Marine Sector (from DBS Vickers)

Fact-finding trip to China. In our China trip, we talked to five of the leading state-owned and privately owned Chinese shipyards and three of the top 25 China-basedsteelmakers. The results were within expectation. Shipyards argue for the steel price to decline in 2H 2008,
as the Chinese government is unlikely to allow steel prices to stay high due to inflationary pressure on the economy. On the contrary, the steelmakers generallyexpect steel prices for higher quality products, including steel plates, to hold steady due to higher raw material costs, even though they also expressed cautious views on possible weaker domestic demand and potential oversupply from unrecorded new capacity from smaller steelmakers in more backward provinces.

Cost pressure is here to stay. We are not convinced thatsteel prices will weaken significantly in 2H 2008. Indeed, with the higher iron ore and coal prices, it is unlikely that steel prices will give back most of the gains made in 2008, especially when the steelmakers and even stockists
are suffering from margin pressure. On the issues of rising labor cost pressure and surging Chinese Renminbi, all eight companies concede that the pressure will remain, even as they take on various hedging policies, if needed. While the SGX-listed Chinese yards are well run companies, they may be swimming against stronger currents of negative macro trends as we head into 2009.

Go for Singapore yards. We are the first Singapore research house to signal caution on SGX-listed Chinese shipyards back in mid-1Q 2008, due to: 1) uncertainty on
their margins in FY09/10 due to unhedged raw material price pressures, 2) cyclical downturn in new orders win that commenced since mid-2007, and 3) limited share price upside with a 70% chance for Chinese shipyards to face share price valuation compression by end 2008.
We continue to advise investors to stick with Singapore based yards, due to: 1) still booming offshore sector, 2) relatively lesser margin pressure for cost and construction structure of offshore vessels, and 3) better share price
valuations.

The valuations for mid-tier Singapore yards, Jaya Holdings and ASL Marine, are undemanding, while SembCorp Marine will command premium as the most direct play to offshore construction.