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Oil Demand In Focus: A Rosy Outlook For Nam Cheong?
Corporate Digest | 21 October 2011
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By: Gerald Teo
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By: Ong Qiuying
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Nam Cheong’s business venture into the shipbuilding industry began in 1968 with the building of fishing boats in Sarawak, Malaysia. A shift in vision in the mid-eighties transformed the business into the building of offshore support vessels (OSVs). To date, it has garnered more than 20 years of experience in building OSVs, with over 60 vessels delivered since 2007.

In a recent interview with Shares Investment (Singapore), Executive Director Leong Seng Keat highlighted to us the company’s decision of the reverse takeover (RTO) of Eagle Brand Holdings. “There is greater certainty and listing via RTO is typically a shorter process, which is also not beholden to market conditions,” Leong said.

Nam Cheong’s latest financial result for six months ended 30 June 2011 showed a drop in revenue and earnings to RM215.2 million (-32%) and RM20 million (-60%) respectively, compared to the previous corresponding period. The company attributed its lower top line to the lesser number of ordered vessels being built due to the spill-over effect of the economic downturn in 2008/2009.

Numerous Contract Wins
Despite the lacklustre performance in its financials, Nam Cheong has seen a pickup in its order book. It secured new contracts for the sale of four anchor handling towing supply (AHTS) vessels amounting to $62.8 million with new clients in a short span of months from late July, which is expected to contribute positively to its FY11 results. It also sold two platform supply vessels and another AHTS vessel worth $66.8 million to repeat customers, Bumi Armada and Gulf Glory Marine Services LLC, on 29 September. Bumi Armada is the largest owner and operator of OSVs in Malaysia, while Gulf Glory Marine Services has an establishment in Sharjah, United Arab Emirates since 2001.

On 19 September, Nam Cheong entered into a joint venture with three major players in the region to expand its offshore marine services and has simultaneously resulted in a sale of its multi-purpose support vessel worth $35.3 million. While the joint venture allows Nam Cheong to tap into the synergistic expertise and network of its partners, Leong pointed out that the continuous contract wins speak volumes of the confidence their clients have in the company. Notably, the shipbuilder’s order book has jumped to 12 vessels with a total contract value of $274 million to be delivered in these two years.

Track Record Backed By Strong Competitive Strengths
“With a wealth of experience, Nam Cheong has been able to ascertain and forecast the market demand to construct built-to-stock vessels to meet expected demand ahead of time, which translates to better margins due to its ability to deliver vessels in a shorter time period,” Leong proudly acclaimed while reflecting on Nam Cheong’s unique competitive strengths. Leong also attributed the numerous contract wins recently to this capability as the company is able to meet the rising demand for smaller AHTS vessels.

Leong mentioned that the higher demand for its vessels has led to outsourcing of vessel construction to some shipyards in China. However, the stronger margins that Nam Cheong is able to achieve with timely deliveries of vessels helped to cushion the margins affected when vessel construction is outsourced to other shipyards.

“While outsourcing has its limitations with the shipbuilder losing control over certain production processes, the company’s strong relationship with partner yards and active participation to walk through the building procedures had ensured that it does not compromise quality and reliability,” Leong highlighted. He added that this asset-light business model has a proven track record and allows the company to expand while maximising outsourcing opportunities. Nam Cheong has its own Miri shipyard, stretching 12.6-hectares in Malaysia, which can deliver up to 12 vessels a year.

Nam Cheong Yard
Nam Cheong is embarking on a yard expansion programme to increase its shipbuilding capacity via upgrade in grandery crane, more workshops and environment-friendly paint-shop

Oil Demand Intact In Developing Nations
Expressing confidence in the company’s strong positioning as the largest shipbuilder of OSVs in Malaysia, Leong also remarked that the current activities in the oil and gas industry remained healthy with potential upsides as the Malaysian government expands oil and gas ventures.

“The supply and demand of the oil and gas dynamics is intact. We look upon it favourably and the momentum that we see in the industry is strong,” said Leong, taking a positive stance on the current resilient oil price level and activities in the industry. “Most oil majors are still planning to increase their expenditures in 2012,” he added.

However, Leong believes that a shakeup in the financial market would impact the oil and gas market. Recently, the International Energy Agency (IEA) trimmed its global oil demand growth forecast for 2012 by 210,000 barrels per day. Separately, the Organization of Petroleum Exporting Countries (OPEC) cut its global oil demand growth estimate next year by 70,000 barrels per day.

Despite the adverse sentiments, the US Energy Information Administration expects growth in oil demand from developing nations to outpace the increase in production from non-OPEC countries. According to IEA, China’s oil demand this year contributed more than half of global incremental demand despite half the pace of last year. Ultimately, the sustained oil demand in developing nations could be an impetus for Nam Cheong given its established foothold in Asia and the Middle East.

Nam Cheong  -- -- --   
Business: An offshore marine group specialising in the building of offshore support vessels. [FY18 Turnover] Shipbuilding (59.2%), vessel chartering (40.8%).

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