2010FFixed assets 763 1,284 1,932 2,577 3,012 Fleet size (number of vessels) 62 70 87 105 Intangible assets 17 28 28 28 28 No of dry bulk ships 47 48 58 74 Other long-term assets 256 305 306 307 308 No of chemical tankers 9 14 16 16 Total non-current assets 1,037 1,617 2,265 2,911 3,348 No of container ships 4 6 8 8 Cash and equivalents 133 673 845 825 765 No of pure car carriers 2 2 4 6 Stocks 23 33 47 45 39 No of LNG tankers N/A N/A 1 1 Trade debtors 306 751 1,102 1,023 851 Baltic Dry Index (yoy change %) 122.0% 20.1% -29.4% -50.0% Other current assets 37 99 99 99 99 Bulk rates (US$/day) 48,329 53,162 45,188 33,891 Total current assets 498 1,557 2,093 1,993 1,753 Trade creditors 201 590 844 813 689 Short-term borrowings 47 64 64 64 64 Other current liabilities 58 119 120 121 121 Total current liabilities 307 773 1,027 998 874 Long-term borrowings 369 484 484 484 484 Other long-term liabilities 44 55 55 55 55 Total long-term liabilities 414 539 539 539 539 Shareholders’ funds 818 1,865 2,796 3,372 3,693 Minority interests 0 2 2 2 2 NTA/share (S$) 0.64 1.22 1.85 2.23 2.44 CASH FLOW 12M - FORWARD FD CORE P/E (X) (US$ m, FYE Dec) 2006 2007 2008F 2009F 2010F Pretax profit 152 538 992 629 369 Depreciation & non–cash adj. 44 52 80 101 126 Working capital changes (75) (70) (112) 50 55 Cash tax paid 17 (3) (20) (13) (7) Others 16 5 26 26 26Cash flow from operations 155 521 967 794 568 Capex (122) (426) (728) (746) (561) Net investments & sale of FA 69 (42) 0 0 0 Others 5 (52) 0 0 0 Cash flow from investing (47) (520) (728) (746) (561) Debt raised/(repaid) (45) 132 0 0 0 Equity raised/(repaid) 0 624 0 0 0 Dividends paid (84) (39) (40) (40) (40) Cash interest & others (162) (177) (27) (27) (27) Cash flow from financing (291) 539 (68) (68) (68) Change in cash (183) 541 171 (20) (61) Change in net cash/(debt) (138) 409 171 (20) (61) Ending net cash/(debt) (284) 126 297 277 217

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COMPANY UPDATE

6 August 2008

CIMB Research Report

UNDERPERFORM Downgraded Malaysian Bulk Carriers Bhd RM3.68 @04/08/08 Yields alone may not keep valuations aloft Target: RM3.00

Dry Bulk Shipping

MA

LAYS

IA

MBC MK / MBCB.KL Raymond Yap CFA +603 2084 9769 – [email protected]

• 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. Maybulk’s 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 Maybulk’s 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 2006 2007 2008F 2009F 2010F Revenue (RM m) 441.6 608.1 867.6 615.7 442.6 EBITDA (RM m) 289.9 389.8 510.3 304.8 135.8 EBITDA margins (%) 65.6% 64.1% 58.8% 49.5% 30.7% Pretax profit (RM m) 313.5 580.4 814.8 371.3 208.4 Net profit (RM m) 300.6 544.7 787.2 352.2 196.1 EPS (sen) 30.1 54.5 78.7 35.2 19.6 EPS growth (%) (53.4%) 81.2% 44.5% (55.3%) (44.3%) P/E (x) 12.2 6.8 4.7 10.4 18.8 Core EPS (sen) 30.1 35.7 52.9 35.2 19.6 Core EPS growth (%) 29.5% 18.7% 48.4% (33.5%) (44.3%) Core P/E (x) 12.2 10.3 7.0 10.4 18.8 Gross DPS (sen) 33.3 52.1 67.6 27.0 13.5 Dividend yield (%) 9.1% 14.1% 18.4% 7.3% 3.7% P/BV (x) 2.4 2.2 1.9 1.7 1.6 ROE (%) 19.9% 33.5% 42.8% 17.1% 9.0% Net cash per share (RM) 0.28 0.68 1.24 1.42 1.54 P/FCFE (x) (325.7) 5.9 3.5 12.7 18.4 EV/EBITDA (x) 11.8 7.8 4.9 7.6 16.1 % change in EPS estimates 12.0% (8.5%) (27.3%) CIMB/Consensus (x) 1.41 0.93 0.59

Source: Company, CIMB Research, Bloomberg

Price chart Market capitalisation & share price info Market cap RM3,680m/US$1,128m Share price perf. (%) 1M 3M 12M 12-mth price range RM5.05/RM3.25 Relative 0.9 (3.1) 13.8 3-mth avg daily volume 0.9m Absolute 2.2 (12.8) (2.1) # of shares (m) 1,000 Major shareholders % held Est. free float (%) 31.0 Pacific Carriers Ltd. 34.5 Conv. secs (m) N/A Global Maritime Ventures 21.5 Malayan Sugar Manuf. 14.0

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Source: Bloomberg Source: Company, CIMB Research, Bloomberg


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 Year built Own/Lease DWT Category % owned1 Alam Sempurna Feb-84 Own 28,094 Handysize 100%2 Alam Senang Mar-84 Own 28,098 Handysize 100%3 Alam Gula May-85 Own 23,418 Handysize 100%4 Alam Selamat Jul-92 Sold and leased 39,110 Handymax 100%5 Alam Mesra Oct-00 Own 46,644 Handymax 70%6 Alam Padu Apr-05 Own 87,052 Post Panamax 100%7 Alam Permai Jun-05 Own 87,052 Post Panamax 100%8 Alam Penting Jul-05 JV / Own 87,052 Post Panamax 50%9 Alam Pesona Sep-05 Own 87,052 Post Panamax 100%

10 Alam Pintar Oct-05 Own 87,052 Post Panamax 100%Total Bulker Fleet DWT 600,624

Product TankersVessel name Year built Own/Lease DWT Category % owned

1 Alam Bitara May-99 Own 45,513 MR 100%2 Alam Budi Mar-01 Own 47,065 MR 100%3 Alam Bistari May-01 Own 47,065 MR 100%

Total Product Tanker Fleet DWT 139,643


Figure 2: Disposals since 2005 Vessel Date Year built Type of ship DWT Nature of sale Proceeds

(RM m)1a Penyu Agar Feb-05 Nov-03 Panamax Tanker 72,718 Outright sale

b Penyu Sisik Apr-05 Panamax Tanker 72,718 Outright salec Penyu Daun Sep-05 Panamax Tanker 72,718 Outright saled Penyu Pipih Jan-06 Panamax Tanker 72,718 Outright sale

2a Alam Mutiara Feb-05 Apr-05 Handymax Bulker 50,296 Outright saleb Alam Maju Apr-05 Handymax Bulker 50,296 Outright sale

3 Alam Sentosa Apr-05 Apr-92 Handymax Bulker 39,110 Sale and leaseback 72.64 Alam Selamat Oct-05 Jul-92 Handymax Bulker 39,110 Sale and leaseback 75.05 Alam Sejahtera Nov-06 Jan-85 Handysize Bulker 29,692 Outright sale 37.16 Alam Sentosa Dec-06 Apr-92 Handymax Bulker 39,110 Outright sale 82.9

7a Alam Cantik Mar-07 May-06 MR Tanker 34,780 Outright saleb Alam Cepat Mar-07 Feb-07 MR Tanker 34,780 Outright sale

8 Alam Cergas Nov-07 Jun-07 MR Tanker 34,780 Outright sale 146.49 Alam Selaras Jan-08 Feb-92 Handymax Bulker 39,110 Outright sale 140.8

10 Alam Comel Feb-08 Aug-07 MR Tanker 34,780 Outright sale 140.511 Alam Makmur Feb-08 Nov-00 Handymax Bulker 46,644 Outright sale 204.5

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Valuation and recommendation Freight rate downturn could reduce dividend payout

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. Downgrade from Trading Sell to UNDERPERFORM, target price unchanged at RM3.00. We have upped Maybulk’s 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) 797.0Exchange rate (RM:US$) 3.30Fleet value (RM m) 2,630.1Add: Net cash FY08F (RM m) 1,242.6Add: Other net assets FY08F (RM m) 420.1Total (RM m) 4,292.8

No of shares (m) 1,000Per share RNAV (RM) 4.29Discount (%) 30.0%Target price (RM) 3.00

Source: Company, CIMB Research

Figure 4: Segmental breakdown RM m, FYE Dec 2007 2008F 2009F 2010F Bulk 485.5 788.3 555.5 389.7 Tanker 116.3 74.3 55.2 48.0 Others 6.3 5.0 5.0 5.0 Total revenue 608.1 867.6 615.7 442.6

Bulk 304.9 496.7 344.4 214.3 Tanker 60.2 40.9 27.6 26.4 Others 26.5 19.5 (0.7) (32.3)

Total PBT 391.6 557.0 371.3 208.4 Source: Company, CIMB Research



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

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COMPANY UPDATE

6 August 2008

UNDERPERFORM Downgraded Thoresen Thai Agencies THB37.75 @04/08/08 Exposed to the cycle Target: THB36.00

Dry Bulk Shipping

THA

ILA

ND

TTA TB / TTA.BK Raymond Yap CFA +603 2084 9769 – [email protected], Kasem Prunratanamala +662 687 0840

• TTA remains highly exposed to the vagaries of the dry bulk cycle. TTA’s 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, TTA’s 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 sector’s 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 2006 2007 2008F 2009F 2010F Revenue (THB m) 16,047.3 20,357.5 31,230.2 28,885.6 26,297.5 EBITDA (THB m) 5,195.5 6,718.7 10,115.5 7,139.6 5,376.9 EBITDA margins (%) 32.4% 33.0% 32.4% 24.7% 20.4% Pretax profit (THB m) 3,930.0 5,238.5 9,467.2 6,059.6 4,075.5 Net profit (THB m) 3,544.2 4,970.0 9,077.2 5,513.6 3,341.8 EPS (THB) 5.5 7.7 14.1 8.6 5.2 EPS growth (%) (41.0%) 40.2% 82.6% (39.3%) (39.4%) P/E (x) 6.9 4.9 2.7 4.4 7.3 Core EPS (THB) 5.4 7.7 13.7 8.6 5.2 Core EPS growth (%) (42.4%) 43.6% 78.1% (37.6%) (39.4%) Core P/E (x) 7.0 4.9 2.8 4.4 7.3 FD core EPS (THB) 5.4 7.7 12.0 7.6 4.7 FD core P/E (x) 7.0 4.9 3.1 5.0 8.1 Gross DPS (THB) 1.4 1.7 3.5 2.1 1.3 Dividend yield (%) 3.6% 4.4% 9.3% 5.7% 3.4% P/BV (x) 2.2 1.6 1.1 0.9 0.8 ROE (%) 34.9% 37.7% 48.9% 22.9% 12.2% Net gearing (%) 63.1% 33.2% N/A N/A N/A Net cash per share (THB) N/A N/A 2.91 11.38 16.66 P/FCFE (x) 12.2 9.9 2.9 3.9 6.1 EV/EBITDA (x) 6.1 4.4 2.2 2.5 2.7 % change in EPS estimates 0.1% (27.4%) (35.8%) CIMB/Consensus (x) 1.43 0.98 0.74


Price chart Market capitalisation & share price info Market cap THB24,299m/US$725m Share price perf. (%) 1M 3M 12M 12-mth price range THB64.88/THB30.78 Relative 10.1 3.9 (8.3) 3-mth avg daily volume 9.6m Absolute 0.0 (17.1) (26.2) # of shares (m) 644 Major shareholders % held Est. free float (%) 80.0 Thai NVDR 13.1 Conv. secs (m) 103.1 Goldman Sachs International 6.1 Conv. price (THB) 58.52 State Street Bank 2.6

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Still highly exposed to spot rates Little rate cover for next year TTA’s 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 PSL’s 56.27% (Figure 1). If dry bulk rates weaken from end-2008 onwards as we expect, TTA’s 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 5.72% Unfixed 94.28%

Fixed 56.27%

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 MMT’s 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 MMT’s THB2.6bn topline growth (Figure 3).

Figure 2: Revenue forecast and assumptions for Mermaid Maritime 2008F 2009F 2010F 2008F 2009F 2010F 2008F 2009F 2010F

Revenue Revenue Revenue Utilisation Utilisation Utilisation Day rate Day rate Day rateUS$ m US$ m US$ m % % % US$/day US$/day US$/day

Tender rig 36.1 52.2 96.9 69.2% 94.4% 91.3% 62,813 76,875 118,958MTR 1 24.5 29.2 41.0 90.8% 93.8% 95.0% 75,000 86,250 120,000MTR 2 11.5 23.1 35.4 47.5% 95.0% 91.3% 50,625 67,500 106,875KM1 - - 20.5 - - 87.5% - - 130,000

Subsea fleet 106.8 181.1 215.3 80.0% 80.0% 80.0% 58,855 83,716 90,370Mermaid Commander (DSV) 41.5 51.5 55.7 95.0% 95.0% 95.0% 121,246 150,484 162,889Mermaid Responder (Dive/ROV) 7.9 8.7 9.4 70.0% 70.0% 70.0% 31,377 34,454 37,294Mermaid Supporter (Dive/ROV) 4.5 5.0 5.4 75.0% 75.0% 75.0% 16,735 18,375 19,890Team Siam (Crane + Dive) 32.4 38.2 41.3 80.0% 80.0% 80.0% 112,652 132,620 143,553Bin Minh (Dive/ROV) 18.1 20.0 21.9 80.0% 80.0% 80.0% 62,754 69,572 76,023Mermaid Soverign (AHTS) 2.4 2.6 2.9 80.0% 80.0% 80.0% 8,367 9,188 9,945New ROV - 28.6 40.9 - 80.0% 80.0% - 132,617 142,151New DPSDSV - 26.4 37.8 - 80.0% 80.0% - 122,416 131,217

Total revenue 142.9 233.3 312.2 Source: Company, CIMB-GK Research


Figure 3: Segmental breakdown THB m, FYE Sep 2007 2008F 2009F 2010F Bulk 15,866.2 25,978.2 20,594.7 15,350.7 Offshore oil & gas 4,025.5 4,762.9 7,777.3 10,407.6 Others 465.8 489.1 513.5 539.2 Total revenue 20,357.5 31,230.2 28,885.6 26,297.5

Bulk 6,594.2 10,158.5 6,473.4 3,861.2 Offshore oil & gas 1,311.7 1,272.9 1,957.6 2,781.5 Others (1,187.2) (1,315.9) (1,291.5) (1,265.8)

Total EBITDA 6,718.7 10,115.5 7,139.6 5,376.9 Source: Company, CIMB-GK Research

Valuation and recommendation 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 sector’s 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 TTA’s 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) 1,188Baht exchange rate 33.50Dry bulk fleet value (THB m) 39,798.0Add: Value of Mermaid Maritime stake (THB m) 8,694.7Add: Net cash/(debt) Mar 08 - holding co only (THB m) -2,472.2Add: Other net assets Mar 08 - holding co only (THB m) 436.1Total (THB m) 46,456.6

No of TTA shares (m) 643.7Per share RNAV (THB) 72.17Discount (%) 50%Target price (THB) 36.09




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

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COMPANY UPDATE

6 August 2008

OUTPERFORM Upgraded Precious Shipping THB19.60 @04/08/08 Sturdy ship in troubled waters Target: THB26.00

Dry Bulk Shipping

THA

ILA

ND

PSL TB / PSL.BK Raymond Yap CFA +603 2084 9769 – [email protected], 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, PSL’s 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 year’s hire days at US$15,540/day, which is marginally lower than 2008’s 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 2006 2007 2008F 2009F 2010F Revenue (THB m) 9,076.5 7,297.4 8,519.0 8,519.0 6,764.4 EBITDA (THB m) 5,784.9 5,012.3 6,011.4 5,931.0 4,040.2 EBITDA margins (%) 63.7% 68.7% 70.6% 69.6% 59.7% Pretax profit (THB m) 3,721.6 4,163.7 4,963.2 4,907.6 3,312.9 Net profit (THB m) 3,715.0 4,156.2 4,957.2 4,901.6 3,306.9 EPS (THB) 3.6 4.0 4.8 4.7 3.2 EPS growth (%) (39.9%) 11.9% 19.3% (1.1%) (32.5%) P/E (x) 5.5 4.9 4.1 4.2 6.2 Core EPS (THB) 3.5 3.4 4.8 4.8 3.2 Core EPS growth (%) (41.6%) (3.8%) 43.1% 0.3% (34.0%) Core P/E (x) 5.6 5.8 4.1 4.1 6.2 Gross DPS (THB) 2.0 2.3 2.5 2.5 1.5 Dividend yield (%) 10.2% 11.5% 12.8% 12.8% 7.7% P/BV (x) 1.7 1.5 1.2 1.1 1.0 ROE (%) 33.8% 31.9% 32.3% 27.5% 17.1% Net cash per share (THB) 1.21 1.41 4.02 6.25 4.53 P/FCFE (x) 8.8 8.8 4.0 4.1 25.3 EV/EBITDA (x) 3.3 3.0 2.1 1.7 3.0 % change in EPS estimates N/A 1.9% 6.3% CIMB/Consensus (x) 1.19 1.23 0.99


Price chart Market capitalisation & share price info Market cap THB20,375m/US$608m Share price perf. (%) 1M 3M 12M 12-mth price range THB36.94/THB17.80 Relative 1.3 0.3 (24.0) 3-mth avg daily volume 1.9m Absolute (8.0) (20.0) (38.8) # of shares (m) 1,040 Major shareholders % held Est. free float (%) 38.0 Nishita Shah & family 42.3 Conv. secs (m) None Khalid Hashim & family 17.5 Thai NVDR 6.8

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Lowest-risk dry bulk stock Smoothing out the cycle Lagging behind the upturn, but also lagging behind the downturn. PSL’s 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, PSL’s earnings lagged behind the spot rate increases, but the reverse will probably be true as spot rates start trending lower (Figure 1).

Figure 1: PSL’s TCE-equivalent earnings vs. the average BDI movement

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1Q2004

2Q 3Q 4Q 1Q2005

2Q 3Q 4Q 1Q2006

2Q 3Q 4Q 1Q2007

2Q 3Q 4Q 1Q2008

2Q 08F 09F 10F2,0003,0004,0005,0006,0007,0008,0009,00010,00011,000PSL's TCE/day (US$) Avg Baltic Dry Index


Outlook FY09 earnings could be stable from FY08

Forward chartering status. Up to 30 June, PSL had already locked in 64% of next year’s hire days at US$15,540/day, which is marginally lower than 2008’s 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 For 2010 calendar year

Proportion Avg cumulative Incremental Proportion Avg cumulative IncrementalAs at fixed rates rates fixed rates rates

% US$/day US$/day % US$/day US$/dayEnd 4Q07 48.91% 12,056 25.51% 11,617End 1Q08 56.27% 13,466 22,836 27.92% 11,502 10,285End 2Q08 64.03% 15,540 30,579 28.71% 13,045 26,482End 3Q08F 72.00% 16,587 25,000 37.00% 14,603 20,000End 4Q08F 80.00% 17,428 25,000 45.00% 15,563 20,000End 1Q09F 55.00% 15,460 15,000End 2Q09F 60.00% 15,422 15,000End 3Q09F 65.00% 15,390 15,000End 4Q09F 70.00% 15,362 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


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 DWT US$ THB Delivery1 20-Jul-07 Handysize #1 32,000 30 1,033 15-Mar-102 20-Jul-07 Handysize #2 32,000 30 1,033 31-Jul-103 20-Jul-07 Handysize #3 32,000 30 1,033 15-Dec-104 11-Oct-07 Supramax #1 54,000 38 1,300 31-Dec-105 20-Jul-07 Handysize #4 32,000 30 1,033 30-Apr-116 11-Oct-07 Supramax #2 54,000 38 1,300 30-Jun-117 20-Jul-07 Handysize #5 32,000 30 1,033 31-Aug-118 20-Jul-07 Handysize #6 32,000 30 1,033 31-Dec-119 11-Oct-07 Supramax #3 54,000 38 1,300 31-Dec-11

10 20-Jul-07 Handysize #7 32,000 30 1,033 30-Apr-1211 20-Jul-07 Handysize #8 32,000 30 1,033 31-Aug-1212 20-Jul-07 Handysize #9 32,000 30 1,033 31-Dec-1213 20-Jul-07 Handysize #10 32,000 30 1,033 30-Apr-1314 20-Jul-07 Handysize #11 32,000 30 1,033 31-Aug-1315 20-Jul-07 Handysize #12 32,000 30 1,033 31-Dec-1316 11-Feb-08 Supramax #4 54,000 38 1,300 201217 11-Feb-08 Supramax #5 54,000 38 1,300 201218 11-Feb-08 Supramax #6 54,000 38 1,300 2012

Total 708,000 588 20,196

Cost


Valuation and recommendation Raising TP because of lower risk profile and better earnings visibility

Upgrade to OUTPERFORM from Neutral; 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. 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.

Share price punished enough

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.


Dry bulk fleet second-hand value (US$ m) 1,055.3Exchange rate (THB:US$) 32.0Dry bulk fleet value (THB m) 33,768.8Add: Net cash (end-2008) (THB m) 4,186.0Add: Other net assets expected by end-2008 (THB m) 3,212.0Add: Value of shipbuilding advances (THB m) 4,039.2Total (THB m) 45,205.9

No of PSL shares (m) 1,040.0Per share (THB) 43.47Discount (%) 40.0%Target price (THB) 26.08




(THB m, FYE Dec) 2006 2007 2008F 2009F 2010F (FYE Dec) 2006 2007 2008F 2009F 2010F Revenue 9,077 7,297 8,519 8,519 6,764 Revenue growth (%) (17.7) (19.6) 16.7 0.0 (20.6) Operating expenses (3,292) (2,285) (2,508) (2,588) (2,724) EBITDA growth (%) (31.4) (13.4) 19.9 (1.3) (31.9) EBITDA 5,785 5,012 6,011 5,931 4,040 Pretax margins (%) 41.0 57.1 58.3 57.6 49.0 Depreciation & amortisation (2,093) (1,825) (1,078) (1,039) (900) Net profit margins (%) 40.9 57.0 58.2 57.5 48.9 EBIT 3,692 3,188 4,933 4,892 3,140 Interest cover (x) 25.6 25.1 N/A N/A N/A Net interest & invt income (116) 15 85 160 168 Effective tax rates (%) 0.0 0.1 0.0 0.0 0.0 Associates’ contribution 20 34 (10) 0 0 Net dividend payout (%) 50.4 50.7 47.2 47.7 42.5 Exceptional items 123 925 (50) (150) 0 Debtors turnover (days) 5.6 3.4 1.6 1.7 2.0 Others 4 1 5 5 5 Stock turnover (days) 2.2 1.2 0.3 0.3 0.4 Pretax profit 3,722 4,164 4,963 4,908 3,313 Creditors turnover (days) 4.0 3.7 3.0 3.2 4.2 Tax 0 (3) 0 0 0 Minority interests (7) (5) (6) (6) (6) Net profit 3,715 4,156 4,957 4,902 3,307 Adj. wt. shares (m) 1,040 1,040 1,040 1,040 1,040 Unadj. year-end shares (m) 520 1,040 1,040 1,040 1,040 BALANCE SHEET KEY DRIVERS (THB m, end Dec) 2006 2007 2008F 2009F 2010F (FYE Dec) 2007 2008F 2009F 2010FFixed assets 11,024 9,570 9,272 9,266 11,785 Baltic Dry Index (yoy change %) 122.0% 20.0% -29.0% -50.0% Intangible assets 0 0 0 0 0 Bulk rates (US$/day) 13,147 16,105 17,071 13,998 Other long-term assets 131 3,686 3,676 3,676 3,676 Fleet size (number of vessels) 44 44 44 44 Total non-current assets 11,155 13,255 12,947 12,941 15,460 Cash and equivalents 1,259 1,470 4,186 6,501 4,708 Stocks 44 6 6 6 7 Trade debtors 101 35 40 40 32 Other current assets 200 252 252 252 252 Total current assets 1,603 1,763 4,485 6,801 4,999 Trade creditors 83 67 73 75 79 Short-term borrowings 0 0 0 0 0 Other current liabilities 638 722 506 506 506 Total current liabilities 720 788 579 582 585 Long-term borrowings 0 0 0 0 0 Other long-term liabilities 0 165 165 165 165 Total long-term liabilities 0 165 165 165 165 Shareholders’ funds 12,025 14,052 16,669 18,971 19,679 Minority interests 13 13 19 25 31 NTA/share (THB) 11.56 13.51 16.03 18.24 18.92 CASH FLOW 12M - FORWARD FD CORE P/E (X) (THB m, FYE Dec) 2006 2007 2008F 2009F 2010F Pretax profit 3,722 4,164 4,963 4,908 3,313 Depreciation & non–cash adj. 2,093 1,825 1,078 1,039 900 Working capital changes 60 88 0 2 12 Cash tax paid 0 0 (216) 0 0 Others 156 (1,350) (80) (165) (173)Cash flow from operations 6,031 4,727 5,746 5,783 4,052 Capex (486) (4,031) (780) (1,033) (3,419) Net investments & sale of FA 161 1,894 0 0 0 Others 17 13 0 0 0 Cash flow from investing (309) (2,124) (780) (1,033) (3,419) Debt raised/(repaid) (3,294) 0 0 0 0 Equity raised/(repaid) 0 566 0 0 1 Dividends paid (1,796) (2,659) (2,340) (2,600) (2,600) Cash interest & others (113) (298) 90 165 173 Cash flow from financing (5,203) (2,391) (2,250) (2,435) (2,426) Change in cash 520 212 2,716 2,315 (1,793) Change in net cash/(debt) 3,814 212 2,716 2,315 (1,793) Ending net cash/(debt) 1,259 1,470 4,186 6,501 4,708

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COMPANY UPDATE

6 August 2008

CIMB Research Report

NEUTRAL Maintained MISC Bhd RM8.85 @04/08/08 Safe haven Target: RM10.00

Tanker Shipping

MA

LAYS

IA

MISC MK / MISC.KL Raymond Yap CFA +603 2084 9769 – [email protected]

• 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 MISC’s 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 Petronas’s offshore field development in Malaysia will provide a stream of new contracts that will boost MISC’s 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 2007 2008 2009F 2010F 2011F Revenue (RM m) 11,198.9 12,957.4 13,063.7 12,332.7 12,682.2 EBITDA (RM m) 3,871.0 3,763.5 3,917.0 3,877.3 4,020.0 EBITDA margins (%) 34.6% 29.0% 30.0% 31.4% 31.7% Pretax profit (RM m) 2,930.3 2,609.4 2,366.6 2,411.8 2,628.7 Net profit (RM m) 2,852.0 2,430.3 2,186.1 2,230.4 2,443.0 EPS (sen) 76.7 65.3 58.8 60.0 65.7 EPS growth (%) 1.0% (14.8%) (10.0%) 2.0% 9.5% P/E (x) 11.5 13.5 15.1 14.8 13.5 Core EPS (sen) 64.9 59.5 58.8 60.0 65.7 Core EPS growth (%) (7.8%) (8.3%) (1.3%) 2.0% 9.5% Core P/E (x) 13.6 14.9 15.1 14.8 13.5 Gross DPS (sen) 41.1 47.3 47.3 47.3 47.3 Dividend yield (%) 4.6% 5.3% 5.3% 5.3% 5.3% P/BV (x) 1.8 1.8 1.7 1.6 1.5 ROE (%) 15.5% 13.1% 11.6% 11.3% 11.7% Net gearing (%) 24.3% 29.7% 23.5% 16.5% 7.0% P/FCFE (x) 189.4 38.2 14.8 13.1 10.3 EV/EBITDA (x) 9.8 10.3 9.7 9.5 8.7 % change in EPS estimates 1.1% 3.3% 1.2% CIMB/Consensus (x) 0.92 0.83 0.85


Price chart Market capitalisation & share price info Market cap RM32,920m/US$10,074m Share price perf. (%) 1M 3M 12M 12-mth price range RM10.15/RM7.80 Relative 6.6 4.0 8.8 3-mth avg daily volume 0.4m Absolute 7.9 (6.4) (6.4) # of shares (m) 3,720 Major shareholders % held Est. free float (%) 17.0 Petronas 62.4 Conv. secs (m) None EPF 10.3

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Source: Bloomberg Source: Company, CIMB Research, Bloomberg


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, MISC’s 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 expectrates 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 AET’s 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. MISC’s container shipping arm is very vulnerable to the deteriorating fundamentals of the European economies because the majority of its capacity is placed on the Asia-Europe 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

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1,510 1,2921,146

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0

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Source: Bloomberg, CIMB Research

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.

Valuation and recommendation Switch to MISC for safety from the dark clouds in other shipping sectors

Maintain NEUTRAL with unchanged target price of RM10.00. 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. 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. 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 Ramunia MMHE Growth for

+ Ramunia MMHE (%)Land size (acres) 304 170 474 55.9%Fabrication area (acres) 100 145 245 145.0%

Outstanding unbilled fabrication 3,090 700 3,790orderbook (RM m) (at 31 Mar 08) (at Dec 07)

Profit and loss Oct 06 - Sep 07 FYE Oct 07Turnover (RM m) 1,040.8 612.9Pretax profit (RM m) 146.8 24.5Pretax margin (%) 14.1% 4.0%Net profit (RM m) 127.0 21.0ROE (%) 24.8% 5.7%

Source: Companies, CIMB-GK Research

Figure 3: Segmental breakdown RM m, FYE Mar 2008 2009F 2010F 2011F LNG 2,418.9 2,342.7 2,483.6 2,592.3 Tanker 3,575.2 4,516.3 3,890.8 3,556.7 Container 4,651.1 3,569.5 3,136.2 3,238.8 Chemical 608.5 534.0 573.2 720.8 Offshore 568.4 625.2 625.2 625.2 Others (mainly Heavy Engineering) 1,135.3 1,476.0 1,623.6 1,948.3 Total revenue 12,957.4 13,063.7 12,332.7 12,682.2

LNG 1,255.4 1,194.8 1,266.7 1,322.1 Tanker 744.2 925.8 778.2 711.3 Container 90.4 (89.2) (94.1) 32.4 Chemical 73.3 58.7 74.5 93.7 Offshore 210.7 250.1 250.1 250.1 Others (mainly Heavy Engineering) 19.5 26.4 136.5 219.2

Total profit before exceptionals 2,393.5 2,366.6 2,411.8 2,628.7 Source: Company, CIMB Research

Figure 4: RNAV calculation CY09 Core Target Target

Net Profit P/E ValuationBusiness segments RM m x RM mLNG 1,050.4 16 16,806.7Petroleum 729.9 12 8,759.1Chemical 63.1 12 757.5Offshore 210.2 20 4,203.5Heavy engineering 223.8 25 5,594.8Sub-total 2,277.4 16 36,121.7Add: Market value of owned liner vessels @ 50% discount 1,118.7RNAV (RM) 37,240.4No of shares 3,719.8Per share RNAV (RM) 10.01




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

11.0

12.0

13.0

14.0

15.0

16.0

17.0




APPENDICES…


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)

Price OriginalDate of S&P Vessel name DWT Built Owner Buyer (US$ m) vessel type Hull type Purpose of buyer

Jan-07 Front Transporter (Heavy Lift Hawk) 149,999 1989 Frontline Blystad 38.0 Suezmax SH For conversion to heavy lift by Aug 08Jan-07 Knock Stocks 138,105 1992 First Olsen Tankers Undisclosed 32.8 Suezmax SH For conversionJan-07 Global Bright 97,078 1992 Phoenix Energy Koreans 30.0 Aframax DS UnknownFeb-07 Apollo Shouju 258,034 1986 Idemitsu Modec 39.5 VLCC SH For conversion to FPSOFeb-07 Nuri (Renata N) 285,933 1992 General Ore Carrier Transmed 39.0 VLCC SH For conversion to VLOC by 2008Feb-07 Sea Cat 89,696 1985 Genmar Frontline n.a. Aframax DB UnknownMar-07 Kanayama (L Elephant) 258,094 1992 Shinwa TMT 39.0 VLCC SH For conversion to VLOC by 2008Mar-07 Front Vanadis 285,872 1990 Frontline TMT 42.0 VLCC SH UnknownMar-07 Satsuma (Dasman) 258,019 1993 NYK FAL 40.0 VLCC SH UnknownApr-07 Suzuka (Stella Cosmo) 269,581 1992 World Marine TMT 39.0 VLCC SH For conversion to VLOC in 2008Apr-07 Bright Artemis (Sino Carrier) 262,000 1992 Mitsui OSK Sinokor 43.0 VLCC SH For conversion by Aug 2007Apr-07 Sunrise V 258,096 1991 Nippon Oil Sanko Kisen 40.0 VLCC SH UnknownApr-07 Titan Taurus (K Cosmos) 255,000 1992 Titan Korea Line 41.0 VLCC SH For conversion to VLOC by June 2008Apr-07 Errorless (Sea Max) 147,000 1993 Top Tankers Norwegian 52.5 Suezmax DH For conversionApr-07 Eagle Memphis 104,000 1987 MISC Greeks 13.1 Aframax DS UnknownApr-07 South View (Destiny King) 64,035 1983 South View Shipping Undisclosed 6.5 Panamax SH UnknownMay-07 Tataki (Hebei Success) 244,275 1993 Dynacom HOSCO 42.0 VLCC SH For conversion to VLOC by 2Q08May-07 Butron (Globe Unity) 147,067 1991 Ondimar Arpeni Patama Suezmax SH For conversion to capesize by 1Q08May-07 Arteaga (Ocean Energy) 147,067 1990 Ondimar Arpeni Patama Suezmax SH For conversion to capesize by 1Q08May-07 Rich Duchess 81,279 1986 Groton Pacific Chinese 13.0 Aframax SH For conversion to heavy lift in 2008Jun-07 Ruby III (Hebei Warrior) 243,850 1990 Altomare HOSCO 41.0 VLCC SH For conversion to VLOC by 2H08Jun-07 Eastern Fortune (Margot N) 225,028 1989 Honam Neu Seeschiffahrt 40.0 VLCC SH For conversion to VLOC (from Jun 07)Jun-07 Front Horizon (African Horizon) 151,445 1988 Frontline Undisclosed 28.0 Suezmax SH UnknownJun-07 Kapsali 84,600 1983 Centrofin Group Tomini 10.5 Post Panamax SH UnknownJun-07 Regent 81,279 1986 Groton Chinese 13.0 Post Panamax SH UnknownJul-07 Sebu 279,986 1993 BW BW Bulk n.a. VLCC SH UnknownJul-07 Yahiko Maru (D Elephant) 258,091 1991 Daiichi Chuo TMT 38.5 VLCC SH For conversion to DH VLCC by Jun 08Jul-07 Okinoshima (Hebei Winner) 258,079 1993 Idemitsu HOSCO 48.0 VLCC SH For conversion to VLOCJul-07 Azuma Enterprise (Rebekka N) 255,226 1990 Transmed Neu Seeschiffahrts n.a. VLCC SH For conversion to VLOC in 1Q08Aug-07 Titan Virgo 299,999 1993 Titan Petro-Med Oils 90.0 VLCC DH For conversion to FPSOAug-07 New Frontier (Renata N) 285,933 1992 Transmed General Ore 46.0 VLCC DH For conversion to VLOC in 2008Aug-07 Han-Ei (Golden Jewel) 259,999 1994 NYK Zodiac Maritime 49.0 VLCC DH For conversion to VLOC in Feb 08Aug-07 Sunrise 258,096 1993 Dynacom Undisclosed 48.0 VLCC DH Unknown

54.0

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.


Figure 2: Tanker sales and purchases from 2007 onwards (SH tankers and/or intended dry bulk/FPSO conversions only) – continued


Aug-07 Navarino 248,965 1986 Avin Koreans 30.5 VLCC SH UnknownAug-07 Shinyo Clipper (Hebei General) 243,870 1992 Shinyo HOSCO 48.0 VLCC SH For conversion to VLOC (potential)Aug-07 Anand Sea (Taurus) 224,737 1981 Chemoil Undisclosed 26.5 VLCC SH For conversion (potential)Sep-07 Lucky Sailor 146,387 1989 Eastmed Chinese 30.0 Suezmax SH For conversion to capesize in 1H08Sep-07 Kudam 101,832 1981 Dynacom Prosafe n.a. Aframax SH For conversion to FPSO by 4Q08Oct-07 Front Duchess 284,480 1993 Frontline General Ore 56.0 VLCC SH For conversion to VLOC by 4Q08Oct-07 Grand Lady 281,794 1991 Eastmed TMT 56.5 VLCC SH For conversion to VLOC by 1Q08Oct-07 Triwati (Hebei Pride) 147,253 1991 BLTA HOSCO 30.0 Suezmax SH UnknownOct-07 Simba 146,270 1989 Dynacom TMT 36.0 Suezmax SH For conversion to capesize by 1H08Oct-07 United Gallant (Hebei Genius) 140,554 1990 Marine Management HOSCO 30.2 Suezmax SH UnknownOct-07 Esperanza 120,880 1993 Tankrederi Chinese 31.0 Suezmax SH UnknownOct-07 Morning Lady 100,486 1991 Byzantine Maritime TMT n.a. Aframax SH For conversion to offshore in 2008Oct-07 Spirit II 100,336 1991 Dynacom TMT 30.0 Product LR II SH UnknownOct-07 Thistle (Iron Monger 5) 100,289 1991 Dynacom TMT 30.0 Product LR II SH For conversion to DH tanker in 2008Oct-07 Poppy (Iron Monger 3) 100,031 1990 Dynacom TMT 28.0 Product LR II SH For conversion to DH tanker in 2008Oct-07 Archangelos R 97,019 1992 AK Shipping TMT 30.5 Aframax SH For conversion to offshore in 2008Oct-07 Tassels 97,000 1990 Dynacom TMT 29.0 Aframax SH For conversion to capesize in 1Q08 (confirmed)Oct-07 Jag Labh (Taiglory) 96,551 1988 Great Eastern COSCO Shanghai 16.0 Aframax SH For conversion to DH tanker in 2008Oct-07 Arietis (Iron Monger 7) 91,717 1989 Eurotankers TMT 30.0 Aframax SH For conversion to bulkerOct-07 Emerald Sky 70,894 1988 Tanker Pacific Qinfa Shipping 20.0 Product LR I SH UnknownOct-07 Emerald Hill 70,887 1991 Tanker Pacific Qinfa Shipping 26.0 Product LR I SH For conversion to panamax in 2Q08 (confirmed)Oct-07 Emerald Bay (Qinfa 9) 69,999 1990 Tanker Pacific Qinfa Shipping 26.0 Product LR I SH For conversion to panamax in 2Q08 (confirmed)Nov-07 Tribuana (Iron Monger 10) 147,500 1989 Berlian Laju Tanker TMT 34.0 Suezmax SH For conversion to capesize in 2008Nov-07 CE-Dragon 96,759 1990 Centrofin Group Chinese 28.0 Aframax SH UnknownNov-07 Frixos 94,287 1987 Liquimar Tankers Undisclosed 15.5 Aframax DS For conversionDec-07 Shinyo Sawako 275,616 1995 Vanships EIA n.a. VLCC SH UnknownDec-07 Shinyo Mariner 271,208 1991 Vanships EIA n.a. VLCC SH UnknownDec-07 Shinyo Alliance 248,034 1991 Vanships EIA n.a. VLCC SH UnknownDec-07 Shinyo Jubilee 240,401 1998 Vanships Fred Cheng n.a. VLCC SH UnknownDec-07 Front Birch 151,680 1991 Frontline Sinokor 40.0 Suezmax DS For conversion to capesize in 2008Dec-07 Front Maple 151,680 1991 Frontline Sinokor 40.0 Suezmax DS For conversion to capesize in 2008Jan-08 Ishwari 145,200 1991 Essar Shipping Nexus Energy 51.0 Suezmax DH For conversion to FPSOFeb-08 Welsh Venture 280,491 1991 Mitsui OSK Petrobras n.a. VLCC SH For conversion to storageFeb-08 Diamond Hope 264,340 1995 Mitsui OSK Saipem 52.5 VLCC SH For conversion to VLOCFeb-08 Sunrise IV 259,530 1991 Nippon Japanese 42.0 VLCC SH UnknownFeb-08 Histria Crown 164,000 1984 Petromin Undisclosed 22.0 Suezmax SH UnknownFeb-08 China Sea 84,841 1988 Tanker Pacific Shanghai Zhenhua 20.0 Post Panamax DS For conversion to heavy liftFeb-08 Red Sea 84,841 1989 Tanker Pacific Shanghai Zhenhua 20.0 Post Panamax DS Unknown





Feb-08 Yellow Sea 84,841 1988 Tanker Pacific Shanghai Zhenhua 20.0 Post Panamax DS UnknownFeb-08 Anette 63,098 1989 Blystad Undisclosed 15.0 Panamax SH For conversion to FPSOMar-08 Sentosa Spirit 97,161 1989 Phoenix Energy Chinese 19.7 Aframax DS For conversion to DH tanker in 2008Mar-08 Seraya Spirit 97,019 1992 Phoenix Energy Chinese 23.0 Aframax DS For conversion to DH tanker in 2008Mar-08 Seletar Spirit 94,998 1988 Phoenix Energy Chinese 17.5 Aframax DS For conversion to DH tanker in 2008Mar-08 Sea Tiger 94,995 1989 Frontline Heng Lian Shipping 21.0 Aframax DS For conversion (potential)Mar-08 Sea Panther 97,112 1990 Frontline Chinese 20.0 Aframax DS For conversion to DH tanker in 2008Mar-08 Sea Leopard 83,970 1986 Frontline Undisclosed 20.0 Aframax DS For conversion to DH tanker in 2008Mar-08 Sea Jaguar 89,601 1985 Frontline Chinese 15.6 Aframax DS For conversion to offshore in 2008Mar-08 Grand Explorer (Phyllis N) 285,768 1990 Sinotrans Neu Shipping 37.0 VLCC SH For conversion to VLOCMar-08 Front Sabang 285,715 1990 Frontline TMT n.a. VLCC SH UnknownMar-08 Tohdoh 261,212 1991 NYK Modec 42.5 VLCC SH UnknownMar-08 Piemonte 113,957 1987 Southern Shipping Chinese 19.0 Aframax DS For conversionApr-08 Titan Venus 250,267 1986 Titan Avin VLCC SH For conversion to storageApr-08 Titan Leo 245,653 1988 Titan Avin VLCC SH For conversion to storageApr-08 Aegean Tiger 88,950 1990 Aegean Marine Chinese 20.0 Aframax DS UnknownMay-08 Grand Mountain 260,995 1993 Mitsui OSK Undisclosed 40.5 VLCC SH For conversionMay-08 Barunawati 111,689 1991 BLTA Chang Yang 29.0 Aframax DB For conversion to DH tanker in 2008Jun-08 Kriti Episkopi 145,242 1992 Avin Chinese 32.0 Suezmax SH UnknownJun-08 Causeway 146,184 1989 Tanker Pacific Chinese 30.0 Suezmax SH UnknownJun-08 Meandros 91,680 1988 Livanos Chinese 17.0 Aframax SH UnknownJun-08 Borga 123,665 1992 J Ludwig Ningbo 33.5 Suezmax DB Unknown

Additional conversion candidates reported by Clarkson and other sourcesDec-07 Mediterranean 214,860 1986 Seariver Maritime Chinese 32.0 VLCC SH For conversion to VLOCN.A. Grigoroussa I 96,967 1987 A.K. Shipping and Trading N.A. Aframax DH For conversionN.A. Shourong 255,396 VLCC For conversion to VLOCN.A. BW Kibo 279,989 BW Ltd VLCC SH For conversion to VLOCN.A. BW Bureya 279,986 1993 BW Ltd VLCC SH For conversion to VLOCN.A. Pacific Ruby 260,988 1993 Unknown VLCC SH For conversion to VLOCN.A. New Shanghai 94,941 1986 COSCO Shanghai Aframax SH For conversionN.A. Hebei Ambition 285,640 1990 HOSCO VLCC SH For conversion to VLOCN.A. Front Tobago 258,096 1992 Cido VLCC SH For conversion to VLOC in 2008N.A. Pacific Amber 264,512 1993 Cido VLCC SH For conversion to VLOC in 2008N.A. Tohzan (Cosmo Astrea) 255,396 1992 NYK VLCC SH For conversion to VLOC in Jun 2008N.A. Takayama 259,991 1993 MOL VLCC SH For conversion to VLOC in Dec 2008

59.0





N.A. BW Nile 285,739 1991 BW Group VLCC SH For conversion to VLOC by 1H08N.A. BW Noto 286,006 1992 BW Group VLCC SH For conversion to VLOC by 2H08

Total 19,634,849



2: Chinese shipyards’ dry bulk orderbook

Figure: Chinese shipyards’ dry bulk orderbook Original Delivery Schedule

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

Total 1,187 103,467,281 5,312,668 23,054,633 40,543,410 27,919,420 6,637,150

Source: Worldyards


3: Profile of selected Chinese yards

Figure: Profile of selected Chinese shipyards

As at 1 July 2008 Facilities Bulk OrdersShipbuilder Ownership Location Area (sq m) Quay (m) (dwt)Bohai Shipbuilding National (CSIC) Huludao, Liaoning 3,600,000 na 3,398,200

Chengxi Shipyard National (CSSC) Jiangyin City, Jiangsu 1,000,000 1,180 2,325,525

Wuhu Shipyard (Chery) Private Wuhu, Anhui 550,000 200 90,000

China Hengfu Private 757,200- Blue Sky Ningbo, Zhejiang na na- Hengfu Shipbuilding and Repair Ningbo, Zhejiang na na- Yisida Shipyard Ningbo, Zhejiang na na

China Shipping Ind. (Jiangsu) National Jiangdu, Jiangsu 530,000 440 1,259,400

COSCO National 5,057,600- Cosco Dalian Dalian, Liaoning 1,200,000 na- Cosco Nantong Nantong, Jiangsu 400,000 na- COSCO Guangdong Guangzhou, Guangdong 200,000 1,200- COSCO Shanghai Shanghai na 360- COSCO Zhoushan Zhoushan, Zhejiang 2,000,000 750

Dalian Shipbuilding National (CSIC) > 1,100,000 3,724 8,420,000- No 1 Production Yard Dalian, Liaoning na 1,600- No 2 Production Yard Dalian, Liaoning 1,100,000 2,124

Dayang Binjiang Private Yangzhou, Jiangsu 1,200,000 na 4,727,770

Fujian Guanhai Private Fuzhou, Fujian na na 665,500

Fujian Mawei Other state-owned Fuzhou, Fujian 334,000 345 259,200

Fujian Shenglong Private Fu'an, Fujian na na 90,000

Guangzhou Huangpu National (CSSC) 1,276,000- 1st shipyard Guangzhou, Guangdong 615,000 3,000- 2nd shipyard Guangzhou, Guangdong 2,500,000 4,500

Guangzhou Longxue National (CSSC) Longxue, Guangzhou 2,530,000 1,300 2,760,000

Hudong-Zhonghua National (CSSC) 3,286,000- 1st shipyard (3rd shipbuilding dept) Shanghai 270,000 2,000- 2nd shipyard (2nd shipbuilding dept) Shanghai na na

Jiangdong Shipyard National (SBIC) 342,000- Jiangdong shipyard Wuhu, Anhui 270,000 500- Jiangdong shipyard (new) Wuhu, Anhui 30,000 na

Jiangmen Nanyang Private Jiangmen, Guangdong 370,000 750 429,900

Jiangnan Shipbuilding National (CSSC) Shanghai, Guangdong na na 3,371,000

Jiangnan Changxing Heavy National (CSSC) Shanghai na na 1,770,000

Jiangnan Changxing Shipbuilding National (CSSC) Shanghai 5,300,000 8,000 2,730,000

Jiangsu Eastern Private Shanghai 167,000 720 2,775,400

Jiangsu Hantong Private Tongzhou, Jiangsu 350,000 na 2,166,000

Jiangsu Rongsheng Private Nantong, Jiangsu na na 3,818,000

Jiangsu Xiangshui Private Xiangshui, Jiangsu na na 228,000

Source: Worldyards, CIMB/CIMB-GK estimates


Bulk Oil Gas Cont. FPSO Main type of ships Bulk Oil Gas Cont. FPSO Main type of ships24 30 4 0 0 MR, Supramax 31 26 2 5 0 Handysize, MR

43 0 0 0 0 Supramax 11 0 0 0 0 Supramax, Handysize

3 0 0 0 4 Handysize, heavy lift 0 0 0 0 0

12 2 0 0 0 1 2 0 1 08 2 0 0 0 Supramax 1 2 0 1 04 0 0 0 0 Panamax 0 0 0 0 00 0 0 0 0 0 0 0 0 0

22 4 0 0 0 Supramax 4 6 0 4 0 Handysize, MPP

78 2 0 4 5 0 0 0 0 025 0 0 0 5 Panamax, Heavy Lift 0 0 0 0 0

0 2 0 0 0 Shuttle tanker 0 0 0 0 011 0 0 0 0 Supramax 0 0 0 0 0

0 0 0 0 0 0 0 0 0 042 0 0 4 0 Supramax, PCTC 0 0 0 0 0

41 51 0 37 0 0 41 0 27 08 18 0 16 0 VLOC, LR I, LR II, Handysize c/s 0 24 0 11 0 Panamax c/s, LR II

33 33 0 21 0 Cape, VLCC, Panamax c/s 0 17 0 16 0 Panamax c/s, VLCC, Afra

71 0 3 3 0 Supramax, Handy Capesize 21 1 0 8 0 Supramax, containership

13 0 0 0 0 Post panamax bulker, handysize 0 0 0 0 0

8 0 0 24 0 Containership 2 2 0 52 2 Containership

2 1 0 0 0 Handymax, product/chemical 0 1 0 0 0 Product/chemical

26 2 0 0 0 0 0 0 0 326 2 0 0 0 Panamax bulker, handysize 0 0 0 0 3 Other service/Misc vessel

0 0 0 0 0 0 0 0 0 0

14 4 0 0 0 VLOC, VLCC, Panamax Bulker 0 0 0 0 0

39 16 0 41 0 112 55 0 57 539 16 0 16 0 Post panamax bulker, container 14 0 0 6 0 Panamax bulker

0 0 0 25 0 MPP, MPP Heavy Lift 98 55 0 51 5 Panamax bulker, handysize,product tanker

6 0 0 18 0 0 2 0 28 00 0 0 18 0 Containership 0 2 0 28 0 MPP, Containership6 0 0 0 0 Supramax 0 0 0 0 0

13 0 0 0 0 Handysize 2 0 0 2 0 Handysize, containership

36 13 4 0 0 Panamax bulker, Chemical, LPG 1 1 0 0 0 Panamax Bulker, chemical

30 0 0 22 0 Handy capesize, panamax c/s 0 0 0 0 0

10 11 0 8 0 VLCC, Capesize, Panamax c/s 0 0 0 0 0

44 3 0 1 0 Panamax bulker, handysize 3 2 0 15 0 Containership, MPP

38 0 0 0 2 Supramax 3 0 0 0 0 Supramax, handysize

28 36 0 4 0 Suezmax 1 0 0 0 0 Panamax Bulker

4 0 0 0 0 Handymax 0 0 0 0 0

Orderbook composition (num) Past deliveries (num)


[ continued on the following page… ]

As at 1 July 2008 Bulk OrdersShipbuilder Ownership Location Area (sq m) Quay (m) (dwt)Jinling Shipyard National (SBIC) 2,506,000- Jinling Shipyard Nanjing, Jiangsu 300,000 372- Jiangsu Jinling Shipbuilding Yinzheng

Mindong Congmao Private Ningde, Fujian na na 528,000

Nanjing Dongze Private Nanjing, Jiangsu na na 6,217,000

Nanjing Wujiazui Private Nanjing, Jiangsu 140,000 150 65,000

Nantong Changqingsha Private Nantong, Jiangsu 160,000 960 274,000

Nantong Daoda Heavy Private Nantong, Jiangsu 540,000 600 422,400

Nantong Huigang Private Nantong, Jiangsu 880,000 1,800 204,000

Nantong Mingde Private Nantong, Jiangsu 533,333 500 269,200

NACKS Other state-owned 599,000- Nantong Cosco-KHI Ship Nantong, Jiangsu 560,000 646- Dalian Cosco Shipbuilding Dalian, Liaoning

New Century Private Jingjiang, Jiangsu 610,000 120 704,000

New Times Private Jiangyin, Jiangsu 10,000,000 1,200 6,046,000

Ningbo Xinle Private 150,000- Ningbo Xinle Ningbo, Zhejiang na na- Ningbo Xinle New Yard Zhoushan, Zhejiang na na

Penglai Zhongbai Private Penglai, Shandon na na 1,203,200

Qingdao Beihai National (CSIC) 3,113,700- Qingdao Beihai Newbuilding Yard Qingdao, Shandong na na

Qingshan Shipyard National (SBIC) Wuhan, Hubei 1,000,000 2,200 1,083,000

Samjin Shipbuilding Private Shandong 80,000 170 1,005,000

Shandong Baibuting Private Rongcheng, Shandong na na 139,400

Shandong Huahai Private na na na 186,500

Shanghai Shipyard National (CSSC) 2,284,000- Chong Ming Shipbuilding Base Shanghai 1,500,000 na- Puxi Factory Shanghai na na

Shanghai Waigaoqiao National (CSSC) Shanghai 1,460,000 1,569 9,011,000

Shanhaiguan Shipbuilding National (CSIC) Qinhuangdao, Hebei 1,360,000 2,018 826,800

Taizhou Kouan Private Taizhou, Jiangsu 650,000 2,000

Taizhou Maple Leaf Private Taizhou, Zhejiang 270,000 1,300 243,100

Taizhou Sanfu Private 1,048,000- South Yard (new site) Taizhou, Jiangsu na na- North Yard (old site) Taizhou, Jiangsu na na

Tianjin Xingang National (CSIC) 301,180- Tianjin Xingang Tianjin 560,000 na- Tianjin Lingang Base Tianjin 3,500,000 Under construction

Under construction

Under construction

Facilities


Bulk Oil Gas Cont. FPSO Main type of ships Bulk Oil Gas Cont. FPSO Main type of ships8 12 0 33 0 0 24 0 67 68 12 0 33 0 Containership 0 24 0 67 6 Containership0 0 0 0 0 0 0 0 0 0

8 0 0 0 0 Panamax bulker 1 1 0 0 0 Handysize, product

2 0 0 0 0 Handysize 0 0 0 0 0

4 0 0 13 0 Containership 0 0 0 3 0 Containership

12 0 0 0 0 Handysize 0 0 0 0 0

6 0 0 0 0 Handysize 0 0 0 0 0

8 0 0 0 0 Handysize 0 0 0 0 0

9 17 0 18 0 PCC, Chemical 2 2 0 0 0 Handysize, chemical

34 4 0 11 0 36 11 0 6 026 4 0 11 0 Supramax, VLOC, Containship 36 11 0 6 0 Supramax, handymax

8 0 0 0 0 VLOC, Capesize 0 0 0 0 0

4 20 0 0 0 LR 1, LR 11, Capesize 31 39 0 6 0 LR 1, Supramax, Handysize

40 31 0 0 0 Capesize, LR 11, Handy Capesize 0 1 0 0 0 LR 1

6 3 0 6 0 11 5 0 0 00 3 0 6 0 MPP, Product/Chemical 0 5 0 0 0 Chemical6 0 0 0 0 Handysize 11 0 0 0 0 Bulker

16 2 0 0 0 Panamax Bulker, Product 0 0 0 0 0

18 0 0 0 0 Capesize, Supramax 0 1 0 0 0 Drillship

19 10 0 13 0 Supramax, Chemical 1 13 1 50 0 Containership, MPP, Heavy Lift

30 0 0 2 0 Handysize 0 0 0 0 0

16 0 0 0 0 Handysize, bulker < 10000 dwt 0 0 0 0 0

5 0 0 0 0 Handysize 0 0 0 0 0

32 0 0 30 0 0 0 0 10 016 0 0 12 0 Supramax, Containership 0 0 0 8 0 Containership16 0 0 18 0 Containership, Supramax 0 0 0 2 0 Containership

51 32 0 0 0 Cape, VLCC, LR II 54 13 0 0 3 Cape, LR II

15 0 0 0 0 Handysize, Post Panamax 5 0 0 0 1 Handysize

8 1 0 0 0 Handysize 0 2 0 0 0 Product/Chemical

24 8 0 19 0 0 2 0 9 024 8 0 19 0 MPP, Supramax 0 2 0 3 0 MPP

0 0 0 0 0 0 0 0 6 0 MPP

8 0 0 5 0 36 3 0 71 108 0 0 5 0 Handysize 36 3 0 71 10 MPP Heavy Lift, MPP0 0 0 0 0 0 0 0 0 0



[ continued on the following page… ]

As at 1 July 2008 Bulk OrdersShipbuilder Ownership Location Area (sq m) Quay (m) (dwt)Weihai Shipyard Other state-owned 610,000- Weihai Shipyard Weihai, Shandong 240,000 na- Shandong New Shipbuilding Heavy Weihai, Shandong

Wuhan Huaxia Private na na na 292,000

Yangzhou Guoyu Private Yangzhou, Jiangsu na na 673,000

Yangzijiang Shipbuilding Private 2,686,000- Jiangsu Yangzijiang Jiangyin, Jiangsu 322,000 1,000- Jiangsu New Yangzijiang Jingjiang, Jiangsu 1,070,000 1,300

Zhejiang Friendship Private Taizhou, Zhejiang 170,000 338 200,000

Zhejiang Jiantiao Private Zhejiang 80,000 na 110,606

Zhejiang Jingang Private 268,000- Zhejiang Jingang Wenling, Zhejiang 128,122 na- Zhejiang Jingang New Shipbuilding Base Wenling, Zhejiang 660,000 Under construction

Zhejiang Shipbuilding Private Ningbo, Zhejiang na na 106,100

Zhejiang Yangfan Private 832,500- Zhoushan Shipyard Zhoushan, Zhejiang na na- Jiangwan Shipyard Zhoushan, Zhejiang na na- Zhejiang Yangfan Zhoushan, Zhejiang na na

Zhejiang Zhenghe Private Zhejiang na na 360,000

Zhoushan Jinhaiwan Private Zhoushan, Zhejiang 1,300,000 7,000 4,656,000

Zhoushan Wuzhou Private Zhoushan, Zhejiang 300,000 3,000 623,300

TOTAL 101,849,681

Under construction

Facilities

Source: Worldyards, CIMB/CIMB-GK estimates


Bulk Oil Gas Cont. FPSO Main type of ships Bulk Oil Gas Cont. FPSO Main type of ships12 2 0 4 0 2 2 0 41 0

0 2 0 4 0 Containership 2 2 0 41 0 MPP, containership12 0 0 0 0 Post panamax bulker, handysize 0 0 0 0 0

10 0 0 0 0 Handysize 0 0 0 0 0

14 0 0 0 0 Supramax 0 0 0 0 0

36 0 0 105 0 10 1 0 71 58 0 0 60 0 MPP, containership 10 1 0 67 5 MPP, containership

28 0 0 45 0 Panamx containership 0 0 0 4 0 Containership

4 2 0 0 0 Supramax, Product/chemical 0 1 0 0 0 Product tanker

2 0 0 0 0 Supramax 0 0 0 0 0

8 9 0 0 0 0 3 0 0 00 9 0 0 0 Product/Chemical 0 3 0 0 0 Product/Chemical8 0 0 0 0 Handysize 0 0 0 0 0

2 0 0 14 0 Panamax containership 10 8 1 24 7 MPP, Supramax

9 4 0 20 0 0 1 0 55 10 0 0 4 0 Containership 0 1 0 44 1 Containership0 0 0 0 0 0 0 0 0 09 4 0 16 0 Containership 0 0 0 11 0 Containership

8 0 0 0 0 Supramax, handysize 0 0 0 0 0

33 6 0 0 0 Capesize, Panamax bulker 0 0 0 0 0

13 0 0 3 0 Supramax 3 0 0 1 0 Handysize

1,518 453 11 791 16 602 424 4 1056 73



4: Failed/cancelled orders (2007)

Figure: Failed orders (2007) Price

Order Date Delivery Beneficial Owner DWT (US$ m) Shipbuilder23-Apr-2007 Sep-2009 Genel Denizcilik Nakliyati AS (GEDEN Lines) 180,000 77.7 Korea Shipyard23-Apr-2007 Dec-2009 Genel Denizcilik Nakliyati AS (GEDEN Lines) 180,000 77.7 Korea Shipyard23-Apr-2007 Jan-2010 Genel Denizcilik Nakliyati AS (GEDEN Lines) 180,000 77.7 Korea Shipyard23-Apr-2007 Mar-2010 Genel Denizcilik Nakliyati AS (GEDEN Lines) 180,000 77.7 Korea Shipyard17-May-2007 May-2009 Romeo Shipping Co Ltd 34,000 32.0 Wonyoung Shipbuilding17-May-2007 Aug-2009 Romeo Shipping Co Ltd 34,000 32.0 Wonyoung Shipbuilding17-May-2007 Oct-2009 Romeo Shipping Co Ltd 34,000 32.0 Wonyoung Shipbuilding17-May-2007 Dec-2009 Romeo Shipping Co Ltd 34,000 32.0 Wonyoung Shipbuilding17-May-2007 Mar-2010 Romeo Shipping Co Ltd 34,000 32.0 Wonyoung Shipbuilding17-May-2007 Jun-2010 Romeo Shipping Co Ltd 34,000 32.0 Wonyoung Shipbuilding31-May-2007 Sep-2010 Brave Maritime Corp Inc 92,100 48.0 Qingdao Jimo Mastek31-May-2007 Oct-2010 Brave Maritime Corp Inc 92,100 48.0 Qingdao Jimo Mastek31-May-2007 Jan-2011 Brave Maritime Corp Inc 92,100 48.0 Qingdao Jimo Mastek31-May-2007 Mar-2011 Brave Maritime Corp Inc 92,100 48.0 Qingdao Jimo Mastek13-Jun-2007 Aug-2010 Trans Pacific Carriers Co Ltd 35,000 29.8 Nanjing Dongze13-Jun-2007 Dec-2010 Trans Pacific Carriers Co Ltd 35,000 29.8 Nanjing Dongze15-Jun-2007 H2-2010 Van-Clipper 75,200 39.0 Penglai Zhongbai15-Jun-2007 H2-2010 Van-Clipper 75,200 39.0 Penglai Zhongbai15-Jun-2007 H1-2011 Van-Clipper 75,200 39.0 Penglai Zhongbai15-Jun-2007 H1-2011 Van-Clipper 75,200 39.0 Penglai Zhongbai06-Jul-2007 May-2009 Aktif Denizcilik Bilgisayar Form 33,500 34.0 Dhumi Heavy Industries06-Jul-2007 Jul-2009 Navimar SA 33,500 34.9 Dhumi Heavy Industries06-Jul-2007 Aug-2009 Navimar SA 33,500 34.9 Dhumi Heavy Industries06-Jul-2007 Aug-2009 Aktif Denizcilik Bilgisayar Form 33,500 34.0 Dhumi Heavy Industries06-Jul-2007 Oct-2009 Aktif Denizcilik Bilgisayar Form 33,500 34.0 Dhumi Heavy Industries06-Jul-2007 Dec-2009 Aktif Denizcilik Bilgisayar Form 33,500 34.0 Dhumi Heavy Industries06-Jul-2007 Feb-2010 Aktif Denizcilik Bilgisayar Form 33,500 34.0 Dhumi Heavy Industries06-Jul-2007 Apr-2010 Aktif Denizcilik Bilgisayar Form 33,500 34.0 Dhumi Heavy Industries27-Jul-2007 Dec-2009 Vanship Holdings Ltd. 80,400 42.0 Nanjing Wujiazui27-Jul-2007 Feb-2010 Vanship Holdings Ltd. 80,400 42.0 Nanjing Wujiazui27-Jul-2007 May-2010 Vanship Holdings Ltd. 80,400 42.0 Nanjing Wujiazui27-Jul-2007 Jun-2010 Vanship Holdings Ltd. 80,400 42.0 Nanjing Wujiazui22-Aug-2007 Mar-2010 Zhejiang Haixi Shipping 92,500 47.0 Zhejiang Yangfan22-Aug-2007 Jun-2010 Zhejiang Haixi Shipping 92,500 47.0 Zhejiang Yangfan22-Aug-2007 Sep-2010 Zhejiang Haixi Shipping 92,500 47.0 Zhejiang Yangfan02-Sep-2007 Nov-2009 Ibramar Schiffahrts GmbH 57,000 41.5 Jiangdong Shipyard02-Sep-2007 Jan-2010 Ibramar Schiffahrts GmbH 57,000 41.5 Jiangdong Shipyard02-Sep-2007 Mar-2010 Ibramar Schiffahrts GmbH 57,000 41.5 Jiangdong Shipyard02-Sep-2007 May-2010 Ibramar Schiffahrts GmbH 57,000 41.5 Jiangdong Shipyard02-Sep-2007 Jul-2010 Ibramar Schiffahrts GmbH 57,000 41.5 Jiangdong Shipyard02-Sep-2007 Sep-2010 Ibramar Schiffahrts GmbH 57,000 41.5 Jiangdong Shipyard10-Oct-2007 Jul-2009 Masters' Ship Management SA 181,000 88.7 STX10-Oct-2007 Sep-2009 Masters' Ship Management SA 181,000 88.7 STX15-Oct-2007 Jun-2011 Medcare Shipping SA 92,500 n/a Kouan Shipbuilding15-Oct-2007 Sep-2011 Medcare Shipping SA 92,500 n/a Kouan Shipbuilding22-Oct-2007 Oct-2009 Pola Shipping 34,000 38.0 Brother Shipbuilding22-Oct-2007 Oct-2009 Pola Shipping 34,000 38.0 Brother Shipbuilding23-Nov-2007 Jun-2011 Jinhui Shipping & Transportation Ltd 300,000 122.5 Dalian Shipbuilding, DSIC23-Nov-2007 Dec-2011 Jinhui Shipping & Transportation Ltd 300,000 122.5 Dalian Shipbuilding, DSIC11-Dec-2007 Apr-2010 Genel Denizcilik Nakliyati AS (GEDEN Lines) 80,000 52.0 Nanjing Wujiazui11-Dec-2007 Aug-2010 Genel Denizcilik Nakliyati AS (GEDEN Lines) 80,000 52.0 Nanjing Wujiazui11-Dec-2007 Dec-2010 Genel Denizcilik Nakliyati AS (GEDEN Lines) 80,000 52.0 Nanjing Wujiazui11-Dec-2007 Apr-2011 Genel Denizcilik Nakliyati AS (GEDEN Lines) 80,000 52.0 Nanjing Wujiazui17-Dec-2007 May-2011 n/a 32,000 37.3 Dae Sun17-Dec-2007 Jul-2011 n/a 32,000 37.3 Dae Sun17-Dec-2007 Aug-2011 n/a 32,000 37.3 Dae Sun17-Dec-2007 Oct-2011 n/a 32,000 37.3 Dae Sun17-Dec-2007 Dec-2011 n/a 32,000 37.3 Dae Sun17-Dec-2007 Jan-2012 n/a 32,000 37.3 Dae Sun

Total 4,599,300

Source: Worldyards


5: Dry bulk fleet development Figure 1: Dry bulk fleet development

No of vessels DWT No of vessels DWT No of vessels DWT No of vessels DWT No of vessels DWTEnd 2007 6,691 392,560,000 768 131,440,000 1,479 108,260,000 1,598 76,900,000 2,846 75,960,000

+ Deliveries (1H08) 144 9,987,146 18 3,426,451 36 2,862,847 46 2,517,279 44 1,180,569+ Conversions (1H08) 7 1,132,854 5 1,013,549 1 57,153 1 52,721 0 9,431- Scrapping (1H08) 0 0 0 0 0 0 0 0 0 0

End Jun 2008 6,842 403,680,000 791 135,880,000 1,516 111,180,000 1,645 79,470,000 2,890 77,150,000+ Deliveries (2H08) 267 18,196,004 26 5,241,000 62 4,838,700 106 5,731,900 73 2,384,404+ Conversions (2H08) 36 7,718,013 30 7,131,487 7 648,678 -1 -52,721 0 -9,431- Scrapping (2H08) 0 0 0 0 0 0 0 0 0 0

End Dec 2008 7,145 429,594,017 847 148,252,487 1,585 116,667,378 1,750 85,149,179 2,963 79,524,973+ 2009 deliveries 792 62,125,705 155 28,872,544 135 11,175,843 268 14,915,490 234 7,161,828+ 2009 conversions 26 4,669,410 17 3,875,808 9 793,602 0 0 0 0- 2009 scrapping -268 -11,530,000 -15 -2,540,000 -36 -2,410,000 -40 -1,810,000 -177 -4,770,000

End 2009F 7,695 484,859,132 1,004 178,460,839 1,693 126,226,823 1,978 98,254,669 3,020 81,916,801+ 2010 deliveries 1,066 100,695,742 334 59,089,688 235 19,335,400 264 14,815,280 233 7,455,374+2010 conversions 3 607,551 2 484,942 1 122,609 0 0 0 0- 2010 scrapping -403 -17,295,000 -23 -3,810,000 -54 -3,615,000 -61 -2,715,000 -265 -7,155,000

End 2010F 8,361 568,867,425 1,317 234,225,469 1,875 142,069,832 2,181 110,354,949 2,988 82,217,175

Handysize (10-40k dwt)TOTAL Bulk Capesize/VLOC (> 100k dwt) Panamax (60-100k dwt) Handymax (40-60k dwt)



Figure 2: Dry bulk fleet development (no of ships)

2,846

1,598

1,479

768

117

152

106

79

57

228

108

157

-32

203

182

313

-500 0 500 1000 1500 2000 2500 3000 3500

Handysize

Handymax

Panamax

Capesize

End 2007 2008 net additions 2009 net additions 2010 net additions


Figure 3: Dry bulk fleet development (m dwt)

76

77

108

131

8.2

8.4

16.8

13.1

9.6

30.2

12.1

15.8

55.8

3.6 2.4 0.3

0.0 50.0 100.0 150.0 200.0 250.0

Handysize

Handymax

Panamax

Capesize




6: Crude tanker fleet development Figure 1: Crude tanker fleet development

No of vessels DWT No of vessels DWT No of vessels DWT No of vessels DWT No of vessels DWTEnd 2007 1,603 274,120,000 504 148,320,000 361 54,670,000 593 61,230,000 145 9,900,000

+ Deliveries (1H08) 45 8,342,197 16 4,910,035 8 1,262,578 18 1,950,908 3 218,676- Scrapping (1H08) -11 -1,463,991 -3 -738,075 -1 -153,741 -5 -443,315 -2 -128,860- Conversions (1H08) -30 -4,788,206 -11 -2,871,960 -4 -558,837 -13 -1,227,593 -2 -129,816

End Jun 2008 1,607 276,210,000 506 149,620,000 364 55,220,000 593 61,510,000 144 9,860,000+ Deliveries (2H08) 71 12,368,112 21 6,406,459 12 1,873,912 37 4,017,741 1 70,000- Scrapping (2H08) -11 -1,486,009 -3 -761,925 -1 -146,259 -5 -456,685 -2 -121,140- Conversions (2H08) -23 -5,498,174 -18 -4,652,354 -6 -908,879 2 141,594 -1 -78,535

End Dec 2008 1,644 281,593,930 507 150,612,180 369 56,038,774 627 65,212,650 142 9,730,326+ 2009 deliveries 207 38,576,934 68 20,926,081 58 9,167,972 71 7,740,035 10 742,846- 2009 scrapping -33 -5,762,905 -16 -3,957,209 -6 -877,855 -8 -742,938 -3 -184,903- 2009 conversions -38 -6,856,601 -18 -4,744,295 -7 -999,917 -11 -981,827 -2 -130,563

End 2009F 1,781 307,551,358 541 162,836,758 414 63,328,974 679 71,227,920 147 10,157,706+ 2010 deliveries 169 33,497,978 64 19,732,507 50 7,908,661 50 5,478,810 5 378,000- 2010 scrapping / conversio -140 -24,544,734 -67 -16,818,137 -26 -3,730,884 -35 -3,157,485 -12 -838,227

End 2010F 1,810 316,504,603 538 165,751,128 438 67,506,751 694 73,549,245 140 9,697,479

Panamax (60-80k dwt)Aggregate crude tanker fleet VLCC/ULCC (200-320k/>320k dwt) Suezmax (120-200k dwt) Aframax (80-120k dwt)


Figure 2: Double hull crude tanker fleet development

No of vessels DWT No of vessels DWT No of vessels DWT No of vessels DWT No of vessels DWTEnd 2007 1,282 215,607,656 356 108,170,000 302 46,050,000 506 53,309,256 118 8,078,400

+ 2008 deliveries (1H08) 45 8,342,197 16 4,910,035 8 1,262,578 18 1,950,908 3 218,676+ 2008 deliveries (2H08) 71 12,368,112 21 6,406,459 12 1,873,912 37 4,017,741 1 70,000

End 2008F 1,398 236,317,965 393 119,486,494 322 49,186,490 561 59,277,905 122 8,367,076+ 2009 deliveries 207 38,576,934 68 20,926,081 58 9,167,972 71 7,740,035 10 742,846

End 2009F 1,605 274,894,899 461 140,412,575 380 58,354,462 632 67,017,940 132 9,109,922+ 2010 deliveries 169 33,497,978 64 19,732,507 50 7,908,661 50 5,478,810 5 378,000

End 2010F 1,774 308,392,877 525 160,145,082 430 66,263,123 682 72,496,750 137 9,487,922

Panamax DHTotal DH only VLCC/ULCC DH Suexmax DH Aframax DH



Figure 3: Single hull crude tanker fleet development

No of vessels DWT No of vessels DWT No of vessels DWT No of vessels DWT No of vessels DWTEnd 2007 321 58,512,344 148 40,150,000 59 8,620,000 87 7,920,744 27 1,821,600

- 2008 conversions -53 -10,286,380 -29 -7,524,314 -10 -1,467,716 -12 -1,085,999 -3 -208,351- 2008 scrapping -22 -2,950,000 -6 -1,500,000 -2 -300,000 -10 -900,000 -4 -250,000

End 2008F 246 45,275,965 114 31,125,686 47 6,852,284 66 5,934,745 20 1,363,250- 2009 conversions -38 -6,856,601 -18 -4,744,295 -7 -999,917 -11 -981,827 -2 -130,563- 2009 scrapping -33 -5,762,905 -16 -3,957,209 -6 -877,855 -8 -742,938 -3 -184,903

End 2009F 176 32,656,459 80 22,424,183 34 4,974,512 47 4,209,980 15 1,047,784- 2010 scrapping/conversion -140 -24,544,734 -67 -16,818,137 -26 -3,730,884 -35 -3,157,485 -12 -838,227

End 2010F 36 8,111,726 13 5,606,046 8 1,243,628 12 1,052,495 3 209,557

Panamax SHTotal SH only VLCC/ULCC SH Suexmax SH Aframax SH


Figure 4: Crude tanker fleet development (no of ships)

593

361

504

34

8

3

53

45

34

15

24

-3

-100 0 100 200 300 400 500 600 700

Aframax

Suezmax

VLCC/ULCC




Figure 5: Crude tanker fleet development (m dwt)

61

55

148

4

1

2

6

7

12

2

4

3

0 20 40 60 80 100 120 140 160 180

Aframax

Suezmax

VLCC/ULCC



[ 88 ]

Notes:


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(ii) As of 6 August 2008, the analysts, Raymond Yap, David Y.K. Lee and Kasem Prunratanamala who prepared this report, have an interest in the securities in the following company or companies covered or recommended in this report: (a) -.

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The securities of such company(ies) may not be eligible for sale in all jurisdictions or to all categories of investors. Australia: Despite anything in this report to the contrary, this research is provided in Australia by CIMB-GK Research Pte. Ltd. (“CIMB-GK”) and CIMB-GK notifies each recipient and each recipient acknowledges that CIMB-GK is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cwlth) in respect of financial services provided to the recipient. CIMB-GK is regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. This research is only available in Australia to persons who are “wholesale clients” (within the meaning of the Corporations Act 2001 (Cwlth)) and is supplied solely for the use of such wholesale clients and shall not be distributed or passed on to any other person. 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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. CGHK 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 CGHK. 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 CGHK. Unless permitted to do so by the securities laws of Hong Kong, no person may issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the securities covered in this report, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong). Indonesia: This report is issued and distributed by PT CIMB-GK Securities Indonesia (“CIMB-GKI”). 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-GKI 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-GKI. 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-GKI. Neither this report nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens wherever they are domiciled or to Indonesia residents except in compliance with applicable Indonesian capital market laws and regulations. Malaysia: This report is issued and distributed by CIMB Investment Bank Berhad (“CIMB”). 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 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.


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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However, the delivery of this research report to any person in the United States of America shall not be deemed a recommendation to effect any transactions in the securities discussed herein or an endorsement of any opinion expressed herein. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB-GK Securities (USA) Inc. Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

RECOMMENDATION FRAMEWORK #1*

STOCK RECOMMENDATIONS SECTOR 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.

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 stock's total return is expected to be within +/-5% of a relevant benchmark's total return.

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.

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.

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.

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.

CIMB-GK Research Pte Ltd (Co. Reg. No. 198701620M)


RECOMMENDATION FRAMEWORK #2 **

STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS OUTPERFORM: Expected positive total returns of 15% or more over the next 12 months.

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: Expected total returns of between -15% and +15% 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.

UNDERPERFORM: Expected negative total returns of 15% or more 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

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.


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