Nma Misc 082411 93359

Key company data: See page 2 for company data and detailed price/index chart.
Rating: See report end for details of Nomuras rating system.

MISC Bhd MISC.KL MISC MK
TRANSPORT/LOGISTICS

EQUI TY RESEARCH

Initiating coverage with NEUTRAL rating
Lacks catalysts

August 24, 2011
Rating
Starts at
Neutral
Target price
Starts at
MYR 6.74
Closing price
August 22, 2011
MYR 7.08
Potential downside
-5.0%

Action/Valuation: Initiating coverage with a NEUTRAL rating
We initiate coverage of MISC Bhd with a NEUTRAL rating given 5%
potential downside to our sum-of-the-parts based MYR6.74 target price.
This is equivalent to 1.4x P/B and below mid-cycle P/B of 1.7x due to
lower-than-historical ROE. Although the company is the second-largest
global shipping company (based on market cap), its average trading
volume is only USD2.2mn.
A differentiated shipping company but half business loss-making
Unlike other Asian shipping companies, MISC has reported full-year net
profit every year since listing in 1987. This is due to defensive and steady
earnings from its LNG business (long-term contracts) and, more recently,
offshore (long contract terms) and heavy engineering (forward orderbook).
However, the shipping operating businesses (crude oil shipping, product
oil shipping and container shipping) are loss-making and we forecast will
remain that way into next year.
Catal ysts: Freight rates to rebound but unlikely to be sharp near term
We expect freight rates to be close to bottoming, but a rebound should be
gradual. Among the loss-making segments, we expect product chemical
oil shipping to return to profit the earliest, but this is unlikely for the next 18
months. We would turn more positive on MISC when shipping freight rates
rebound to profitable levels. However, we expect a difficult FY12 for MISC.

Note: forecasts still based on March-year end; the company has
announced that its year-end is changing to December.

31 Mar FY11 FY12F FY13F FY14F
Currency (MYR) Actual Old New Old New Old New
Revenue (mn) 12,326 10,843 11,907 13,459
Reported net profit (mn) 1,871 356 579 1,176
Normalised net profit (mn) 948 356 579 1,176
Normalised EPS 21.24c 7.98c 12.98c 26.35c
Norm. EPS growth (%) -10.9 -62.4 62.6 103.0
Norm. P/E (x) 33.3 N/A 88.7 N/A 54.6 N/A 26.9
EV/EBITDA (x) 13.2 19.4 16.7 13.2
Price/book (x) 1.4 N/A 1.4 N/A 1.4 N/A 1.4
Dividend yield (%) 4.9 N/A 1.4 N/A 0.7 N/A 1.1
ROE (%) 8.2 1.6 2.6 5.2
Net debt/equity (%) 36.1 51.4 59.0 62.5
Source: Nomura estimates
Anchor themes
With half of the MISC business
loss-making, we would turn
more positive when freight rates
within these segments rebound
(crude oil shipping, product oil
shipping and container
shipping).
Nomura vs consensus
Our 2012F earnings (Mar YE)
are 114% below consensus
estimate of MYR762mn net
profit (Dec YE) due to our
cautious view on the tankers
industry; we forecast a 22%
decline in average tanker rates.
Research anal ysts

Asia Shipping
Andrew Lee - NIHK
andrew.lee@nomura.com
+852 2252 6197
Cecilia Chan - NIHK
cecilia.chan@nomura.com
+852 2252 6181

See Appendix A-1 for analyst
certification and important
disclosures. Analysts employed
by non US affiliates are not
registered or qualified as
research analysts with FINRA
in the US.
This document is being provided for the exclusive use of GERALD AMBROSE at ABERDEEN ASSET MANAGEMENT SDN BHD
Nomura | MISC Bhd August 24, 2011

2
Key data on MISC Bhd
Incomestatement(MYRmn)
Year-end 31 Mar FY10 FY11 FY12F FY13F FY14F
Revenue 13,775 12,326 10,843 11,907 13,459
Cost of goods sold -12,342 -10,846 -10,154 -10,788 -11,655
Gross profit 1,433 1,480 689 1,119 1,805
SG&A

Employee share expense

Operating profit 1,433 1,480 689 1,119 1,805

EBITDA 2,722 2,829 1,933 2,400 3,196
Depreciation -1,288 -1,349 -1,244 -1,281 -1,391
Amortisation

EBIT 1,433 1,480 689 1,119 1,805
Net interest expense -316 -317 -311 -358 -400
Associates & J CEs 33 160 276 276 276
Other income

Earnings before tax 1,151 1,322 653 1,036 1,681
Income tax -90 -17 -29 -46 -75
Net profit after tax 1,061 1,305 624 990 1,606
Minority interests -140 -357 -268 -411 -430
Other items

Preferred dividends

Normalised NPAT 921 948 356 579 1,176
Extraordinary items -239 923 0 0 0
Reported NPAT 682 1,871 356 579 1,176
Dividends -1,562 -1,562 -446 -212 -345
Transfer to reserves -880 308 -90 367 831

Valuation and ratio anal ysis

FD normalised P/E (x) 29.7 33.3 88.7 54.6 26.9
FD normalised P/E at price target (x) 28.3 31.7 84.5 51.9 25.6
Reported P/E (x) 40.1 16.9 88.7 54.6 26.9
Dividend yield (%) 4.9 4.9 1.4 0.7 1.1
Price/cashflow (x) 7.2 14.1 36.2 16.4 12.1
Price/book (x) 1.3 1.4 1.4 1.4 1.4
EV/EBITDA (x) 13.3 13.2 19.4 16.7 13.2
EV/EBIT (x) 24.9 24.1 44.4 32.0 22.1
Gross margin (%) 10.4 12.0 6.4 9.4 13.4
EBITDA margin (%) 19.8 22.9 17.8 20.2 23.7
EBIT margin (%) 10.4 12.0 6.4 9.4 13.4
Net margin (%) 5.0 15.2 3.3 4.9 8.7
Effective tax rate (%) 7.8 1.3 4.4 4.4 4.4
Dividend payout (%) 229.0 83.5 125.3 36.7 29.4
Capex to sales (%) 34.1 16.2 36.9 33.6 29.7
Capex to depreciation (x) 3.6 1.5 3.2 3.1 2.9
ROE (%) 3.1 8.2 1.6 2.6 5.2
ROA (pretax %) na 4.8 2.6 3.5 4.9

Growth (%)

Revenue -12.7 -10.5 -12.0 9.8 13.0
EBITDA -23.2 3.9 -31.7 24.1 33.2
EBIT -23.3 3.2 -53.4 62.3 61.3
Normalised EPS

-10.9 -62.4 62.6 103.0
Normalised FDEPS

-10.9 -62.4 62.6 103.0

Per share

Reported EPS (MYR) 17.67c 41.91c 7.98c 12.98c 26.35c
Norm EPS (MYR) 23.85c 21.24c 7.98c 12.98c 26.35c
Fully diluted norm EPS (MYR) 23.85c 21.24c 7.98c 12.98c 26.35c
Book value per share (MYR) 5.30 4.91 4.89 4.97 5.16
DPS (MYR) 0.35 0.35 0.10 0.05 0.08
Notes
Earnings to decline in FY12 before
recovering
Price and price relati ve chart (one year)
(%) 1M 3M 12M
Absolute (MYR) -10.4 0.7 -20.1
Absolute (USD) -10.3 2.4 -15.4
Relative to index -3.9 5.5 -26.3
Market cap (USDmn) 10,648.1
Estimated free float
(%)
3.7

52-week range
(MYR)
9.1/6.5

3-mth avg daily
turnover (USDmn)
2.21

Major shareholders
(%)
Petroliam Nastional
Bhd
62.0

Employees Provident
Fund
11.0

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3
Cashflow(MYRmn)
Year-end 31 Mar FY10 FY11 FY12F FY13F FY14F
EBITDA 2,722 2,829 1,933 2,400 3,196
Change in working capital 1,212 -1,261 -727 63 52
Other operating cashflow -133 667 -333 -540 -629
Cashflow from operations 3,801 2,235 873 1,923 2,620
Capital expenditure -4,695 -2,000 -4,000 -4,000 -4,000
Free cashflow -895 235 -3,127 -2,077 -1,380
Reduction in investments -550 -2,088 0 0 0
Net acquisitions 548 2,090 2 2 2
Reduction in other LT assets -15 -176 0 0 0
Addition in other LT liabilities 41 -11 0 0 0
Adjustments -333 -1,919 -2 -2 -2
Cashflow after investing acts -1,204 -1,869 -3,127 -2,077 -1,380
Cash dividends -1,408 -1,562 -446 -212 -345
Equity issue 5,203 0 0 0 0
Debt issue 2,041 0 1,500 1,500 1,500
Convertible debt issue

Others -510 -1,065 268 411 430
Cashflow from financial acts 5,327 -2,627 1,322 1,699 1,584
Net cashflow 4,124 -4,496 -1,805 -378 204
Beginning cash 3,725 7,849 3,353 1,548 1,169
Ending cash 7,849 3,353 1,548 1,169 1,373
Ending net debt 4,923 7,903 11,208 13,086 14,382

Balancesheet(MYRmn)
As at 31 Mar FY10 FY11 FY12F FY13F FY14F
Cash & equivalents 7,849 3,353 1,548 1,169 1,373
Marketable securities 0 0 0 0 0
Accounts receivable 1,994 1,310 1,453 1,596 1,804
Inventories 345 404 406 406 406
Other current assets 39 1,678 1,678 1,678 1,678
Total current assets 10,226 6,744 5,085 4,849 5,261
LT investments 1,511 3,599 3,599 3,599 3,599
Fixed assets 28,229 26,819 29,575 32,294 34,902
Goodwill 963 849 849 849 849
Other intangible assets

Other LT assets 131 307 307 307 307
Total assets 41,060 38,317 39,414 41,898 44,918
Short-term debt 3,577 1,247 747 747 747
Accounts payable 3,959 3,647 3,065 3,271 3,531
Other current liabilities 78 144 144 144 144
Total current liabilities 7,614 5,038 3,956 4,162 4,422
Long-term debt 9,194 10,008 12,008 13,508 15,008
Convertible debt

Other LT liabilities 215 205 205 205 205
Total liabilities 17,024 15,251 16,169 17,875 19,635
Minority interest 374 1,155 1,423 1,834 2,264
Preferred stock 0 0 0 0 0
Common stock 4,464 4,464 4,464 4,464 4,464
Retained earnings 17,636 15,886 16,912 17,512 18,210
Proposed dividends 1,562 1,562 446 212 345
Other equity and reserves

Total shareholders' equity 23,662 21,912 21,822 22,188 23,019
Total equity & liabilities 41,060 38,317 39,414 41,898 44,918

Liquidity (x)

Current ratio 1.34 1.34 1.29 1.17 1.19
Interest cover 4.5 4.7 2.2 3.1 4.5

Leverage

Net debt/EBITDA (x) 1.81 2.79 5.80 5.45 4.50
Net debt/equity (%) 20.8 36.1 51.4 59.0 62.5

Activity (days)

Days receivable 69.0 48.9 46.6 46.7 46.1
Days inventory 10.2 12.6 14.6 13.7 12.7
Days payable 109.3 128.0 121.0 107.2 106.5
Cash cycle -30.0 -66.5 -59.7 -46.7 -47.7
Notes
Capex remains high due to
newbuilding orderbook
Notes
Gearing increasing, but below 1x

4
Key focus charts

Fig. 1: FY11A (YE-Mar) revenue breakdown a unique
shipping company due to diverse businesses

Source: Company data, Nomura research

Fig. 2: Earnings differ: FY11 pre-tax breakdown MISC has
mixture of defensive and highly volatile businesses


Fig. 3: Pre-tax earnings comparison: Petroleum and
container shipping still loss-making in FY14

Source: Company data, Nomura estimates. Note: Year-end is March

Fig. 4: MISC operating and pre-exceptional margins
despite earnings recovery, margins remain low


Fig. 5: MISC sum-of-the-parts valuation breakdown


Fig. 6: MISC P/BV and pre-exceptional ROE chart

Source: Company data, Nomura estimates

LNG
20%
Petroleum
24%
Chemical
6%
Offshore
6%
Heavy
engineering
25%
Liner
logistics
19%
1,487
-150
-181
343
434
-592
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EBIT margins
Pre-exceptional profit margins
5.77
1.17
1.79
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(%) (x)
P/B (LHS) ROE (RHS)

5
Executive summary
We initiate coverage on MISC Bhd with a sum-of-the-parts target price of MYR6.74. With
5% potential downside, we have a NEUTRAL rating. We view MISC as a global,
integrated energy shipping company and differentiated shipping operator compared to its
Asian shipping peers due to its diverse shipping subsegments that provide a mix of
stable and volatile earnings. With half of MISCs businesses loss-making, we would turn
more positive on a strong rebound in crude oil, product chemical and container freight
rates.
Earnings vary depending on the shipping segments, as we expect steady revenue and
earnings from the LNG, heavy engineering and offshore businesses. This will likely
continue to be the key earnings drivers due to the longer-term nature of the contracts
and forward orderbook. We estimate these three businesses will generate at least
MYR2.1bn in profit before tax annually.
Unfortunately, the other more cyclical businesses are loss-making. We believe the other
businesses of crude oil shipping, chemical product oil shipping and container shipping
are likely to remain loss-making despite shipping freight rates close to bottoming and set
to rebound. Earnings remain under pressure due to expiry of longer-term contracts as
45% crude and 40% product chemical capacity is on contracts rather than spot. Among
these cyclical segments, we are more optimistic on the product chemical tanker business
and estimate this to rebound to profitability the earliest.
MISCs USD10.7bn market cap means that it is the second-largest global shipping
company. However, its liquidity is among the lowest, with average daily trading volume of
only USD2.2mn due to limited free float. We estimate only 3.7% of the shares
outstanding is free float after 62.7% from Petronas and the remainder from domestic
buyside firms.
Key upside risks to our view:
Rebound in freight rates: Our NEUTRAL rating on MISC is due to only a gradual
rebound in shipping freight rates with the crude oil, chemical oil and container shipping
segments continuing to be loss-making. However, if demand surprises, newbuilding
delivery slippage increases or scrapping is higher, this could lead to higher rates.
Further divestments: Following the listing of MMHE, we believe management could
consider other listings or divestments. This could be the crude oil tanker or container
operations.
Additional LNG contracts: We believe MISC would consider expanding its LNG fleet if
the opportunity arose.
Key downside risks to our view
Renewing expired LNG contracts: LNG is a major earnings driver given 20-year
contracts. Management noted about 7 out of 29 vessels are on third-party contracts
with staggered expiry from 2014.
Capex and funding: With orderbook of 15 owned and 7 chartered vessels, we believe
the company could need to raise additional funds to finance capex.

Fig. 7: MISC sum-of-the-parts valuation

Business Valuation methodology Target P/B 2012F BV RM m RM/share
LNG EBITDA/(WACC-growth) valuation due to long term contracts 25,754 5.77
Tankers Average P/B of the global oil tanker shipping sector to FY12F book 0.9 5,542 5,209 1.17
Offshore Profit before tax / (WACC-growth) valuation due to long term contracts 7,994 1.79
Heavy engineering Nomura target price (@ RM5.74 per share) 6,107 1.37
Containerships Mid-cycle P/B (Average of container shipping sector) 0.9 1,402 1,318 0.30
Gross asset value 46,383 10.39
Less: net debt Estimated FY12F (11,208) (2.51)
Less: off-balance sheet debt Estimated fleet value of chartered vessels (3,673) (0.82)
Less: minorities Estimated FY12F (1,423) (0.32)
Estimated fair value 30,079 6.74
Initiate coverage with NEUTRAL
rating due to lack of catalysts
Steady earnings from LNG,
heavy engineering and offshore
segments
but losses from crude oil
shipping, chemical product oil
shipping and container shipping
Second-largest global shipping
company in terms of market cap,
but limited liquidity
We would turn more positive if
shipping freight rates rebounded
strongly

6
Outlook for each business:
LNG (positive): We estimate revenue and earnings for the LNG segment are likely to
remain stable and flat given LNG contracts are traditionally for 20 years.
Offshore (positive): We expect stable earnings growth for the offshore business, as all
equipment has already been locked in under long-term contracts.
Heavy engineering (positive): Nomura downgraded MMHE to REDUCE with a
MYR5.74 target price in report titled, Wait for near-term disappointments to pass before
buying into long-term story, dated 19 August 2011. Our analyst Muzhafar Mukhtar
expects FY11 earnings to disappoint and Turkmenistan order wins. MMHEs long-term
earnings potential remains intact.
Crude oil shipping (negative): We expect depressed crude oil shipping freight rates with
only a gradual rebound; hence we expect this segment to remain loss-making. Losses
could increase this year as the crude oil tanker fleet increases given MISC
newbuildings.
Chemical product oil shipping (recovering): We expect losses to narrow, as we are
more optimistic on the product oil shipping segment due to stable demand and low
orderbook. However, we believe it will still be loss-making this year at least.
Container shipping (negative): With a small container fleet and a niche network, we
believe MISC container shipping is likely to remain loss-making over the next few years.

Fig. 8: Sector outlook

Source: Company data, Nomura estimates. Note: Year-end is March.

Sensitivity to freight rates
Given the three cyclical businesses were loss-making in FY11, we highlight below the
impact of a 5% change in freight rates. Container shipping is most sensitive due to lack
of pricing power, the relatively small network and the fact that it is reporting the largest
losses. The impact is not as significant as earnings, as our target price is based on a
sum-of-the-parts analysis.

Fig. 9: Net profit sensiti vity to 5% increase in freight rates


Segment
2011 revenue
(RM mn)
2011 PBT
(RM mn) Outlook
LNG 2,501 1,487 Defensive and stable earnings due to long-term nature of contracts (20 years)
Offshore 681 343 Stable earnings due to already being locked in under contracts
Heavy engineering 3,063 434 Earnings growing due to orderbook
Crude oil 2,952 -150
Only gradual recovery in crude oil tanker freight rates, hence we estimate losses
continuing
Chemical oil 770 -181
Industry outlook most attractive due to small orderbook, but sharper recovery not
until next year
Container 2,359 -592
Losses to continue due to container sector suffering from excess supply and
irrational behaviour from container lines
0.0
5.0
10.0
15.0
20.0
25.0
Crude Product Container shipping
(%)
LNG is key earnings driver due
to long-term contracts
Chemical product shipping to be
the first of loss-making
businesses to return to black, in
our view
Earnings sensitive to changes in
freight rates

7
Valuation and target price
Given the diverse business operations for MISC, our target price of MYR6.74 is derived
from valuing the company based on a sum-of-the-parts analysis:
LNG: Given the long-term nature of the contracts (traditionally 20-25 year contracts),
we have adopted EBITDA/(WACC-growth). Based on this, we value LNG business at
MYR5.77/share.
Offshore: As the offshore segment is also long-term contracts, our MYR1.79/share
value is driven by profit before tax/(WACC-growth).
Heavy engineering: TP of MYR5.74 for MMHE is based on: 1) a two-stage EVA, with the
first stage ending in FY16F (WACC of 11-15%, long term growth: 2%) to value the
Malaysian business and 2) 17x P/E to value its share of Turkmenistan earnings. Note:
since J uly, our market risk premium has been adjusted for election uncertainty (increased
by 255bps), and our target P/E for Turkmenistan includes a similar discount (-19%
compression of the P/E sustained by the stock so far, which is at ~50% premium over
average market P/E of 14x). Excluding these adjustments, our TP would be MYR7.40.
Container shipping: We estimate container shipping segment is worth MYR1.3bn
(MYR0.30/share) based on the Asian container shipping stocks under coverage
average implied price target P/BV multiple of 0.9x.
Crude and chemical product tankers: As we estimate losses for this segment, we have
valued this segment based on 0.9x P/BV multiple, which is the average P/B for listed
global tanker shipping companies. This values the crude and chemical product tanker
segment at MYR5.2bn. This is equivalent to MYR1.17/share.

Fig. 10: MISC sum-of-the-parts based price target breakdown


Our MYR6.74 target price is equivalent to 1.4x P/B, compared to a mid-cycle P/B 1.7x.
Hence, our target price is below historical average. We believe this is appropriate given
lower-than-historical ROE.

Fig. 11: MISC P/BV and pre-exceptional ROE

Source: Company data, Nomura estimates Note: Pre-exceptional ROE is used while table on page 2 reflects net profit

Business Valuation methodology Target P/B 2012F BV RM m RM/share
LNG EBITDA/(WACC-growth) valuation due to long term contracts 25,754 5.77
Tankers Average P/B of the global oil tanker shipping sector to FY12F book 0.9 5,542 5,209 1.17
Offshore Profit before tax / (WACC-growth) valuation due to long term contracts 7,994 1.79
Heavy engineering Nomura target price (@ RM5.74 per share) 6,107 1.37
Containerships Mid-cycle P/B (Average of container shipping sector) 0.9 1,402 1,318 0.30
Gross asset value 46,383 10.39
Less: net debt Estimated FY12F (11,208) (2.51)
Less: off-balance sheet debt Estimated fleet value of chartered vessels (3,673) (0.82)
Less: minorities Estimated FY12F (1,423) (0.32)
Estimated fair value 30,079 6.74
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-
0
8
M
a
r
-
0
9
M
a
r
-
1
0
M
a
r
-
1
1
M
a
r
-
1
2
M
a
r
-
1
3
(%) (x)
P/B (LHS) ROE (RHS)
MYR6.74 fair value

8
Fig. 12: Valuation comparison

Data as at 22 August Note: MISCs valuation under Tanker and LNG represented the implied valuations of its tankers and LNG division
Source: Bloomberg, Nomura estimates

Stock Market cap
Company name Currency code Share price US$ mn 2011F 2012F 2011F 2012F 2011F 2012F
Tanker
Overseas Shipholding Grp US$ OSG US 14.94 455 nm nm 0.3 0.3 -8.7 -5.7
Teekay Tankers US$ TNK US 6.09 369 19.0 19.0 0.7 0.8 3.8 4.0
Nordic American Tankers US$ NAT US 16.88 797 nm nm 0.9 0.9 -2.2 -0.6
Frontline US$ FRO US 6.70 522 nm nm 0.8 0.8 -6.2 -2.6
Tsakos Energy Navigation US$ TNP US 6.27 289 nm 28.5 0.3 0.3 -1.9 1.9
Knightsbridge US$ VLCCF US 18.34 448 12.1 11.5 1.2 1.3 9.8 10.7
Ship Finance US$ SFL US 12.58 995 7.4 7.8 1.1 1.1 17.2 16.5
Double Hull Tankers US$ DHT US 2.67 172 10.0 11.5 0.7 0.7 6.5 2.2
Euronav EUR EURN BB 5.87 436 nm nm 0.3 0.3 -6.3 -7.1
MISC - tanker business only RM MISC MK 7.08 10,633 nm nm 0.9 0.9 -9.5 -5.1
Average 12.1 15.6 0.7 0.7 0.3 1.4
LNG
Golar LNG US$ GLNG US 29.62 2,368 30.2 14.8 3.8 3.5 13.8 23.8
Teekay LNG US$ TGP US 31.97 1,997 19.1 15.5 1.9 2.2 10.4 14.0
HOEGH LNG Nor Krone HLNG NO 38.30 330 nm nm nm nm nm nm
MISC - LNG business only RM MISC MK 7.08 10,633 17.7 19.3 2.7 2.7 15.4 13.9
Average 22.3 16.6 2.8 2.8 13.2 17.2
Chemical and gas
Stolt-Nielsen Nor Krone SNI NO 114.00 1,341 67.6 44.2 4.2 4.0 6.6 9.0
I.M. Skaugen Nor Krone IMSK NO 27.70 138 nm 692.5 9.9 9.8 -8.8 1.3
Average 67.6 368.4 7.1 6.9 -1.1 5.1
Container shipping
CSCL HK$ 2866 HK 1.79 4,703 nm 23.9 0.6 0.5 -1.0 2.3
Evergreen NT$ 2603 TT 18.05 1,965 51.2 18.2 0.9 0.8 1.7 4.6
Hanjin Won 117930 KS 16,450 1,291 nm 48.3 0.6 0.6 -9.0 1.3
HMM Won 011200 KS 25,900 3,427 nm 261.9 1.3 1.3 -11.7 0.5
NOL S$ NOL SP 1.04 2,214 nm 42.9 0.7 0.7 -2.4 1.6
OOIL HK$ 316 HK 34.80 2,792 105.5 22.5 0.7 0.7 0.6 2.9
Wan Hai NT$ 2615 TT 15.85 1,212 62.5 29.2 1.1 1.1 1.8 3.7
Yang Ming NT$ 2609 TT 15.85 1,400 nm 3785.1 1.1 1.1 -2.7 0.0
MISC - container business only RM MISCK MK 7.08 10,633 nm nm 0.9 0.9 -48.5 -34.6
Average 73.1 529.0 0.9 0.9 -7.9 -2.0
Multi-modal
Kawasaki Kisen Yen 9107 J P 195 1,943 11.5 7.6 0.4 0.4 3.8 5.6
Mitsu OSK Lines Yen 9104 J P 317 4,978 10.8 7.9 0.5 0.5 5.8 7.2
MISC - group RM MISC MK 7.08 10,633 88.7 54.6 1.4 1.4 1.6 2.6
Average 37.0 23.4 0.8 0.8 3.7 5.1
P/E P/B ROE (%)

9
What is the company and outlook?
We view MISC as a differentiated shipping company since it operates six different
energy and shipping-related businesses, unlike other Asian shipping companies that
operate either a single business or are dominated by one segment. Excluding MISC,
China Cosco is the most diverse shipping company with six businesses, but these are
shipping-related. MISC is also focused on energy services, which is a key differentiator
to offer Asian shipping lines.
MISCs six segments can be split into stable (LNG, offshore and heavy) and volatile
(crude oil shipping, chemical oil shipping, and container shipping).
Key differences between MISCs different segments:
LNG (stable): Stable revenue and earnings due to long-term contracts, as a standard
LNG contract is 20 years followed by another 20-year contract (albeit at lower freight
rates). MISC is the largest owner of LNG vessels with 29 vessels. Within this, only 7
are on contracts to third-parties other than Petronas.
Offshore (stable): MISC has expanded its offshore segment to 5 FPSO, 5 FSO and 1
MOPU. This provides steady income to the company due to contract terms.
Heavy engineering (stable): Through its 67% stake in MMHE (MMHE MK), this
segment includes engineering and construction, marine repair and marine conversion.
Nomura analyst Muzhafar Mukhtar believes MMHE could disappoint consensus on
FY11 earnings and Turkmenistan order wins. Although longer-term earnings remain
intact, valuations are still at a substantial premium to regional peers.
Crude oil shipping (volatile): A key business following the acquisition of American Eagle
Tankers in J uly 2003 and orderbook is primarily crude oil tankers (13 of 15 owned
newbuildings). However, this division is loss-making due to a sharp decline in crude oil
freight rates from excess supply. We are only expecting gradual recovery in crude oil
freight rates.
Chemical oil shipping (volatile): Smallest segment of the shipping operation segment
and loss-making due to weak product tanker freight rates. However, we are more
positive on this sector compared with other shipping segments due to attractive industry
fundamentals from low orderbook.
Container shipping (volatile): A niche container shipping company with limited exposure
and primarily focused on the intra-Asia route. According to the company, the key
business is Halal services covering Asia and Oceania region. This segment is loss-
making too given the small size and is ranked only 29th globally with a limited network.
We estimate the container business will remain loss-making.

Fig. 13: 2010 revenue breakdown of Asian shipping
companies


Fig. 14: MISC profit before tax by division FY11A


43
35
22
100100
61
71
100
93
90
84
48
7
12
0
19
10
15
2
34
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92
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89
88 80
57
96
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40%
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Container Drybulk Tanker
Car carriers Others
Japanese
Asian cont ainer
Asian dry bulk
1,487
-150
-181
343
434
-592
12
-1,000
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RM mn
A differentiated shipping
company vis-a-vis competitors
due to diverse businesses

10
Crude oil shipping segment set to remain loss making
We believe the company is focused on expanding its crude oil tanker business as
highlighted by 1) crude oil tankers being the largest subsegment fleet (85 crude oil
tankers, 37 chemical tankers, 29 LNG and 33 containerships (owned and chartered))
and 2) newbuilding orderbook primarily dominated by crude oil tankers (of 22 total
newbuildings, 14 are crude oil tankers (13 owned and 1 chartered)). We believe the
importance of crude oil tankers for MISC started with the acquisition of American Eagle
Tankers (AET) in J uly 2003 for USD1.1bn. The acquisition increased MISCs tanker fleet
by 29 Aframax tankers and 2 VLCCs to 37 Aframax tankers and 3 VLCCs. Based on the
current orderbook and assuming no scrapping, MISCs crude oil tanker fleet will grow to
94 vessels by 4Q13F. Managements longer-term plan is to maintain a crude fleet
breakdown of 75% owned and 25% chartered.

Fig. 15: MISC crude oil tanker fleet


Fig. 16: MISC crude oil tanker segment pre-tax margins


We estimate MISCs crude oil tanker fleet is on a mixture of time charter and spot
contracts, which will lead to a sharp swing in earnings in our view, as we estimate profit
before tax margins ranges from 23% in FY09 to -12% in FY12F (based on our
estimates). This is due to volatile crude oil freight rates, as average crude oil freight has
declined over 60% from its peak in J une 2008. For the April-J une 2011 quarter, MISCs
crude oil segment reported profit before tax loss and margin of USD28mn and -11%,
respectively. The companys COA contracts have a freight rate floor and ceiling.
We only expect a gradual and slow rebound in crude oil freight rates due to excess supply
due to newbuilding deliveries ordered in anticipation of the phasing out of single-hull
vessels. However, exemptions to the IMO regulation led to single-hull scrapping being
slower than expected. Given our estimate of only a gradual rebound in crude oil freight
rates and factoring the breakdown between MISCs spot and time charter contracts, we
estimate the crude oil tanker losses will narrow, but the division will still be loss-making
over the next three years given we estimate crude oil freight rates to gradually rebound.

Fig. 17: MISC crude oil tanker shipping segment financials


42
47
59
66
72
71
78
85
0
10
20
30
40
50
60
70
80
90
2
0
0
4

2
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5

2
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6

2
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7

2
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8

2
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9

2
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-20%
-10%
0%
10%
20%
30%
40%
50%
2
0
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5

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6

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F
RM m 2008 2009 2010 2011 2012F 2013F 2014F
Reported revenue 3,576 4,383 3,058 2,952 2,631 2,548 2,448
Operating expenses (2,385) (3,089) (2,582) (2,811) (2,720) (2,479) (2,313)
EBITDA 1,191 1,294 476 142 (89) 69 135
Depreciation expenses (420) (249) (306) (256) (238) (224) (210)
EBIT 771 1,045 170 (114) (328) (155) (75)
Interest expenses and other expenses (101) (52) (46) (37) (16) (38) (57)
Reported pre-tax profit 670 993 124 (150) (344) (193) (132)
We believe management views
the crude oil tanker as a key
business
MISC crude oil shipping loss-
making
We only estimate a gradual
rebound in crude oil tanker
freight rates

11
Crude oil tanker shipping sector outlook gradual recovery
Despite changing trade routes leading to longer distances and increasing ton-mile
demand, we expect only a gradual recovery in the crude oil tanker shipping sector as
supply remains a problem. We estimate supply outpacing demand growth for the third
consecutive year in 2011, balanced supply-demand growth in 2012 and demand
outpacing supply growth in 2013.
Crude oil imports continue to be driven by end-users lacking natural resources or facing
depleting reserves. For example, Australian reserves have declined to 4.1bn barrels at
end-2010 from 4.8bn barrels in end-2000 (according to BP Statistical Review of World
Energy 2011). Nomuras oil and gas team estimates non-OECD countries (especially
Asia and China) will be the main drivers of future oil demand. IEA estimates oil demand
will increase by 3.5% this year, with Asia accounting for 46% of the incremental increase.
J apan could be a future driver, as J apanese oil imports declined 25% in J an-May 2011.
China is becoming a key demand driver, with its global oil import market share
increasing to 12% by end-2010 from 6-8% during 2002-06. Further, Chinas crude oil
import is set to record a CAGR of 7% in the next 10 years due to: 1) increasing refinery
capacity from industrialisation activity as Chinas refining capacity increased at a CAGR
of 6.5% in the past 10 years and 2) Chinas oil reserve target of 100 days by 2020.
Although global oil volume demand is set to increase by up to 3.4%, ton-mile demand is
set to grow at a sharper pace due to changing trade routes resulting in longer distances.
China still sources the majority of its crude oil from the Middle East but crude oil imports
from West Africa have increased, increasing journey times by 7.5 days.
Global crude oil tanker supply is the problem given newbuildings were ordered based on
the IMO regulation under MARPOL phasing out single-hull vessels by 2010. However,
exceptions allowed single-hull vessels to operate until 2015. This resulted in slower
scrapping of single-hull vessels. At end-2010, 6% of the global crude oil tanker fleet was
made up of single hull vessels (18mn dwt) compared to 53% in 2001 when IMO adopted
a revised phase-out schedule for single hull tankers (effective 1 September 2003).
Despite the 2015 clause, we believe the scrapping of single-hull vessels will continue
with only 2.4mn dwt by end-2013 in operation due to environmental concerns, especially
after the Gulf of Mexico spill in 2010.
Newbuilding delivery slippages are likely to continue with 32% of 1H11 newbuildings
undelivered due to low freight rates and ship financing problems. Despite factoring
scrapping and newbuilding delivery slippages, we still estimate 9.3% supply growth in
2011 before it eases to 6.4% and 3.0% in 2012 and 2013, respectively. However, given
we estimate only balanced crude oil shipping fundamentals in 2012, we expect only a
gradual recovery in freight rates with a sharper rebound in 2013.

Fig. 18: Crude oil shipping industry demand and supply
growth and freight rates

Source: Clarksons, Drewry, Fearnleys, Nomura estimates

Fig. 19: MISC annual crude oil revenue and PBT


-
10,000
20,000
30,000
40,000
50,000
60,000
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
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F
2
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F
2
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1
3
F
(US$/day) (%) Supply growth
Demand growth
Average tanker rates (US$/day)
-1,000
0
1,000
2,000
3,000
4,000
5,000
2
0
0
5

2
0
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6

2
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2
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2
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4
F
(RM mn) Revenue
Profit before tax
Industry fundamentals for crude
oil tanker to improve in 2012 and
2013
Chinese crude oil imports a key
demand river
Not only volumes but longer
distances, hence ton-miles
Single-hull vessels continue to
be phased out
Newbuilding delivery slippages
still over 30%

12
Crude oil tanker shipping key industry charts

Fig. 20: Global crude oil tanker supply growth still an
issue in 2011F

Source: Clarksons, Nomura estimates

Fig. 21: Global crude oil tanker industry fundamentals
demand to gradually outpace supply and drive rates

Source: Clarksons, Drewry. Fearnleys, Nomura estimates

Fig. 22: Longer distances improving ton-mile demand

Source: Fearnleys, Nomura estimates

Fig. 23: China becoming a key dri ver (data as of 2010)

Source: BP Statistical Review of World Energy 2011

Fig. 24: Crude oil tanker freight rates only slow recovery

Source: Clarksons

Fig. 25: Crude oil tanker industry breakeven (as of 2009)

Source: Moore Stephens

0
2
4
6
8
10
12
14
16
2011F 2012F 2013F
(%)
With slippages and disposals
Without slippages and disposals
-
10,000
20,000
30,000
40,000
50,000
60,000
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2
0
0
1
2
0
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2
2
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3
2
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2
0
1
0
2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
(US$/day) (%) Supply growth
Demand growth
Average tanker rates (US$/day)
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
2
0
0
3
2
0
0
4
2
0
0
5
2
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6
2
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1
F
2
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1
2
F
2
0
1
3
F
(%)
Tonnes Ton-mile
US
24%
Europe
25%
China
12%
India
9%
J apan
10%
Others
20%
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2
0
0
0
2
0
0
1
2
0
0
2
2
0
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3
2
0
0
4
2
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2
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7
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2
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2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
(US$/day) VLCC Suzemax Aframax
4,279
4,684
942
1,069
1,178
1,154
697
915
1,109
1,440
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Panamax Suezmax
(US$/day)
Crew Stores
Repairs & maintenance Insurance
Administration

13
Crude oil tanker shipping industry assumptions

Fig. 26: Crude oil tanker shipping industry assumptions


Fig. 27: Global crude oil tanker shipping demand growth model


Fig. 28: Global crude oil tanker shipping supply estimate breakdown

Source: Clarksons, Dreqry, Nomura estimates

Fig. 29: Global crude oil tanker shipping freight rates by vessel size

Source: Bloomberg, Clarksons, Nomura estimates

2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
Supply growth 2.8 4.5 6.8 4.8 4.7 3.7 6.7 4.4 9.3 6.4 3.0
Demand growth 7.2 6.8 -0.7 2.4 0.4 5.1 -3.9 1.1 3.4 6.6 6.6
+/- balance (ppt) 4.5 2.3 -7.5 -2.3 -4.3 1.4 -10.6 -3.3 -5.9 0.1 3.6
Average tanker rates (US$/day) 27,500 41,928 45,715 44,878 44,381 52,133 30,077 28,415 22,095 22,532 23,896
Rate change (%) 32.3 52.5 9.0 (1.8) (1.1) 17.5 (42.3) (5.5) (22.2) 2.0 6.1
2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
Crude oil ton-mile demand (bn) 8,024 8,569 8,509 8,715 8,751 9,201 8,846 8,944 9,249 9,858 10,508
% change y-y 7.2 6.8 -0.7 2.4 0.4 5.1 -3.9 1.1 3.4 6.6 6.6
Blended avg distance (miles) 3,756 3,866 3,787 3,807 3,869 3,993 3,928 3,900 3,960 4,180 4,440
% change y-y 3.0 2.9 -2.0 0.5 1.6 3.2 -1.6 -0.7 1.5 5.6 6.2
Exports (mt)
Middle East 828 832 842 881 824 848 797 805 813 821 829
Africa 279 320 335 357 362 364 360 361 365 362 358
Carribean 222 222 212 210 206 212 224 235 253 264 268
North Sea 79 62 58 44 34 34 36 36 37 37 37
Asia 78 68 82 80 87 88 89 92 93 94 94
Others 650 712 719 717 749 757 747 765 775 780 781
Total seaborne volume 2,136 2,217 2,247 2,289 2,262 2,304 2,252 2,293 2,336 2,358 2,367
Change yoy
Middle East 14.9 0.5 1.2 4.6 -6.5 2.9 -6.0 1.0 1.0 1.0 1.0
Africa 10.7 14.7 4.6 6.6 1.3 0.7 -1.3 0.2 1.2 -0.8 -1.2
Carribean -2.8 -0.1 -4.5 -0.6 -2.3 3.2 5.6 5.1 7.7 4.2 1.6
North Sea -9.6 -9.6 -21.3 -28.9 -21.8 0.1 3.5 2.1 1.0 0.8 -0.7
Asia -29.7 -12.3 19.3 -2.0 9.3 1.1 1.0 2.9 1.2 1.5 -0.2
Others -0.2 9.6 0.9 -0.3 4.5 1.1 -1.4 2.4 1.4 0.7 0.1
Total 4.2 3.8 1.3 1.9 -1.2 1.9 -2.3 1.8 1.8 1.0 0.4
m dwt 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
Fleet, 1 January 221.7 227.8 238.1 254.2 266.3 278.7 289.2 308.6 322.3 352.5 375.2
- double hull 122.9 146.4 164.8 185.3 200.7 220.1 242.2 274.8 304.6 340.7 370.5
- single hull 98.8 81.5 73.3 68.9 65.6 58.7 47.0 33.8 17.8 11.8 4.7
Add: Deliveries 23.5 18.7 20.3 15.4 19.2 22.1 34.5 30.6 36.1 33.3 20.4
Expected deliveries 25.5 18.2 21.2 15.1 19.9 23.4 43.7 45.4 48.2 34.8 16.6
Add: addition from previous delayed deliveries 0.0 9.6 8.9
Delays and cancellations (12.0) (11.1) (5.1)
Late order changes - - -
Assumed deliveries 36.1 33.3 20.4
Delays and cancellations 8% -3% 4% -2% 4% 6% 21% 33% 25% 25% 20%
- delay 20% 20% 20%
- cancellation 5% 5% 0%
- order changes 0% 0% 0%
Less: Scrapping (15.4) (5.1) (2.1) (0.9) (0.9) (2.1) (4.9) (7.0) (6.0) (10.6) (9.0)
Less: Other (losses)/additions (2.0) (3.3) (2.2) (2.4) (5.7) (9.5) (10.2) (9.9) 0.0 0.0 0.0
Others (0.0) (0.0) 0.0 (0.0) (0.2) (0.0) 0.0 0.0 0.0 0.0 0.0
Fleet, 31 December 227.8 238.1 254.2 266.3 278.7 289.2 308.6 322.3 352.5 375.2 386.5
- double hull 146.4 164.8 185.3 200.7 220.1 242.2 274.8 304.6 340.7 370.5 384.2
- single hull 81.5 73.3 68.9 65.6 58.7 47.0 33.8 17.8 11.8 4.7 2.4
Change yoy 2.8% 4.5% 6.8% 4.8% 4.7% 3.7% 6.7% 4.4% 9.3% 6.4% 3.0%
2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
Average daily rates (US$/day)
VLCC 34,260 55,166 58,643 58,308 55,548 73,413 39,577 38,093 28,146 28,676 30,403
Suezmax 27,308 40,458 43,392 43,192 44,452 47,192 30,577 28,412 21,629 22,068 23,408
Aframax 20,933 30,160 35,111 33,135 33,144 35,793 20,077 18,740 16,510 16,850 17,878
Average tanker rates 27,500 41,928 45,715 44,878 44,381 52,133 30,077 28,415 22,095 22,532 23,896
Change in rates (yoy)
VLCC 33% 61% 6% -1% -5% 32% -46% -4% -26% 2% 6%
Suezmax 43% 48% 7% 0% 3% 6% -35% -7% -24% 2% 6%
Aframax 20% 44% 16% -6% 0% 8% -44% -7% -12% 2% 6%
Average tanker rates 32% 51% 10% -2% -1% 15% -42% -6% -21% 2% 6%

14
Chemical product oil tanker shipping segment recovery
soon
MISCs chemical shipping segment is its smallest shipping operating segment, only
accounting for 4-7% of total revenue during FY05-11. However, it was loss-making in
FY09-11 due to a sharp decline in freight rates, as we estimate 40% chemical capacity is
on the spot market. This resulted in profit before tax margins of -24% in FY10 and FY1;
we expect margins to improve with -20% in FY12 before +4% in FY14.
By end-2011, we estimate MISC would operate a fleet of 37 chemical tankers. This
chemical fleet is slated to increase by another five vessels by 2Q12 as one newbuilding
and four chartered chemical tankers would be delivered.

Fig. 30: MISC chemical product oil tanker fleet


Fig. 31: MISC chemical product oil tanker segment pre-tax
margin


Among the shipping subsectors, we are relatively more optimistic on the product and
chemical shipping sectors due to stable demand and, more importantly, a low orderbook,
as we estimate the product tanker orderbook as a percentage of fleet is only 15%. Based
on our estimates, after factoring newbuilding slippages and scrapping, global product
chemical tanker supply should grow only 5.0%, 2.9% and 0.1% in 2011, 2012 and 2013,
respectively.
Factoring the recovery in freight rates, we believe MISCs chemical product oil business
is likely to be the first of MISCs shipping segments to return to profitability (excluding
LNG, as LNG business is profitable). We expect earnings and negative margins to have
peaked in FY11. However, we are not estimating this rebound to profitability to occur
until FY14F, and this business is only a small proportion of the whole MISC, as we
estimate it will only account for 8% of group revenue in 2014.

Fig. 32: MISC chemical product oil tanker shipping segment financials


69
22 22
21
27
26
34
37
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RM m 2007 2008 2009 2010 2011 2012F 2013F 2014F
Chemical revenue 497 573 1,006 780 715 847 906 1,083
LPG 39 37 36 60 55 55 55 55
Reported revenue 536 610 1,042 840 770 902 960 1,138
Operating expenses -871 -866 -754 -677
EBITDA -101 36 206 461
Depreciation expenses -234 -212 -286 -396
EBIT -336 -177 -80 65
Interest expenses 155 -7 -17 -25
Reported pre-tax profit 75 73 -118 -204 -181 -184 -97 40
Chemical product shipping
segment is only a small
business for MISC
We expect losses to narrow and
return to profit in FY14 due to
improving industry fundamentals

15
Chemical product oil tanker shipping outlook
fundamentals to improve
We believe industry fundamentals for the chemical product oil tanker shipping market are
more attractive than for MISCs other shipping subsectors, as demand is likely to outpace
supply from 2012 owing to the relatively small orderbook given demand has remained
stable. Based on this, we estimate chemical product oil tanker freight rates have bottomed
with a stronger rebound into next year. According to our oil and gas analyst, demand for
chemical product oil would be stronger during summer due to the driving season, while
strong winter demand would be driven by the need for fuel oil for electricity.
With the product oil tanker orderbook as percentage of fleet at only 15%, even if we
assumed no newbuilding delivery slippage or scrapping of existing fleet, supply grows
only 10.5%, 3.6% and 0.6% in 2011, 2012 and 2013. Shipyard space remains tight as
new newbuilding orders would be delivered after 2012. Newbuilding delivery delays are
inevitable newbuilding delivery slippage was 42% for 1H11. We estimate 50%
newbuilding slippage in 2010 with 12% cancelled orders and 38% delayed.
Further, net supply growth would also be affected by the scrapping of single-hull vessels,
as 8.5% of the product tanker fleet of Panamax and Handysize vessels were still single-
hull vessels at end-2010. This, along with lower freight rates, led to scrapping picking up
in 2010 to 5% of the fleet, compared to 2-3% for the past five years. We expect
scrapping to continue with 1.7mn dwt scrapped in 1H11, compared to 5.7mn dwt for
2010. Factoring newbuilding delivery delays and scrapping, we estimate net supply
growth of 5.0%, 2.9% and 0.1% in 2011, 2012 and 2013, respectively.
Chemical product oil demand continues to be driven by refinery capacity and production
imbalances. For example, the US remains an importer of gasoline (mainly from Europe)
and an exporter of diesel (mainly to Europe) given the refinery capacity limitations as
Europe shifted to diesel. China is not a key driver of chemical product oil demand given
its policy of self-reliance; China is a driver of crude oil demand to service its growing
refineries. However, within Asia, Singapore is a refining hub, while India plans to be a
major product exporter in Asia. Indonesia is set to be a larger product importer given
limited refineries in the country, while Australian imports could also grow due to potential
refinery closures.
Given we estimate demand growth to outpace supply growth from next year and peak
season set to begin, we expect freight rates to rebound from current levels. We estimate
average produce oil tanker freight rates to remain stable at the end of the year, followed
by 6% and 8% y-y increases in 2012 and 2013, respectively.

Fig. 33: Chemical product oil shipping industry
fundamentals demand to outpace supply growth and drive
freight rates

Source: Clarksons, Dreqry, Nomura estimates

Fig. 34: Global chemical product oil tanker supply growth
lower supply growth


0
5,000
10,000
15,000
20,000
25,000
30,000
0.0
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F
(US$/day) (%)
Supply growth (LHS)
Demand growth (LHS)
Avg product tanker rates (RHS)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2011F 2012F 2013F
(%)
More optimistic on chemical
product oil shipping sector than
other shipping subsectors
Lower orderbook and high
newbuilding delivery slippages
Ton-mile demand increasing too
... leading to stronger rebound in
freight rates

16
Chemical product oil tanker shipping key industry charts
Fig. 35: Chemical product oil tanker industry fundamentals
to improve ahead of 2012 net demand growth
Source: Clarksons, Drewry, Nomura estimates

Fig. 36: Orderbook as percentage to fleet lowest for
chemical product oil tanker

Fig. 37: Chemical product oil tanker newbuilding delivery
slippages YTD delays +40%
Source: Clarksons, Nomura estimates Note: The delivery schedule is based on
Calrksons expected monthly delivery

Fig. 38: Monthly scrapping and freight rates

Source: Clarksons

Fig. 39: Freight rates bottomed and recovering


Fig. 40: Handysize product tanker industry breakeven cost
(data as 2009)
Source: Moore Stephens
-5
-4
-3
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(%)
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(%)
Drybulk Containers
Crude tankers Product tankers
0.0
0.5
1.0
1.5
2.0
2.5
J
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(mn dwt) Expected Actual
0
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1,000
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(mn dwt )
Monthly scrapping (LHS)
Baltic Clean Tanker Index (RHS)
-100
-50
0
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100
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200
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500
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(%)
Baltic clean tanker index y-y % chng
4,071
817
1,175
578
1,042
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Handysize product
(US$/day) Crew Stores
Repairs & maintenance Insurance
Administration

17
Chemical product oil shipping industry assumptions

Fig. 41: Chemical product oil tanker shipping industry assumptions

Source: Clarksons, Fearnleys, Nomura estimates

Fig. 42: Global chemical product oil tanker shipping demand growth model

Source: Clarksons, Fearnleys, Nomura estimates

Fig. 43: Global chemical product oil tanker shipping supply estimate breakdown


Fig. 44: Global chemical product oil tanker shipping freight rates by vessel size


2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
Supply growth 3.1 7.9 8.7 9.0 9.0 10.4 7.8 3.7 5.0 2.9 0.1
Demand growth 4.8 -29.5 6.9 41.2 7.5 7.2 3.8 5.3 3.4 3.2 3.3
+/- balance (ppt) 1.7 -37.3 -1.8 32.1 -1.5 -3.2 -4.0 1.6 -1.6 0.3 3.2
Average product tanker rates (US$/day) 16,668 21,624 28,980 29,048 27,611 26,351 17,303 14,889 14,859 15,765 16,950
Rate change 11.8 29.7 34.0 0.2 -4.9 -4.6 -34.3 -13.9 -0.2 6.1 7.5
Crude oil vs oil products demand (ton-miles) 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
Crude oil 10,825 8,795 8,875 8,715 8,751 8,911 8,681 8,931 9,236 9,844 10,493
Oil products 2,190 1,545 1,652 2,332 2,506 2,686 2,788 2,936 3,036 3,133 3,237
Multiplier 4.9 5.7 5.4 3.7 3.5 3.3 3.1 3.0 3.0 3.1 3.2
Change yoy
Crude oil -18.8 0.9 -1.8 0.4 1.8 -2.6 2.9 3.4 6.6 6.6
Oil products -29.5 6.9 41.2 7.5 7.2 3.8 5.3 3.4 3.2 3.3
m dwt 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E
Fleet, 1 J anuary 73.4 75.7 81.6 88.7 96.7 105.4 116.3 125.4 130.1 136.6 140.5
- double hull 35.0 41.7 51.1 60.5 71.1 82.6 96.8 109.9 119.0 128.8 135.0
- single hull 38.4 33.9 30.5 28.2 25.6 22.7 19.6 15.5 11.1 7.8 5.4
Add: Deliveries 6.8 9.3 9.5 10.6 11.6 14.3 13.8 10.5 10.2 6.9 1.9
Expected deliveries 8.9 10.3 11.4 13.2 15.4 18.9 22.5 21.0 13.6 5.1 0.9
Add: addition from previous delayed deliveries 0.0 3.0 1.0
Delays and cancellations (3.4) (1.2) -
Late order changes 0.0 0.0 0.0
Assumed deliveries 10.2 6.9 1.9
Delays and cancellations 24% 9% 16% 20% 25% 25% 38% 50% 25% 15% 0%
'- delay 22% 12% 0%
'- cancellation 3% 3% 0%
'- order changes 0% 0% 0%
Less: Scrapping (4.2) (3.0) (2.0) (2.0) (2.5) (2.0) (3.6) (5.7) (3.7) (3.0) (1.8)
Less: Other (losses)/additions (0.3) (0.4) (0.5) (0.5) (0.4) (1.4) (1.2) (0.1) 0.0 0.0 0.0
Others 0.0 (0.0) (0.0) (0.0) 0.0 (0.0) 0.0 (0.0) 0.0 0.0 0.0
Fleet, 31 December 75.7 81.6 88.7 96.7 105.4 116.3 125.4 130.1 136.6 140.5 140.6
- double hull 41.7 51.1 60.5 71.1 82.6 96.8 109.9 119.0 128.8 135.0 136.2
- single hull 33.9 30.5 28.2 25.6 22.7 19.6 15.5 11.1 7.8 5.4 4.4
Change yoy 3.1% 7.9% 8.7% 9.0% 9.0% 10.4% 7.8% 3.7% 5.0% 2.9% 0.1%
2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
Average daily rates (US$/day)
Panamax (Dirty tanker) 18,615 24,372 31,907 31,096 29,317 29,221 19,375 16,616 15,727 16,602 17,851
Handysize (Clean tanker) 14,720 18,876 26,053 27,000 25,904 23,481 15,231 13,163 13,991 14,928 16,050
Average product tanker rates 16,668 21,624 28,980 29,048 27,611 26,351 17,303 14,889 14,859 15,765 16,950
Change in rates (yoy)
Panamax (Dirty tanker) 13% 31% 31% -3% -6% 0% -34% -14% -5% 6% 8%
Handysize (Clean tanker) 10% 28% 38% 4% -4% -9% -35% -14% 6% 7% 8%
Average product tanker rates 12% 30% 34% 0% -5% -5% -34% -14% 0% 6% 8%

18
Container business segment diminishing importance
MISCs container liner fleet consisted of 33 vessels as at end-FY11 and is only the 29th
largest globally (based on Containerisation International data). The MISC container fleet
mainly consists of small vessels given the average size of the container vessels is 2,251
TEU, while the average size of the largest container line globally, Maersk, is 4,556 TEU.
The difference in fleet size is due to the operating routes, as Maersk operates a global
container shipping network but MISCs container business is focused on intra-Asia.
The importance of the container business to MISC has been declining in recent years, as
management is focusing on expanding other businesses given container revenue is
likely to account for only 19% of total revenue in FY11 from 36% in 2008. We believe the
container business is not a core business as highlighted by the absence of container
newbuildings on order. Further, we believe management may consider divesting the
container shipping segment, but only once this subsector is sustainably profitable.
However, the container business has been loss-making for the past three years.

Fig. 45: MISC container fleet


Fig. 46: Current size of container fleet compared to peers

Source: Containerisation International, Nomura estimates

The outlook for MISCs container business is not much better as we remain bearish on
the container shipping sector, estimating container sector margins are likely to remain
under pressure into 2H11 due to carriers irrational market-share driven strategies, cost
inflation pressures and excess supply on long haul routes of Asia Europe and Asia US
that leads to supply cascading into the Intra Asia route.
We estimate the MISC container shipping segment will remain loss-making for the next
three years, despite our current estimate of the sector being profitable from next year.
We believe the key reason is the lack of scale due to the relatively small fleet, which
prevents MISC from providing a diverse shipping network; we do not believe
management would consider expanding into the long-haul shipping markets. We
estimate container losses and margins to narrow as container freight rates rebound, but
we still forecast a 2014F profit before-tax margin of -9.5%.

Fig. 47: MISC container liner segment financials


27
20
27
30
36
37
33 33
0
5
10
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a
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1
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O
O
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2
9

M
I
S
C
(000 TEUs)
RM m 2007 2008 2009 2010 2011 2012F 2013F 2014F
Reported revenue 3,542 4,649 4,550 2,824 2,359 2,152 2,110 2,242
Operating expenses (3,457) (4,492) (5,401) (3,928) (2,802) (2,712) (2,471) (2,306)
EBITDA 85 158 (851) (1,104) (443) (560) (361) (64)
Depreciation expenses (135) (128) (140) (124) (124) (114) (117) (127)
EBIT (49) 30 (990) (1,228) (566) (674) (478) (191)
Interest expenses and other expenses 5 14 88 6 (25) (6) (15) (22)
Pre-tax profit (45) 44 (902) (1,222) (592) (680) (493) (213)
Only 29th largest global
container fleet
Importance of container
business declining
MISC container segment to
remain loss-making in the next
few years

19
Container shipping outlook uncertain
The container shipping sector continues to remain under pressure and loss-making due
to a mixture of supply imbalance and market share driven-strategies of container lines
resulting in lower freight rates. Cost inflation (especially in the case of bunker oil) is also
cutting into margins with container lines struggling to pass this to customers. Further, we
believe the 3Q peak season could disappoint with demand sequentially improving at only
a slow pace but, more importantly, increased supply preventing container lines from
pushing through rate increases. We believe a short-term spike in freight rates is likely if
peak season demand is pushed into a short period and leads to temporary container
supply shortage, but the higher freight rates would be unsustainable.
The turnaround in sector earnings from an operating margin of +11% for 2010 to -1% in
1Q11 was not a demand issue as highlighted with OOILs 1H11 volumes increasing 9%
y-y. The problem was due to an influx of large vessels on key long haul routes as well as
carriers pricing behaviour. However, we are starting to become concerned about
potential slowdown in demand as leading demand indicators such as ISM and PMI are
moving closer to the 50 level, while unemployment remains high.
The container sector orderbook as a percentage of fleet is slightly misleading as this has
declined to currently 30% from a high of 61% in November 2007. However, this is
dominated by large vessels (+8,000 TEU), which account for 62% of orderbook and only
operate on Asia Europe and transpacific. In fact, the +10,000 TEU sized container
vessels only operate on the Asia Europe route. The orderbook as a percentage of fleet
for the 8,000-9,999 TEU and +10,000 TEU fleet is 25% and 158%, respectively. Hence,
supply on the main revenue driving route of Asia Europe and transpacific is set to remain
an issue given capacity is set to continue increasing on these routes.
Pricing strategies adopted by carriers have also exacerbated the problem as we believe
some carriers have focused on market share and high load factors at the expense of
freight rates. Despite the sharp decline in freight rates (-7% since beginning of the year
based on average spot rates from Shanghai Shipping Exchange) and increasing costs,
idle capacity is only 0.8% as against 11.7% at end-2010. We believe idle capacity could
increase from October onwards once the disappointing peak season becomes a reality.
Although we forecast freight rates will rebound in 2012 given newbuilding deliveries
peaking this year, we believe it is too early to focus on next year given the uncertainty
surrounding 2H11. If carriers continue this irrational pricing behaviour, the sector could
continue to be loss-making next year. Margins are also under pressure from cost
inflation, especially bunker oil. We estimate bunker oil is the single largest-cost item and
accounts for roughly 25% of total costs, but 1H11 average oil price has increased to
USD630 from the 2010 average of USD469, with the carrier bearing the higher costs.

Fig. 48: Container shipping sector supply growth,
demand growth and freight rates
Source: Clarksons, Containerisation International, Drewry, Nomura estimates

Fig. 49: Container orderbook as percentage of fleet
breakdown long haul routes under most pressure
Source: Clarksons, Nomura research

1,200
1,300
1,400
1,500
1,600
1,700
1,800
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2
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3
F
(US$/TEU) (%)
Demand growth (LHS)
Supply growth (LHS)
Head-haul rates (RHS)
0%
10%
20%
30%
40%
50%
60%
70%
J
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1
Container sector outlook
remains uncertain
Margins already negative
Supply pressure on crucial long
haul routes the problem
Carriers also acting irrationally
with market share strategies
Sector to improve in 2012, but
uncertainty remains for the rest
of this year

20
Container shipping key industry charts
Fig. 50: Container sector under pressure from declining
freight rates and higher costs (especially oil)

Source: Bloomberg, Shanghai Shipping Exchange, Nomura research

Fig. 51: Freight rates under pressure on all routes intra-
Asia faring better than others

Source: Shanghai Shipping Exchange, Nomura research

Fig. 52: Leading indicators are pointing to demand growth
easing with potentially weak 2H11

Source: Thomson Reuters Datastream

Fig. 53: Consumer spending key but unemployment remains
high


Fig. 54: No longer are carriers controlling capacity, focusing
instead on market share and loads rather than profits

Source: Drewry, Nomura research

Fig. 55: Delivery of large vessels set to continue into next
year; hence, need for carrier strategies to change

Source: Clarksons, Nomura estimates Note: The delivery schedule is based on
Calrksons expected monthly delivery
85
95
105
115
125
135
145
J
a
n
-
1
0
J
a
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-
1
1
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-
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-
1
1
Freight rates Bunker costs
50
60
70
80
90
100
110
120
130
140
D
e
c
-
0
0
D
e
c
-
0
1
D
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c
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0
2
D
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c
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3
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4
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5
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6
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0
7
D
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c
-
0
8
D
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c
-
0
9
D
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-
1
0
China-US China-Europe China-Asia
20
30
40
50
60
70
80
J
a
n
-
0
5
J
a
n
-
0
6
J
a
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7
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8
J
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-
0
9
J
a
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-
1
0
J
a
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-
1
1
US ISM new orders
EU PMI
China PMI
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
J
a
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-
0
5
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6
J
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8
J
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-
0
9
J
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-
1
0
J
a
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-
1
1
EU unemployment
US unemployment
0
200
400
600
800
1,000
1,200
1,400
15
20
25
30
35
40
45
2
Q
0
6
3
Q
0
6
4
Q
0
6
1
Q
0
7
2
Q
0
7
3
Q
0
7
4
Q
0
7
1
Q
0
8
2
Q
0
8
3
Q
0
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4
Q
0
8
1
Q
0
9
2
Q
0
9
3
Q
0
9
4
Q
0
9
1
Q
1
0
2
Q
1
0
3
Q
1
0
4
Q
1
0
1
Q
1
1
Transpacific capacity (LHS)
Asia-Europe capacity (LHS)
Overall CCFI index (RHS)
(mn TEUs)
0
20
40
60
80
100
120
140
2
0
1
1
-
0
6
2
0
1
1
-
0
8
2
0
1
1
-
1
0
2
0
1
1
-
1
2
2
0
1
2
-
0
2
2
0
1
2
-
0
4
2
0
1
2
-
0
6
2
0
1
2
-
0
8
2
0
1
2
-
1
0
2
0
1
2
-
1
2
2
0
1
3
-
0
2
2
0
1
3
-
0
4
2
0
1
3
-
0
6
2
0
1
3
-
0
8
2
0
1
3
-
1
0
2
0
1
3
-
1
2
2
0
1
4
-
0
2
2
0
1
4
-
0
4
2
0
1
4
-
0
6
2
0
1
4
-
0
9
2
0
1
4
-
1
1
2
0
1
5
-
0
3
(000 TEUs)
+10,000 TEUs 8,000-9,999 TEUs

21
Container shipping industry assumptions

Fig. 56: Container shipping industry assumptions

Source: Containerisation International, Clarksons, Drewry, Nomura estimates

Fig. 57: Container shipping demand growth model

Source: Containerisation International, Clarksons, Drewry, Nomura estimates

Fig. 58: Container shipping supply estimate breakdown


Fig. 59: Container shipping freight rates by vessel size


2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
Global demand growth (%) 14.3 14.8 10.0 10.8 12.7 5.4 -9.3 13.4 7.7 8.3 8.2
Nominal supply growth (%) 8.8 9.7 13.1 16.5 13.8 12.7 6.1 9.3 7.9 7.8 5.3
+/- balance 5.4 5.1 -3.1 -5.8 -1.1 -7.3 -15.4 4.0 -0.2 0.5 2.9
Overall freight rates (US$/TEU) 1,663 1,821 1,822 1,610 1,755 1,856 1,251 1,719 1,593 1,645 1,728
Change yoy (%) 24.2 9.5 0.0 -11.6 9.0 5.8 -32.6 37.3 -7.3 3.3 5.0
2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
Transpacific (%) 9.9 15.4 13.4 10.1 1.8 -7.2 -13.3 16.6 6.3 6.9 8.2
Asia/Europe (%) 24.5 15.4 9.8 13.9 16.6 -5.7 -14.6 17.8 6.5 7.1 8.1
Global demand growth (%) 14.3 14.8 10.0 10.8 12.7 5.4 -9.3 13.4 7.7 8.3 8.2
TEU (000) 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
Fleet, 1 J anuary 6,021 6,554 7,191 8,130 9,475 10,782 12,154 12,896 14,098 15,215 16,400
Add: Deliveries 559 644 942 1,370 1,333 1,479 1,122 1,335 1,204 1,273 953
Expected deliveries 644 685 914 1,307 1,411 1,725 2,036 2,242 1,606 1,376 668
Add: addition from previous delayed deliveries 0 321 390
Delays and cancellation -401 -424 -106
Assumed deliveries 1,204 1,273 953
Delays and cancellations 13 6 -3 -5 5 14 45 40 25 25 10
- delay 20 23 8
- cancellation 5 2 2
Less: Scrapping -26 -8 -2 -24 -21 -100 -377 -126 -88 -88 -88
Less: Others -1 1 -1 -2 -5 -6 -3 -8 0 0 0
Fleet, 31 December 6,554 7,191 8,130 9,475 10,782 12,154 12,896 14,098 15,215 16,400 17,264
Change yoy (%) 8.8 9.7 13.1 16.5 13.8 12.7 6.1 9.3 7.9 7.8 5.3
Index 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
Transpacific 100 105 105 99 96 110 87 111 109 112 117
Asia Europe 100 111 112 98 118 125 88 152 134 137 142
Intra Asia 100 109 118 108 113 121 99 120 117 121 126
Overall freight rates 100 110 110 98 107 113 80 117 110 113 118
Transpacific (%) 13.9 5.0 0.0 -5.7 -3.4 14.1 -23.3 24.4 -2.1 3.0 5.0
Asia Europe (%) 29.3 11.4 0.9 -14.0 19.7 7.2 -37.3 63.7 -17.6 3.0 5.0
Intra Asia (%) -6.9 9.2 8.3 -9.5 4.8 7.7 -21.2 20.7 -3.1 4.0 5.0
Overall freight rate growth (%) 24.2 9.5 0.0 -11.6 9.0 5.8 -32.6 37.3 -7.3 3.3 5.0

22
LNG shipping segment key earnings contributor
The LNG business for MISC is a steady revenue and earnings driver due to the long-
term nature of its contracts. LNG contracts are traditionally 20-25 year contracts and are
potentially followed by another 20-year contract upon expiry of the first long-term
contract (albeit at lower freight rates).
Due to the nature of the contracts and specialised services, margins are higher too. For
example, pre-tax margin has averaged 55% during FY05-11 for MISCs LNG business.
Earnings can vary depending upon whether vessels are being drydocked, but would
otherwise be stable.
MISC operates one of the largest LNG fleets globally with 29 LNG vessels. It is followed
by MOL and NYK, which operate 20 and 19 LNG vessels, respectively. Of MISCs LNG
fleet, 22 are under contract to Petronas with only 7 to third parties (with staggered expiry
from 2014). Given Petronas is the main shareholder for MISC, we believe future
Petronas LNG export contracts would also be given to MISC.

Fig. 60: MISC LNG fleet


Fig. 61: LNG pre-tax margins


We remain positive on the LNG business due to the long-term contracts but also due to
the small orderbook, as we estimate orderbook as a percentage of fleet is only 13%.
Further, given LNG newbuildings are expensive (latest price for a LNG newbuilding is
USD202mn for a 160k cbm LNG), we estimate orders are likely to be placed to coincide
with new LNG plants.
However, speculative LNG newbuilding orders have increased in recent years and this is
leading to increased competition.
Although the LNG business is not the largest revenue contributor (20% compared to
24% for crude oil shipment and 25% for heavy engineering), it is likely to remain the key
earnings driver for MISC due to the nature of its contracts and margins. We estimate the
LNG business will generate profit before tax of more than CNY1.2bn per year.

Fig. 62: MISC LNG segment financials


17
18
21
22
27
29 29 29
0
5
10
15
20
25
30
35
2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

40%
45%
50%
55%
60%
65%
2
0
0
5

2
0
0
6

2
0
0
7

2
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0
8

2
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2
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2
F
2
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1
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F
2
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F
RM m 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F
Reported revenue 2,634 2,600 2,413 2,416 2,600 2,727 2,501 2,362 2,218 2,162
Operating expenses (412) (407) (215) (297) (447) (337) (400) (400) (400) (400)
EBITDA 2,222 2,193 2,199 2,119 2,152 2,390 2,101 1,962 1,818 1,762
Depreciation expenses (586) (688) (758) (771) (869) (596) (544) (503) (472) (460)
EBIT 1,636 1,505 1,440 1,348 1,283 1,795 1,557 1,460 1,346 1,302
Interest expenses and other expenses (83) (96) (118) (112) (108) (80) (71) (6) (13) (19)
Pre-tax profit 1,553 1,409 1,322 1,237 1,174 1,715 1,487 1,454 1,333 1,283
LNG is a steady earnings driver
with high margins
MISC operates the largest LNG
fleet globally
Industry fundamentals for LNG
also attractive
LNG segment generates at least
MYR1.2bn per year

23
LNG shipping outlook remains attractive
We have a positive outlook on the global LNG shipping market, as we estimate demand
for LNG transportation will outpace LNG fleet supply growth, especially given the
relatively small orderbook. Further, we believe the majority of LNG newbuildings are not
speculative orders, unlike LNG deliveries in 2008-2009. This is different from other
shipping subsectors as newbuilding orders are placed with a contract upon delivery.
Gas is a cheaper source of energy than oil and more environment friendly than coal.
Based on IEAs estimates in its Energy Outlook 2030, gas will become a more important
source of energy and account for 26% of energy sources by 2030 from 24% in 2010. The
increasing number of liquification plants and regasification terminals globally will drive
LNG transportation demand. Based on Global LNG Info, at end December 2010, there
were 71 regasification terminals with another 22 under construction and 42 more
planned. Further, the J apanese earthquake and tsunami have led to increasing concerns
about nuclear power globally, especially as J apan is already a major LNG demand
driver.
J apan is the worlds largest LNG demand driver and accounted for 32% of global LNG
demand in 2010. However, we believe new regions for growth are likely to be China,
India and Singapore. China is likely to be a key driver due to its energy requirements, as
there has been an increased focus on clean fuels. Based on its 12th Five-Year Plan,
China aims to increase the share of natural gas usage in the country to 8% of its total
energy pie by 2015F from 4% in 2010. Based on discussions with our Nomura oil and
gas team, Chinas LNG demand would increase by a CAGR of 19% between 2010 and
2020 and account for 9% of market share in 2020 (compared to only 4% in 2010).
With the global LNG newbuilding orderbook at only 46 vessels or 7.0mn Cu. M., this
implies orderbook as percentage of fleet at only 13%. We have assumed no newbuilding
delivery slippage or any scrapping and this implies supply growth of only 1.6%, 0.8% and
0.7%, respectively. Further, we believe the majority of the newbuildings are already
under contract upon delivery. In our view, this is due to the high cost of an LNG
newbuilding as the newbuilding price is USD202mn for a 160k cbm LNG. The price of
LNG newbuilding has only declined 19% from the peak.
Traditionally, LNG vessels are chartered for 20-25 years, providing steady earnings as
LNG newbuildings are ordered for specific projects. However, in recent years, spot and
short-term LNG contracts have increased. The Lloydslist article titled LNG order spree to
avoid previous pitfalls dated 13 J une 2011, noted that spot and short-term trade now
account for about 25% of total LNG trade. However, an April 2011 report from Argus
Global LNG estimates that spot LNG contracts were only 7-10% of total traded volumes.
Despite this increase in spot trade, we still estimate majority of LNG vessels are under
long-term contracts.

Fig. 63: LNG industry supply/demand growth

Source: Bloomberg, Nomura estimates

Fig. 64: Top 10 LNG players end-2010

Source: Clarksons

0%
5%
10%
15%
20%
25%
30%
2
0
0
5
2
0
0
6
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2
0
0
8
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2
E
2
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E
Supply growth Demand growth
0
5
10
15
20
25
30
35
M
I
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C
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G
r
p
Positive outlook on LNG
shipping industry
Orderbook as percentage to
fleet at only 13%
Gas to become more important
energy source in future
LNG contracts are normally up
to 20 years, but increasing spot
contracts

24
Offshore segment steady
With five Floating Production Storage and Offloading (FPSO), five Floating Storage and
Offloading (FSO) and one Mobile Offshore Production Unit (MOPU) currently under
operation and another MOPU and a Semi Submersible Floating Production Unit (FPU)
projects scheduled for delivery over the next six months, MISC is currently the fourth-
largest owner-operator of floating production systems (FPS) in the world. With support
from its parent company Petronas, MISC would be leveraged to Petronas new projects
(for example, Gumusut-Kakap field, offshore Sabah).
As offshore drilling is a long-term activity, long-term contracts are signed, with contracts
lasting for 2 years +a 3-year option to 15 years +a five-year option. According to
management, all operating FPSO and FSOs are contracted while the new MOPU and
FPU are also under a long-term contract.

Fig. 65: Offshore fleet breakdown

Source: Company data

We expect stable earnings growth for the offshore business as all equipment has already
been locked in under long-term contracts. Given an estimated stable pre-tax margin of
55% in FY12-13F, we expect pre-tax profit would increase 1% to MYR346mn in 2012F,
followed by a 6% and 3% decline in pre-tax profit to MYR325mn and MYR317mn in
2013F and 2014F, respectively.

Fig. 66: Offshore revenue and pre-tax profit


Fig. 67: Offshore pre-tax margins trend


Fleet detail s Built Design prodcution capaci ty (bpd) Storage capcity (bbl s)
Floating Production Storage and Offl oading (FPSO)
FPSO Bunga Kertas 2004 30,000 619,000
FPSO Brasil 2002 120,000 1,700,000
FPSO Kikeh 2007 150,000 2,020,000
FPSO Espirito Santo* 2009 100,000 2,000,000
FPSO Ruby II 2010 45,000 600,000
Floating Storage and Offloading (FSO)
FSO Puteri Dulang 1991 0 873,847
FSO Angsi 2005 0 472,631
FSO Cendor 2006 0 590,000
FSO Abu 2007 0 617,200
FSO Orkid** 2009 0 777,504
Mobil e Offshore Producti on Unit (MOPU)
MOPU SATU 2010 20,000 0
Orderbook
Mobil e Offshore Producti on Unit (MOPU)
MOPU DUA
Semi Submersi bl e Floating Production Unit (FPU)
FPU Gumusut Kakap
-
100
200
300
400
500
600
700
800
2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F
RM mn Offshore revenue Offshore pre-tax profit
0%
10%
20%
30%
40%
50%
60%
70%
80%
2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2
F
2
0
1
3
F
2
0
1
4
F
Steady earnings due to longer-
term contracts

25
Offshore outlook attractive
With global oil demand continuing to grow (Nomura oil and gas team estimates growth of
1.8% and 1.6% in 2012 and 2013, respectively), we expect this to drive demand in
deepwater and marginal field activities, which will, in turn, lead to demand for FPS.
Further, with the ageing of offshore equipment (including floater and jack-ups), Nomura
Singapores offshore analyst estimates that order cycle will likely continue over the next
few quarters. A growing trend has seen a preference for newer and more advanced
equipment, which would be another positive catalyst for the sector.
In fact, Nomuras oil and gas team believes there may still be new supply growth
beyond our estimates through 2013F as high oil prices attract new investments into the
sector. Also, with declining oil reserves (reserve/production ratio dropped to 46 as at
end-2010 from 47 as at end-2009), we foresee increasing need for more exploration and
development so that new oil fields can be developed to replace existing ones.
Given an increasing demand for offshore, our Singaporean offshore analyst foresees a
sustainable floater (including drillships and semisubs) and jack-up order momentum over
the coming months, due to an urgent need for renewal of fleets. For example, over 42%
of the global floater fleet was built before 1985, while almost 69% of jack-ups are over 25
years old. With a premium assigned to newer rigs and jack-ups as well as environmental
concerns over older fleets, most rig owners are looking to renew their fleets, leading to
recent growth in dayrates.

Fig. 68: Jackup dayrates
Source: Rowan, Nomura research Note: Chart taken from the report, A look at
competition in the offshore rig new0build market, dated 10 J une 2011

Fig. 69: Jackup age profile end-May 2011
Source: RigBase, Nomura research

Fig. 70: Floaters dayrates
Source: Sevan Marine, Nomura research

Fig. 71: Floaters age profile
Source: Sevan Marine, Nomura research. Note: Chart taken from the report, A look at
competition in the offshore rig new0build market, dated 10 J une 2011

0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Commodity Premium High-Spec
US$/day
5
98
15
10 9
13
184
144
71
0
25
50
75
100
125
150
175
200
<
1

y
r
1
-
5

y
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6
-
1
0

y
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1
1
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1
5

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1
6
-
2
0

y
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2
1
-
2
5

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2
6
-
3
0

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+
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r

C
o
n
s
t
r
u
c
t
i
o
n
340
360
380
400
420
440
460
480
1H10 2H10 1Q11
US$000/day Rigs >5 yrs old Rigs <5 yrs old
Built 2006
or after (incl
newbuilds),
38%
Built 1996-
2005, 14%
Built 1986-
1995, 6%
Built 1985
or before,
42%
Increasing global demand for
offshore equipment

26
Heavy engineering
Malaysian Marine & Heavy Engineering Holdings Bhd (MHB), MISCs 67%-held
subsidiary, focuses on the oil and gas sector. Its three main businesses are:
Engineering and construction: MHB primarily constructs oil and gas offshore structures
(fixed or floating platforms; so far, this has been limited to production rigs, ie, no
exploration drilling rigs), and components for such structures. MHB is one of only seven
companies licensed for major offshore O&G fabrication in Malaysia. This business is
the primary contributor to earnings (79% of EBIT for FYE Mar 11).
Marine conversion: Conversion of vessels into FPSOs/FSOs (the only yard to do so in
Malaysia), rigs to MOPUs/MODUs. This also includes modification of vessels, including
jumboisation, ie, increasing the length or breadth, or both, of a vessel.
Marine repair: Primarily repairs LNG carriers, tankers, containerships and bulk carriers.
Currently, MHB owns a 151-ha yard in Pasir Gudang, on the southern tip of Malaysia,
where it is embarking on a MYR2.7bn yard expansion and optimisation programme, to
be completed by 2014. In addition, the company announced in May that it would acquire
Sime Darbys Pasir Gudang yard for MYR399mn, which would effectively double its
capacity and eliminate its closest domestic competitor. The deadline for the due
diligence exercise has been extended to August. MHB also operates (but does not own)
the Kiyanly yard in Turkmenistan, on behalf of Petronas. Through this, it captures
revenue from the development of Petronas Block 1 gas project.

Fig. 72: MHB is the dominant fabricator in Malaysia August 2011
Malaysian fabricators licensed for major offshore O&G structures
Note: Shaded Sime Darby yard to be acquired by MHB. Remaining Sime Darby yards to be acquired by Petronas.
Source: ODS Petrodata, Company data, Nomura research

The ready availability of repair facilities at MHBs yard allow for cost savings for the
parent (particularly for the LNG fleet). MHBs engineering capabilities also give MISC an
advantage in expanding its portfolio of FPS under the offshore segment. In FY11, MHB
contributed 32% to MISCs earnings, and we expect this to rise to 38% by FY14F.

Fig. 73: MHB PBT breakdown


Fig. 74: MHB PBT margins


Yard Company Overal l Area (m
2
)
Annual Tonnage
Capaci ty (mt)
Market Share (%of
annual tonnage
Capaci ty)
Fabri cati on
Area (m
2
)
Max Ski d Track
Tonnage (mt)
Deepwater
Experi ence
Maj or
MMHE Pasir Gudang MMHE 1,506,000 69,700 22.8% 321,400 40,000 Yes
Sime Darby Pasir Gudang Sime Darby 507,476 60,000 19.6% 447,585 15,000 No
Sime Darby Teluk Ramunia Fabrication Yard A Sime Darby 169,968 10,000 3.3% 124,064 6,000 No
Sime Darby Teluk Ramunia Fabrication Yard B Sime Darby 323,749 30,000 9.8% 292,010 11,000 No
Sime Darby Teluk Ramunia Fabrication Yard C Sime Darby 194,249 20,000 6.5% 155,312 10,000 No
Kencana Lumut Kencana HL 635,500 48,000 15.7% 560,500 20,000 No
Labuan Shipyard LSE 300,000 36,000 11.8% 81,947 12,000 No
Pulau Indah yard Ramunia Holdings 226,624 15,000 4.9% 164,600 8,400 No
Boustead Penang Boustead HI 160,880 9,000 2.9% 4,000 No
Brooke Sejingkat Brooke Dockyards 82,000 8,500 2.8% 63,500 4,000 No
-200
-100
-
100
200
300
400
500
600
700
800
900
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
M
a
r
2
0
1
1
D
e
c
F
2
0
1
2
F
2
0
1
3
F
RM mn
Associates &J CEs
Others
Marine conversion &repair
E&C
0.0
5.0
10.0
15.0
20.0
25.0
2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2
F
2
0
1
3
F
2
0
1
4
F
%
Through 67% held Malaysian
Marine & Heavy Engineering

27
Still positive on Malaysia upstream O&G
Our bullish outlook for Malaysian field development capex (the main earnings driver for
fabricators such as MMHE) still remains:
Malaysian capex guidance from Petronas remains strong: In J une, Petronas upped its
previous capex guidance for the next five years from MYR275bn (given in March 2011)
to MYR300bn. Based on our estimates, this represents a 76% step up from the current
average domestic capex run rate, and will likely be focused on the upstream sector.
Continued reserve additions: 698mmboe of resources were added to Malaysias
reserves in FYE Mar 2011, according to Petronas data. While less than the 1,246
mmboe added in FY10, this is still supportive of development capex. Furthermore, the
reduced addition in FY11 can be linked to lower exploration activity in the previous two
years; this should pick up going forward (see below).
Exploration activity pickup: 11 new PSCs were awarded by Petronas in FYE March
2011, representing a substantial increase from previous years (4 in 2010). The
increased exploration activity that should follow could help sustain the rate of reserve
additions. The pick-up in exploration activity can already be seen in rig utilisation data
(up from trough in October 2010).
Field development and subsea expected to be the strongest beneficiaries of Malaysian
upstream capex: According to INTSOK forecasts, average Malaysian E&P capex for
2011-13F is likely to be 11% higher than 2008-10F. This is likely to be most
pronounced in the field development (EPCIC, pipelines) and subsea segments.

Fig. 75: Petronas domestic capex guidance remains strong

Petronas average domestic capex for FYE Mar 03-07, 08-11, 12-16
Source: Petronas, Nomura estimates Note: Year-end is March.

Fig. 76: Continued reserve growth to sustain devt capex

Malaysia: reserves and development capex (FYE Mar)
Source: Petronas, Nomura estimates Note: Year-end is March.

Fig. 77: Field development expected to be one of the prime
beneficiaries of increasing E&P capex
E&P capex breakdown
Source: INTSOK, Nomura research

Fig. 78: Utilisation rates indicate a pick-up in domestic
exploration has begun
Malaysia - Rig utilisation (jackup, semisub, drillship)
Source: ODS-Petrodata, Nomura research

-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
F
2
0
1
3
F
2
0
1
4
F
2
0
1
5
F
2
0
1
6
F
RM bn
Average domestic
-
2
4
6
8
10
12
14
-
0.2
0.4
0.6
0.8
1.0
1.2
1.4
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
RM bn bboe
Reserve additions
(Malaysia)
Development capex
(Malaysia)
0
500
1,000
1,500
2,000
2,500
3,000
2010 2011F 2012F 2013F
USD mn
Reservoir and Seismic Field Development
Subsea Well
0
20
40
60
80
100
120
A
u
g
-
0
7
N
o
v
-
0
7
F
e
b
-
0
8
M
a
y
-
0
8
A
u
g
-
0
8
N
o
v
-
0
8
F
e
b
-
0
9
M
a
y
-
0
9
A
u
g
-
0
9
N
o
v
-
0
9
F
e
b
-
1
0
M
a
y
-
1
0
A
u
g
-
1
0
N
o
v
-
1
0
F
e
b
-
1
1
M
a
y
-
1
1
A
u
g
-
1
1
Total Util % Marketed Util %

28
Financial analysis
For MISC, the revenue and earnings contribution of each business varies significantly.
(Note: when we compare pre-exceptional earnings, the three shipping-operating
segments were loss-making.) Based on FY11, heavy engineering was the largest
revenue generator (25%) but it generated only 32% of pre-tax profits. The LNG business
generated the largest pre-tax profits (MYR1.5bn vs total pre-tax profit of MYR1.4bn)
amongst the various businesses, but was only 20% of total revenue since LNG is a
higher margin business.
The container shipping, crude oil tanker shipping and chemical product tanker shipping
segments all reported pre-tax losses in FY11 YE March due to a sharp decline in
respective freight rates with combined pre-tax margin of -15%. Of these, container
shipping was the worst performer with a pre-tax margin of -25% in FY11.
The key reason for the different revenue and earnings profile is due to contract terms. MISCs
other shipping businesses are exposed to spot market with spot freight rates driven by
industry fundamentals unlike the longer-term contracts for LNG shipping and offshore
earnings. Heavy engineering earnings are from its already concluded orderbook.

Fig. 79: Revenue breakdown FY11A (Yr-end 31 March)

Fig. 80: FY11 pre-tax margins (yr-end 31 March)

We expect earnings to bottom in FY12F as crude oil, product tanker and container freight
rates decline. We estimate combined MYR1.2bn pre-tax losses from crude oil shipping,
product chemical oil shipping and container shipping, while the other remaining
segments are more defensive and should report pre-tax profit of +MYR2.3bn. For FY13F
and FY14F, we estimate a net profit rebound driven by lower losses from shipping
transportation (crude oil, product chemical, and container) and improving earnings from
the heavy engineering business (completion of the capacity-doubling Pasir Gudang
acquisition and contract wins of approximately MYR9bn). We estimate LNG and offshore
segment earnings will remain stable over 2012-2014F.

Fig. 81: MISC segmental pre-tax profit estimates

Source: Company data, Nomura estimates Note: Year-end is March

LNG
20%
Petroleum
24%
Chemical
6%
Offshore
6%
Heavy
engineering
25%
Liner
logistics
19%
59
-5 -24
50
14
-25
11
-30
-20
-10
0
10
20
30
40
50
60
70
L
N
G
P
e
t
r
o
l
e
u
m
C
h
e
m
i
c
a
l
O
f
f
s
h
o
r
e
H
e
a
v
y

e
n
g
i
n
e
e
r
i
n
g
L
i
n
e
r

l
o
g
i
s
t
i
c
s
T
o
t
a
l

p
r
e
-
t
a
x

p
r
o
f
i
t
(%)
Segmental pre-tax profit (RM m) 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F
LNG 1,553 1,409 1,322 1,237 1,174 1,715 1,487 1,454 1,333 1,283
Petroleum 1,277 1,131 1,008 670 993 124 -150 -344 -193 -132
Chemical 51 77 75 73 -118 -204 -181 -184 -97 40
Energy related shipping 2,881 2,617 2,406 1,979 2,050 1,635 1,155 926 1,043 1,190
Offshore 35 56 39 198 256 320 343 428 325 317
Heavy engineering -206 4 129 233 356 403 434 281 523 779
Other energy business -171 60 168 431 613 723 777 709 847 1,096
Liner logistics 206 5 -45 44 -902 -1,222 -592 -680 -493 -213
Bulk 259 0 0 0 0 0 0 0 0 0
Others -298 16 -36 -67 -169 -137 12 0 0 0
Total pre-tax profit 2,876 2,699 2,494 2,387 1,591 999 1,353 954 1,398 2,073
Revenue and earnings vary
significantly between businesses
Loss-making: container, crude
oil tanker and chemical tanker
Profitable: LNG, offshore, and
heavy engineering
Earnings to remain under
pressure in FY12

29
Based on this, we estimate pre-exceptional margins of 5% and 9% for FY13F and
FY14F, respectively. This is still lower than the 28% pre-exceptional margin for FY05, as
we still estimate crude oil tanker shipping and container shipping segments to remain
loss-making in FY14F. In FY05, the shipping operating business (excluding LNG)
reported pre-tax profit and margin of MYR1.5bn and 24%, respectively.
Net debt to equity was 36% at end-March 2011 and we estimate it will increase to 51% in
2012F due to funding of newbuildings. Based on orderbook at end-March 2011, MISC
has 15 newbuildings (owned), ie, 1 offshore, 1 chemical and 13 petroleum.

Fig. 82: Pre-tax margin trend


Fig. 83: Net debt to equity


Among the different segments, we expect LNG to remain the main earnings contributor
and account for 62% of pre-tax profits in FY14F. This should be followed by heavy
engineering and offshore segments, which would also remain profitable as these are
defensive and steady earnings contributors. By FY14F, we estimate the chemical
product oil business will return to profitability due to quicker recovery in product shipping
freight rates. However, we estimate crude oil shipping and container shipping segments
to remain loss-making in FY14F.

Fig. 84: Revenue and segmental pre-tax breakdown

0
5
10
15
20
25
30
2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F
0
10
20
30
40
50
60
70
2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2
F
2
0
1
3
F
2
0
1
4
F
Revenue (RM m) 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F
LNG 2,634 2,600 2,413 2,416 2,600 2,727 2,501 2,362 2,218 2,162
Petroleum 3,058 3,279 3,416 3,576 4,383 3,058 2,952 2,631 2,548 2,448
Chemical 386 567 536 610 1,042 840 770 902 960 1,138
Energy related shipping 6,077 6,446 6,365 6,602 8,024 6,626 6,223 5,895 5,726 5,748
Offshore 95 205 172 558 691 730 681 629 591 576
Heavy engineering 805 970 1,119 1,138 2,510 3,595 3,063 2,167 3,480 4,893
Other energy business 900 1,176 1,291 1,696 3,201 4,325 3,744 2,796 4,071 5,469
Liner logistics 3,044 3,122 3,542 4,649 4,550 2,824 2,359 2,152 2,110 2,242
Bulk 629 0 0 0 0 0 0
Others 0 3 0 0 8 0 0 0 0 0
Total revenue 10,651 10,747 11,199 12,947 15,783 13,775 12,326 10,843 11,907 13,459
Segmental pre-tax profit (RM m) 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F
LNG 1,553 1,409 1,322 1,237 1,174 1,715 1,487 1,454 1,333 1,283
Petroleum 1,277 1,131 1,008 670 993 124 -150 -344 -193 -132
Chemical 51 77 75 73 -118 -204 -181 -184 -97 40
Energy related shipping 2,881 2,617 2,406 1,979 2,050 1,635 1,155 926 1,043 1,190
Offshore 35 56 39 198 256 320 343 428 325 317
Heavy engineering -206 4 129 233 356 403 434 281 523 779
Other energy business -171 60 168 431 613 723 777 709 847 1,096
Liner logistics 206 5 -45 44 -902 -1,222 -592 -680 -493 -213
Bulk 259 0 0 0 0 0 0 0 0 0
Others -298 16 -36 -67 -169 -137 12 0 0 0
Total pre-tax profit 2,876 2,699 2,494 2,387 1,591 999 1,353 954 1,398 2,073
Margins recovering but still
below historical highs
LNG is main earnings generator

30
Company profile
Listed in 1987 on the Kuala Lumpur stock exchange, MISC is the largest Malaysian
shipping company and second-largest global shipping company (based on market cap).
As of end-March 2011, MISC operated 184 vessels (85 crude oil tankers, 37 chemical
tankers, 29 LNG and 33 containerships) as well as offshore and heavy engineering
businesses.
Petronas is the largest shareholder of MISC with a 62% stake. Employee Provident
Fund, Amanah Raya Nominees and Lembaga Kemajuan Tanah Persskutuan are the
other major shareholders with 8.9%, 4.0% and 2.3% share, respectively. The remaining
top 10 shareholders are also domestic Malaysian funds, which we believe are unlikely to
reduce its stake. We believe only a 3.7% stake (foreign ownership) is free float.

Fig. 85: MISC market cap comparison

Source: Bloomberg

Fig. 86: Current MISC shareholder structure


Fig. 87: Corporate milestones


0
5
10
15
20
25
30
M
a
e
r
s
k
M
I
S
C
C
h
i
n
a

C
o
s
c
o
M
i
t
s
u
i

O
S
K

L
i
n
e
s
N
i
p
p
o
n

Y
u
s
e
n

K
a
b
u
s
i
k
i
C
S
C
L
H
M
M
O
O
I
L
N
O
L
K
a
w
a
s
a
k
i

K
i
s
e
n

K
a
i
s
h
a
(US$ bn)
Petronas
63%
Employees
Provident
Fund
11%
Foreign
investors
5%
Other
Malaysian
government
agencies
18%
Malaysian
Investors
3%
Year Event
1968 Incorporation of MISC via J V between Malaysian government and group of private entrepreneurs
1970 Started national liner service
1983 Delivery of first LNG tanker
1987 Listed on main board of Bursa Malaysia Securities Berhad via IPO
1991 Diversified into shipbuilding, repairing and engineering related businesses
1997 Petronas acquired 29.3% stake in MISC and assumed management control
1998 Acquired assets of Konsortium Perkapalan Berhad & PNSL Limited and merged with PETRONAS Tankers Sdn
Bhd increasing PETRONAS' stake in MISC to 62.01%.
2003 Secured first and second LNG time charter contract outside Petronas
Acquired American Eagle Tanker from NOL for US$1.1 bn
Delivery of first VLCC
2004 Malaysia Shipyard and Engineering (MSE) Holdings Sdn Bhd became a subsidiary of MISC
2005 Launch of Malaysia Marine & Heavy Engineering Sdn. Bhd., new corporate identity of MSE
2006 Malaysia Marine and Heavy Engineering became a wholly-owned subsidiary of MISC
2007 Delivered its first deepwater floating, production, storage and offloading facility, FPSO Kikeh for Murphy Oil
Ventured into tank terminal operations through a joint venture with Dialog Group Berhad
2008 MMHE took 100% ownership of the Kiyanly Fabrication Yard in Turkmenistan
2009 Further diversified its LNG business by partnering with PETRONAS International Corporation Limited and
Mustang Engineering Limited to provide Floating LNG solutions and services worldwide long-term charterparty
contract with Yemen LNG officially commenced following the signing of the Protocol of Delivery and
2010 Listing of MMHE
Limited freefloat

31
Fig. 88: MISC owned fleet list


Name TEU Dwt Built
Crude tankers
1 Bunga Kasturi Enam 297,300 2008
2 Bunga Kasturi 299,999 2003
3 Bunga Kasturi Lima 298,100 2007
4 Bunga Kasturi Empat 298,100 2007
5 Bunga Kasturi Tiga 298,040 2006
6 Bunga Kasturi Dua 300,542 2005
7 Eagle Venice 306,998 2005
8 Eagle Valencia 306,998 2005
9 Eagle Vienna 306,999 2004
10 Eagle Virginia 306,999 2002
11 Eagle Vermont 306,999 2002
12 Eagle Kuntan 107,500 2010
13 N/B Tsuneishi Zosen Numakuma 1425 107,500 2010
16 Eagle Kuching 107,500 2009
17 Eagle Turin 107,000 2008
18 Eagle Torrance 107,123 2007
19 Bunga Kelana 10 105,193 2004
20 Bunga Kelana 9 105,174 2004
21 Bunga Kelana 8 105,200 2004
22 Bunga Kelana 7 105,274 2004
23 Eagle Toledo 107,092 2003
24 Eagle Trenton 107,123 2003
25 Eagle Tucson 107,123 2003
26 Eagle Tampa 107,123 2003
27 Eagle Tacoma 105,592 2002
28 Bunga Kelana 6 105,815 1999
29 Bunga Kelana 5 105,788 1999
30 Bunga Kelana 4 105,811 1999
31 Eagle Augusta 105,345 1999
32 Eagle Anaheim 107,160 1999
33 Eagle Atlanta 107,160 1999
34 Bunga Kelana 3 105,784 1998
35 Eagle Phoenix 106,127 1998
36 Eagle Austin 105,426 1998
37 Eagle Albany 107,160 1998
38 Bunga Kelana Dua 105,884 1997
39 Bunga Kelana Stu 105,976 1997
40 Eagle Columbus 107,166 1997
41 Eagle Charlotte 107,169 1997
42 Eagle Subaru 95,675 1994
43 Eagle Otome 95,663 1994
44 Bunga Kenanga 73,096 2000
45 Eagle Milwaukee 73,096 1987
46 N/B OKSKAYA SHIPYARD NAVASHINO 6,600 2010
49 Bunga Kekaras 29,990 1995
50 Bunga Kemiri 9,932 1995
51 Bunga Siantan 16,924 1991

32
Fig. 89: MISC owned fleet list


Name TEU Dwt Built
Chemical tankers
52 Bunga Bakawali 45,000 2010
53 Bunga Agelica 45,000 2010
54 Bunga Angsana 38,000 2010
55 Bunga Alpinia 38,000 2010
56 Bunga Allium 38,000 2010
57 N/B SLS Shipbuilding Chungmu 521 45,553 2010
60 Bunga Aster 37,961 2010
61 N/B STX Shipbuilding J inhae 2051 37,961 2010
62 Bunga Melati Satu 32,127 1997
63 Bunga Alamanda 38,000 2009
64 Bunga Akasia 38,000 2009
65 Bunga Melati Dua 32,168 1997
66 Bunga Melati 3 31,983 1999
67 Bunga Melati 4 31,967 1999
68 Bunga Melati 5 31,975 1999
69 Bunga Melati 6 31,981 2000
70 Bunga Melati 7 31,972 2000
LNG
71 Seri Balquis 91,198 2009
72 Seri Bijaksana 89,953 2008
73 Seri Bakti 86,040 2007
74 Seri Begawan 86,040 2007
75 Seri Balhaf 85,999 2008
76 Seri Alam 83,482 2005
77 Seri Amanah 83,400 2006
78 Seri Anggun 76,000 2006
79 Seri Angkasa 71,500 2006
80 Seri Ayu 76,000 2007
81 Puteri Intan Satu 76,190 2002
82 Puteri Delima Satu 76,190 2002
83 Puteri Nilam Satu 76,190 2003
84 Puteri Zamrud Satu 76,144 2004
85 Puteri Firus Satu 76,190 2004
86 Puteri Mutiara Satu 76,190 2005
87 Puteri Intan 73,519 1994
88 Puteri Delima 73,519 1994
89 Puteri Nilam 73,519 1995
90 Puteri Zamrud 73,519 1996
91 Puteri Firus 73,519 1997
92 Tenaga Dua 72,087 1980
93 Tenaga Empat 72,087 1981
94 Tenaga Lima 72,087 1981
95 Tenaga Satu 72,087 1982
96 Tenaga Tiga 72,087 1981
97 Aman Bintulu 9,220 1993
98 Aman Sendai 9,220 1997
99 Aman Hakata 9,090 1998
Containerships
100 Bunga Seroja Dua 7,943 103,717 2007
101 Bunga Seroja Satu 7,900 103,717 2006
102 Bunga Pelangi Dua 4,469 65,318 1995
103 Bunga Raya Dua 3,842 48,304 1998
104 Bunga Raya Satu 3,842 48,304 1998
105 Bunga Teratai 1,725 23,518 1998
106 Bunga Teratai 3 1,725 23,584 1998
107 Bunga Teratai 4 1,725 23,574 1998
108 Bunga Teratai Dua 1,725 24,073 1998
109 Bunga Bidara 1,351 24,613 1990
110 Bunga Delima 1,351 24,554 1990
111 Bunga Kenari 1,351 24,554 1991
112 Bunga Terasek 1,201 24,561 1991
113 Bunga Mas 10 736 12,288 1998
114 Bunga Mas 9 736 12,250 1998
115 Bunga Mas 11 714 10,326 1998
116 Bunga Mas 12 710 10,313 1998
117 Bunga Mas Enam 699 8,991 1997
118 Bunga Mas Lima 699 8,668 1997
Bulk
119 Bunga Saga 9 73,127 1999
LPG
120 Pernas Butane 2,213 1991
121 Konsep Maju 4,999 1995
122 Bunga Kekwa 3,052 1995

33
APPENDIX 1: Crude oil shipping industry
Crude oil shipping fleet supply
We only classify VLCC, Suezmax and Aframax vessels for our crude oil tanker fleet
analysis. The table below highlights the different characteristics of each type of crude oil
tanker. Similar to drybulk vessels, the larger vessel is normally used for longer distances
due to economies of scale. Within the crude oil tanker subgroups, VLCC is the largest
given its size ranges between 200,000-350,000 dwt, while Aframax size ranges from
85,000-110,000 dwt. In terms of fleet (based on number of vessels), Aframax has the
largest fleet of crude oil tankers. VLCC has the highest orderbook as percentage of fleet.

Fig. 90: Crude oil tanker fleet characteristics as at end-June 2011


The global crude oil tanker orderbook as a percentage of fleet is currently at 25%, which
has declined from a high of 50% in August 2008. This is the lowest among the major
shipping subsectors (drybulk and container orderbook as percentage of fleet stands at
43% and 30%, respectively).
Based on the expected delivery schedule, we estimate 50% of the overall orderbook is
slated for 2011 delivery and another 33% will be delivered in 2012. This would imply
supply growth of 15% and 9% in 2011 and 2012, respectively, assuming no newbuilding
delivery delays and no scrapping of existing fleet. However, global supply growth is likely
to be lower than this due to delays and cancellations of newbuildings and scrapping of
existing fleet due to regulations and age of fleet. For example, 33% of 2010 newbuildings
was undelivered in 2010 while 2.5mn dwt of existing capacity has already been scrapped
in J anuary-J une 2011.

Fig. 91: Crude oil tanker orderbook as percentage of fleet


Fig. 92: Global crude oil tanker supply growth


Fleet breakdown Orderbook
Vessel name Size (dwt) Number DWT (mn) Number DWT (mn) Key load areas
VLCC 200,000- 563 108 161 51 Arabian Guly
350,000 dwt West Africa
Red Sea
North Sea
Mediterranean
Suezmax 120,000- 430 66 129 20 Mediterranean
200,000 dwt West Africa
Black Sea
North Sea
Aframax 85,000- 899 95 119 13 North Sea
110,000 dwt Mediterranean
Caribbean
Arabian Gulf
SE Asia
Black Sea
China
0
10
20
30
40
50
60
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
(%)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
2011F 2012F 2013F
(%)

Crude oil tanker orderbook as
percentage of fleet at 25%...
... with 50% of newbuildings
delivered in 2012

34
Single hull vs double hull, scrapping
Scrapping of existing crude oil tanker fleet is likely to be a key swing factor given 7mn
dwt was scrapped in 2010 and 2.5mn dwt in the first six months of 2011. We believe
scrapping is likely to increase due to international regulations for phasing out single-hull
vessels for safety reasons.
At the end of 2010, 5.5% of the global crude oil fleet of 352.5mn dwt were single-hull oil
tankers or 80 of the 1,855 vessels were single-hull vessels. However, based on IMO
regulation 20 under MARPOL in 2005, single-hull vessels are to be phased out or
converted into double-hull vessels by 2010. The exceptions are: 1) the US has a different
phase out scheme that exempts LOOP (Louisiana Offshore Oil Port) and lightering areas
until 2015 and these are the main discharge areas for VLCCs, 2) J apan and Singapore
will allow single-hull tankers to call into their ports until 2015 and 3) most Middle East
countries have not ratified MARPOL. We believe the oil tanker disasters of Hebei Spirit in
2007 and Deepwater Horizon in 2010 are likely to lead to a majority of single-hull vessels
being pushed out of operation.

Fig. 93: Crude oil tanker scrapping and freight rates

Source: Clarksons

Fig. 94: Crude oil tanker fleet single hull vs double hull


Newbuilding orderbook breakdown
Delivery of newbuildings continues to be delayed, as we estimate 33% of 2010 slated
newbuilding deliveries were delayed and 32% of newbuildings slipped for the first six
months of 2011. We believe this is due to a mixture of ship financing problems for
owners and construction delays at the shipyard. We estimate 28% of crude tanker
orderbook is from charter-related companies while 4% is from greenfield shipyards.

Fig. 95: Global crude tanker orderbook owner type

Fig. 96: Global crude tanker orderbook shipyard country

0
500
1,000
1,500
2,000
2,500
3,000
3,500
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
J
a
n
-
9
9
J
a
n
-
0
0
J
a
n
-
0
1
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
(mn dwt )
Baltic Dirty Tanker Index (RHS)
0
50
100
150
200
250
300
350
400
450
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
(mn dwt)
Double hull Single hull
28
26 26
61
28
3
1 2
21
3
10 18
5
9
12
58
55
67
9
57
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011F 2012F 2013F 2014F Total
Charterer KG Not categorized Operator
26
34
46
9
31
16
6
7
0
10
56
56
41
67
54
17
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011F 2012F 2013F 2014F Total
China Europe J apan Korea Other Asia ROW
Single-hull vessels set to
continue to be scrapped
31% orderbook from Chinese
shipyards

35
Crude oil shipping demand
For crude oil transport shipping operators, demand is driven not only from the importing
area but also changing import and export regions, as this affects the distance travelled.
Hence, ton-mile demand (volume and distance combined) is key given the length of time
at sea. China has become the largest importer of crude oil in Asia with 28% and 12%
market share for Asian crude oil imports and global crude oil imports in 2010,
respectively. Nomuras oil and gas team estimates Chinas demand for crude oil will
outpace other countries for the next two years due to strong GDP growth and increasing
end product (for example, gasoline, fuel oil) demand. Further, Chinas oil imports from
West Africa have been increasing, leading to longer distance travelled compared to
Middle East. For example, ton-mile demand has grown at a 1.62x multiplier (average
2011-13F) to volume demand growth.

Fig. 97: Crude oil imports market share breakdown 2010

Source: BP Statistical Review of World Energy

Fig. 98: Global tanker shipping demand volume and ton
mile growth

Source: Drewry, Clarksons, Nomura estimates

Oil is the main and primary source of global energy; as per EIA data, oil accounts for
34.8% of global energy.
One of the main reasons for the continued global demand for crude oil is because end-
users lack natural resources. For example, North America and Europe are the largest
crude oil importers; their oil reserve to production ratio is only 15 years and 22 years,
respectively. Saudi Arabias (largest oil exporting country) oil reserve to production ratio
is 72 years.

Fig. 99: Global energy sources 2009

Source: EIA

Fig. 100: Oil reserves to production ratio 2010


US
24%
Europe
25%
China
12%
India
9%
J apan
10%
Others
20%
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
(%)
Tonnes Ton-mile
Oil, 34.8
Coal, 29.3
Natural gas,
24.1
Others, 11.8
81.9
21.7
14.8 14.8
46.2
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Middle East Europe North
America
Asia Pacific Global
(year s)
For demand, consider volume
and distances
Demand driven by end-users
lacking natural resources

36
Importing regions
North America is the largest crude oil importing region globally, with a 27% market share
in 2010 (based on IEA data) followed by Asia, as both regions rely on imported oil to
match their requirements. North America has always been the key importing region; its
market share was 34% in 2000. Asia (ex J apan) imports have grown significantly in the
past decade, at a CAGR of 6% since 2000 with market share of only 25% in 2000.
Further, based on BP Energy outlook 2030 report, by 2030 Asia (including J apan) with a
20-year CAGR of 2.6% would reach 45% market share.
China has been key, as its imports have increased from 1.41mm bbl/day in 2000 to
4.8mm bbl/day in 2010. In fact, based on Nomuras oil and gas team, Chinas import is
likely to be the fastest growing in the next couple years due to GDP growth leading to
higher demand.

Fig. 101: Crude oil importing breakdown FY10

Source: Fearnleys

Fig. 102: Crude oil importing countries future growth

Source: Fearnleys

Supply producing regions
The Organization of the Petroleum Exporting Countries (OPEC) is the main source of
crude oil supply, producing 39% market share. This is followed by North America and
Russia with 16% and 15%, respectively. Although North America is the second-largest
oil producing region, it does not produce enough to meet domestic demand; as a result,
North America is the largest crude oil importing region. Based on the Nomura oil and gas
teams estimate, production is set to grow the fastest in Latin America. Despite a more
gradual production supply growth from OPEC, this will still remain a key producer.

Fig. 103: Crude oil exporting breakdown FY10


Fig. 104: Crude oil exporting country future growth

Source: Fearnleys, Nomura estimates

Americas
27%
Asia ex-
J apan
38%
J apan
10%
Europe and
Med
22%
Others
3%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
2
0
1
0
2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
Americas Asia ex-J apan
J apan Europe and Med
Others
Middle East
35%
Africa
16%
Carribean
10%
North Sea
2%
Asia
4%
Others
33%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2
0
1
0
2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
Middle East Africa
Carribean North Sea
Asia Others
OPEC is the main provider of
crude oil

37
Key demand driver China
We expect China to remain a key demand driver for global oil tanker market, despite
already being the largest Asian crude oil importer, followed by J apan. Further, based on
the Nomura global oil and gas teams forecasts the fastest growing oil consuming
country will be China. The team estimates that Chinese imports would account for 35%
of the incremental increase in oil consumption during 2011-2013.

Fig. 105: Global oil demand change stronger imports
driven by China

Source: IEA

Fig. 106: China crude oil monthly imports

Source: Bloomberg, Nomura research

We believe this is due to:
Increased refinery capacity and industrial activity: According to the IEA report, Medium-
term oil & gas markets 2011, global refinery crude distillation capacity is expected to
increase by 9.6mb/d during 2011-2016 and Chinas market share in this segment
should increase from 11% in 2010 to 13% in 2016. This would be the fastest-growing
region during this period. Chinas increase in refinery capacity is driven by increased
Chinese consumption from rising income and consumption policies, which has led to
end-user demand for appliances, cars and garments (based on IEA report).
Chinas plan to increase oil reserves: Based on Chinas National Petroleum Reserve
Centre (NPRC), China targets 100 days of strategic oil reserves by 2020, which is
equivalent to 780mm bls. The first phase to 30 days oil reserve was completed in 2004-
2008. The next phases are 2009-2011, followed by another 2011-2020 phase.

Fig. 107: Global refinery capacity China market share
increasing

Source: BP

Fig. 108: China oil reserves target

Source: China National Petroleum Reserve Centre

North
America
31
North
America
27
Europe
20 Europe
16
China, 6
China, 11
Other Asia,
10
Other Asia,
12
Latin America
6
Latin America
7
Middle East 7 Middle East 9
Others
20
Others
18
0
10
20
30
40
50
60
70
80
90
100
2002 2010
(%)
-40
-20
0
20
40
60
80
0.0
5.0
10.0
15.0
20.0
25.0
J
a
n
-
0
4
J
u
l
-
0
4
J
a
n
-
0
5
J
u
l
-
0
5
J
a
n
-
0
6
J
u
l
-
0
6
J
a
n
-
0
7
J
u
l
-
0
7
J
a
n
-
0
8
J
u
l
-
0
8
J
a
n
-
0
9
J
u
l
-
0
9
J
a
n
-
1
0
J
u
l
-
1
0
J
a
n
-
1
1
(%) (mn t ons)
Total China import (LHS)
y-y % chng (RHS)
OECD North
America 23
OECD North
America 21
OECD
Europe
17
OECD
Europe
15
OECD Pacific
9
OECD Pacific
8
FSU 9
FSU 9
China 11
China 13
Other Asia 11
Other Asia 12
Middle East 8
Middle East
10
Others
11
Others
12
0
10
20
30
40
50
60
70
80
90
100
2010 2016
(%)
102
200
480
0
100
200
300
400
500
600
Phase 1 (2004-2008) Phase 2 (2009-2011) Phase 3 (2011-2020)
(mm bbl )
China imports set to continue
growing

38
Not only are Chinas crude oil global market share and imports continue to grow, China
is beginning to source oil from different regions. The Middle East remains the key source
of Chinas imported crude oil but its market share has gradually declined. For example,
based on VLCC voyage fixtures, the Middle Easts import market share declined from
almost 80% in 2009 to 78% in 2010, while West Africas oil import market share
increased to 12% in 2010 from 9.6% in 2009. This leads to an additional 7.5 days
travelling time; Middle East to China is normally 16-17 days.

Fig. 109: China VLCC voyage fixtures


Fig. 110: China crude oil imports transported on VLCC


Also focus on potential Japan demand
Another potential future oil demand driver is J apan, which accounted for 10% of total
global crude oil imports in 2010. After the earthquake and tsunami in March 2011,
J apans crude oil imports fell by 11% y-y in May and were 5% lower y-y for the first five
months of this year. We believe J apans oil imports could also increase in the future as
the country moves away from nuclear power and oil becomes an alternative energy
source. For example, in our oil and gas report, Take profit on oil over the summer peak;
petrochems offer more LT upside, published in May 2011, our team noted an expected
increase in oil demand for power generation and forecast a 171kbbl/d increase in oil
demand this summer as well as another additional 180k bbl/d in 3Q11 over 2Q11.

Fig. 111: Crude oil import market share 2010

Source: Bloomberg

Fig. 112: Japan crude and product oil monthly imports

Source: Bloomberg

0
50
100
150
200
250
300
350
2008 2009 2010
Num of
f ixt ures
Carribean Middle East Others West Africa
0
10
20
30
40
50
60
70
80
90
2008 2009 2010
mn t ons
Americas
27%
Asia ex-
J apan
38%
J apan
10%
Europe and
Med
22%
Others
3%
1.0
1.5
2.0
2.5
3.0
3.5
4.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
J
a
n
-
0
4
J
u
n
-
0
4
N
o
v
-
0
4
A
p
r
-
0
5
S
e
p
-
0
5
F
e
b
-
0
6
J
u
l
-
0
6
D
e
c
-
0
6
M
a
y
-
0
7
O
c
t
-
0
7
M
a
r
-
0
8
A
u
g
-
0
8
J
a
n
-
0
9
J
u
n
-
0
9
N
o
v
-
0
9
A
p
r
-
1
0
S
e
p
-
1
0
F
e
b
-
1
1
mn kl mn kl Crude import (LHS)
Product import (RHS)
Chinese demand also leading to
longer travel distances
J apan imports weaker but could
rebound

39
Crude oil shipping freight rates
Crude oil tanker freight rates are volatile, as these depend upon market conditions
(shortage or excess supply), weather issues and natural disasters (such as Hurricane
Katrina or J apanese earthquake). Further, a slight change in industry fundamentals
could lead to a sharp swing in freight rates. Hence, earnings for crude oil operators can
vary significantly each month, especially if the vessel is operating in the spot market. The
owner has the option to operate in the spot market or charter out vessels. Chartering out
the vessel would lead to a steady guaranteed freight rate, but if spot freight rates
increase, then the vessel owner would lose out.
These freight rates are also affected by seasonal factors as crude oil tanker freight rates
are historically stronger during 4Q-1Q period due to stronger oil demand for electricity
during winter. The quieter periods are April to September.

Fig. 113: Crude oil tanker seasonality

Source: Thomson Reuters Datastream, Nomura research

The Baltic Dirty Tanker index is the average daily crude oil tanker spot freight rate; it
immediately reflects the current spot market industry fundamentals. Tanker freight rates
are highly volatile as the Baltic Dirty Tanker Index reached a high of 3,194 in November
2004 but is currently at 743, still 13% higher than recent lows.
We estimate crude oil tanker freight rates are close to the bottom, with quarterly freight
rates bottoming in 2Q11. However, we only expect gradual recovery in crude oil tanker
freight rates by 4Q12. We expect overall crude oil tanker rates to rebound by only 2%
and 6% in 2012-13F, respectively.

Fig. 114: Baltic Dirty tanker index


Fig. 115: Crude oil freight rates (time-charter)

Source: Clarksons

800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
J an Feb Mar Apr May J un J ul Aug Sep Oct Nov Dec
-100
-50
0
50
100
150
200
250
0
500
1,000
1,500
2,000
2,500
3,000
3,500
J
a
n
-
9
9
J
a
n
-
0
0
J
a
n
-
0
1
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
(%)
Baltic Dirty tanker index y-y % chng
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
J
a
n
-
0
1
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
(US$/day)
VLCC Suzemax Aframax
Seasonally stronger during 4Q
Crude oil shipping freight rates
to remain depressed this year

40
Oil tanker shipping demand
Fig. 116: Global energy source oil is largest (2009)

Source: EIA

Fig. 117: Floating storage an additional demand driver

Source: Bloomberg

Fig. 118: VLCC voyage fixtures to China distances getting
longer as West Africa to China is longer distance


Fig. 119: Japan oil and product oil imports potential driver

Source: Bloomberg

Fig. 120: China refinery capacity growth key driver for
future demand as China is self-sufficient for product demand


Fig. 121: China oil reserves also China crude oil import
driver

Source: Chinas National Petroleum Reserve Centre

Oil, 34.8
Coal, 29.3
Natural gas,
24.1
Others, 11.8
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
120,000
J
a
n
-
0
0
F
e
b
-
0
0
A
p
r
-
0
0
M
a
y
-
0
0
J
u
l
-
0
0
S
e
p
-
0
0
O
c
t
-
0
0
D
e
c
-
0
0
F
e
b
-
0
1
M
a
r
-
0
1
M
a
y
-
0
1
(000 bbls)
0
50
100
150
200
250
300
350
2008 2009 2010
Num of
fixtures
1.0
1.5
2.0
2.5
3.0
3.5
4.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
J
a
n
-
0
4
J
u
n
-
0
4
N
o
v
-
0
4
A
p
r
-
0
5
S
e
p
-
0
5
F
e
b
-
0
6
J
u
l
-
0
6
D
e
c
-
0
6
M
a
y
-
0
7
O
c
t
-
0
7
M
a
r
-
0
8
A
u
g
-
0
8
J
a
n
-
0
9
J
u
n
-
0
9
N
o
v
-
0
9
A
p
r
-
1
0
S
e
p
-
1
0
F
e
b
-
1
1
Crude import Product import
OECD North
America 23
OECD North
America 21
OECD
Europe
17
OECD
Europe
15
OECD Pacific
9
OECD Pacific
8
FSU 9
FSU 9
China 11
China 13
Other Asia 11
Other Asia 12
Middle East 8
Middle East
10
Others
11
Others
12
0
10
20
30
40
50
60
70
80
90
100
2010 2016
(%)
102
200
480
0
100
200
300
400
500
600
Phase 1 (2004-2008) Phase 2 (2009-2011) Phase 3 (2011-2020)
(mm bbl)

41
Oil tanker shipping supply

Fig. 122: Orderbook as percentage to fleet

Source: Clarksons

Fig. 123: Fleet breakdown single hull and double hull

Source: Clarksons

Fig. 124: Age profile of crude oil tanker fleet, end-March
2011

Source: Clarksons

Fig. 125: Scrapping

Source: Clarksons

Fig. 126: Crude tanker newbuilding orderbook slippage

Source: Clarksons

Fig. 127: Newbuilding slippage by vessel sizes

Source: Clarksons

0.0
10.0
20.0
30.0
40.0
50.0
60.0
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
(%)
0
50
100
150
200
250
300
350
400
450
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
(mn dwt)
Double hull Single hull
8% 8%
3%
5%
27%
33%
40% 35%
63%
57% 56%
58%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Aframax Suezmax VLCC Total crude
>30 25-29 20-24 10-19 <10
0
500
1,000
1,500
2,000
2,500
3,000
3,500
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
J
a
n
-
9
9
J
a
n
-
0
0
J
a
n
-
0
1
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
(mn dwt)
Baltic Dirty Tanker Index (RHS)
-15
-10
-5
0
5
10
15
20
25
30
35
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
(%) Delays
Cancellations
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
(mn dwt)
VLCC Suexmax Aframax

42
Oil tanker shipping freight rates

Fig. 128: Baltic Dirty Tanker Index


Fig. 129: Average earnings

Source: Clarksons

Fig. 130: VLCC time charter rates

Source: Clarksons

Fig. 131: Suezmax time charter rates

Source: Clarksons

Fig. 132: Aframax time charter rates

Source: Clarksons

Fig. 133: Crude oil seasonality freight rates

Source: Thomson Reuters Datastream, Nomura research

-100
-50
0
50
100
150
200
250
0
500
1,000
1,500
2,000
2,500
3,000
3,500
J
a
n
-
9
9
J
a
n
-
0
0
J
a
n
-
0
1
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
(%)
Baltic dirty tanker index y-y % chng
0
50,000
100,000
150,000
200,000
250,000
J
a
n
-
9
9
J
a
n
-
0
0
J
a
n
-
0
1
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
US$/day
VLCC Suezmax Aframax
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
J
a
n
-
0
1
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
(US$/day)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
J
a
n
-
0
1
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
(US$/day)
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
J
a
n
-
0
1
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
(US$/day)
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

43
Oil tanker vessel prices

Fig. 134: VLCC newbuilding and second-hand prices

Source: Clarksons

Fig. 135: Suezmax newbuilding and second-hand prices

Source: Clarksons

Fig. 136: Aframax newbuilding and second-hand prices

Source: Clarksons

Fig. 137: Oil tanker demolition prices

Source: Clarksons

Fig. 138: Crude oil tankers monthly deliveries schedule

Source: Clarksons

Fig. 139: Crude oil tankers new orders being placed

Source: Clarksons

0
20
40
60
80
100
120
140
160
180
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
US$ mn Newbuilding 5 years old
0
20
40
60
80
100
120
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
0
10
20
30
40
50
60
70
80
90
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
0.0
5.0
10.0
15.0
20.0
25.0
30.0
J
a
n
-
0
1
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
US$ mn VLCC Suezmax Aframax
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
J
a
n
-
1
1
J
u
l
-
1
1
J
a
n
-
1
2
J
u
l
-
1
2
J
a
n
-
1
3
J
u
l
-
1
3
J
a
n
-
1
4
J
u
l
-
1
4
mn dwt
0
2
4
6
8
10
12
14
J
a
n
-
0
6
A
p
r
-
0
6
J
u
l
-
0
6
O
c
t
-
0
6
J
a
n
-
0
7
A
p
r
-
0
7
J
u
l
-
0
7
O
c
t
-
0
7
J
a
n
-
0
8
A
p
r
-
0
8
J
u
l
-
0
8
O
c
t
-
0
8
J
a
n
-
0
9
A
p
r
-
0
9
J
u
l
-
0
9
O
c
t
-
0
9
J
a
n
-
1
0
A
p
r
-
1
0
J
u
l
-
1
0
O
c
t
-
1
0
(mn dwt)

44
APPENDIX 2: Product oil shipping
industry
Product oil shipping fleet supply
Within the product oil tanker fleet, our analysis is based on only Panamax vessels and
Handysize vessels. The Panamax vessel is 55,000 and up to 85,000 dwt, while the
Handysize vessel is 10,000-55,000 dwt.
Product oil tankers are slightly different from crude oil tankers with the key differences
being:
Smaller sizes: The size of the Panamax and Handysize vessel ranges between 10,000-
110,000 dwt and can operate to smaller ports. Crude oil tanker sizes range from
85,000-350,000 dwt.
Additional vessel features: Product tankers are more specialised with additional
features such as extra coated tanks, which improve safety when transporting cargo.
Ability to transport several cargoes at the same time: Due to the design of product oil
tankers which separates the vessel into different sections, product tankers can
transport numerous cargoes on the same journey. This is compared to only 1-2
cargoes for crude oil tankers.
Shorter distances travelled: For example, the time for a VLCC operating from Saudi
Arabia to the US Gulf coast is 82 days but for a product tanker operating from
Singapore to the US west coast is only 53 days.

Fig. 140: Product oil tanker fleet characteristics

Based on our estimates, considering only Panamax and Handysize vessels as product
tankers, the current product tanker orderbook as a percentage to fleet is only 15%. This
is below the high of 50% in September 2007. With the product tanker fleet at 3,631
vessels and 130mn dwt at end-2010, the orderbook was 816 vessels and 19.7mn dwt
and delivered over 4 periods. The average age of the fleet is 8.5 years. Within this, 7%
are over 25 years, 5% between 20-24 years and 67% less than 10 years.

Fig. 141: Product oil tanker orderbook as percentage to fleet


Fig. 142: Age profile of product tanker fleet end-March 2011


Standard Deadweight
Tonnage
Long Range II (LR2) Products Tanker 110,000 dwt Arabian Gulf to Far East
Various regional trades
Long Range I (LR1) Products Tanker 75,000 dwt Various regional trades
Medium Range II (MR2) Products Tanker 45,000 60,000 dwt Transatlantic trade
Various regional trades
Medium Range I (MR1) Products Tanker 30,000 40,000 dwt Short haul trades
Asset Class / Definition Standard Trading Routes
0
10
20
30
40
50
60
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
(%)
6%
4%
5%
22%
14%
20%
64%
77%
67%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Handy Panamax Total product
>30 25-29 20-24 10-19 <10
Product chemical oil tankers are
different from crude oil tankers

Orderbook as percentage of
fleet is only 15%

45
Newbuilding delivery slippages for product tankers were the highest among the shipping
subsectors with newbuilding delivery slippage reaching 50% in 2010, based on our
estimates. This is significantly higher than 2010 newbuilding slippages for crude oil
tanker (33%), container (40%) and drybulk (36%).
For 2011, 2012 and 2013, we conservatively estimate product oil tanker newbuilding
slippages of 13%, 8% and 5%, respectively. However, newbuilding slippage for the first
six months of 2011, is already 42%.
Net supply growth for the product oil tanker is likely to be even lower due to scrapping,
especially given 8.5% of 2010 product tanker fleet of 130mn dwt were single hull
vessels. The scrapping rate has historically been 2-3% of existing fleet but increased to
5% in 2010 due to the beginning of the phase-out of single hull vessels and we expect
single-hull vessels in operations to decline further.

Fig. 143: Global product oil tanker newbuilding slippage

Source: Clarksons Note: The delivery schedule is based on Calrksons expected
monthly delivery

Fig. 144: Global product oil tanker supply growth


Breaking down the current global product oil tanker orderbook, we estimate 36% and
19% of the product tanker orderbook is from Korean and Japanese shipyards,
respectively. Product tankers placed at Chinese shipyards only account for 23% as we
believe product tankers are more specialised unlike drybulk vessels. Chinese shipyards
account for 49% of the global drybulk orderbook. Operator-owners account for 51% of
the global product oil tanker orderbook.

Fig. 145: Global product oil tanker orderbook shipyard
country
Source: Clarksons

Fig. 146: Global product oil tanker orderbook owner type

Source: Clarksons

0.00
0.50
1.00
1.50
2.00
2.50
J
a
n
-
1
1
M
a
y
-
1
1
S
e
p
-
1
1
J
a
n
-
1
2
M
a
y
-
1
2
S
e
p
-
1
2
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
(%)
25 23
2
23
18
20
15
19
31
44
68
36
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011F 2012F 2013F Total
China Europe Japan Korea Other Asia ROW
34
20
15
30
6
1
4
16
15
2
15
44
63
83
51
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011F 2012F 2013F Total
Charterer KG Not categorized Operator
Newbuilding delivery slippage
was 50% in 2010
Supply growth also offset by
scrapping

46
Product oil shipping demand
Product demand can also be split into clean products (such as gasoline, jet fuel, heating
kerosene among others) and dirty products (such as petroleum coke and generally lower
quality products). These are higher value added than crude oil.
Product oil shipping demand depends on numerous factors ranging from refinery
capacity (current, new and closure for maintenance), regional economic outlook, country
consumption requirements (for example, the US imports gasoline as domestic refineries
are unable to meet their needs) and government policies.

Fig. 147: Product oil demand breakdown end-2010

Source: IEA

Fig. 148: Global refinery breakdown by country end-2010


Further, weather problems and different seasons can also become demand drivers. Bad
weather can lead to closure of refineries and result in imports from other regions, thus
potentially leading to spike in freight rates as vessels are forced to re-route or ballast to
other regions. Demand for fuel oils is traditionally stronger during summer due to
electricity consumption.
Despite these considerations, global product oil shipping demand is correlated to crude
oil shipping demand. Based on data for the past few years, the multiplier between
product oil ton-mile demand and crude oil ton-mile demand has averaged 3.3x from
2006-10.

Fig. 149: Global product oil shipping demand and growth

Source: Drewry, Fearnleys

Fig. 150: Historical multiplier between crude oil ton-mile
demand and product oil ton-mile demand

Source: Drewry

32%
8%
22%
6%
6%
26%
Gasoline Jet/Kerosene Diesel Other gas oil RFO Other
S. & Cent.
America
7
North
America
23
China
11
Europe
27
Middle East
9
Others
23
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
(%)
2.8
2.9
3.0
3.1
3.2
3.3
3.4
3.5
3.6
2007 2008 2009 2010 2011F 2012F 2013F
(x)
Weather disruptions can also
affect demand
Crude oil ton-mile demand to
product oil ton-mile demand:
3.3x

47
The main product importing region is Asia, with a 46% market share (8% China, 5%
Japan, 13% Singapore and 17% for other Asia Pacific). Europe has 17% market share
followed by the US with 16% market share, as Europe and the US have insufficient
refining capacity for diesel and gasoline, respectively. For product exports, the main
exporters are Middle East, Russia and the US at 14.1%, 13.6% and 13.4%, respectively.

Fig. 151: Product oil import breakdown end-2010


Fig. 152: Product oil export breakdown end-2010


The Asia Pacific region is primarily a net product importer, with Russia and the Middle
East as the main net exporting regions. The US is both a major importer and exporter,
primarily because it imports gasoline due to a shortage and exports diesel to Latin
America and Europe. Likewise, Europe imports diesel, as its reliance on diesel has
increased but refineries are unable to meet this demand. Europe exports gasoline to the
US due to weaker European demand and as the US has insufficient gasoline produced
at its refineries.
For Asia, Singapore is a key region given its position as a regional trading hub, while
Indias longer-term plan is to become one of Asia's largest product exporters despite
already exporting to the US, Latin America and Europe.
Indonesia is also important given it has limited refineries and is hence reliant on product
imports. China is unlikely to be a major product importer given its upcoming refinery
expansion plans and target of being self-sufficient for these products. Hence, China is
more of a crude oil demand driver than product oil demand driver.

Fig. 153: Product oil net imports end-2010


Fig. 154: Global refiner capacity


US
16%
Mexico
4%
S. & Cent.
America
8%
Europe
17%
China
8%
Japan
5%
Singapore
13%
Others
29%
US
13%
Europe
9%
Former
Soviet Union
14%
Middle East
14%
India
8%
Singapore
9%
Others
33%
-120.0
-100.0
-80.0
-60.0
-40.0
-20.0
-
20.0
40.0
60.0
80.0
E
u
r
o
p
e
S
i
n
g
a
p
o
r
e
C
h
i
n
a
J
a
p
a
n
U
S
E
a
s
t

&

S
o
u
t
h
e
r
n

A
f
r
i
c
a
W
e
s
t

A
f
r
i
c
a
N
o
r
t
h

A
f
r
i
c
a
I
n
d
i
a
M
i
d
d
l
e

E
a
s
t
F
o
r
m
e
r

S
o
v
i
e
t

U
n
i
o
n
mn tonnes
OECD North
America 23
OECD North
America 21
OECD
Europe
17
OECD
Europe
15
OECD Pacific
9
OECD Pacific
8
FSU 9
FSU 9
China 11
China 13
Other Asia 11
Other Asia 12
Middle East 8
Middle East
10
Others
11
Others
12
0
10
20
30
40
50
60
70
80
90
100
2010 2016
(%)
Asia is main importing region
Singapore is key trading hub

48
Product oil shipping freight rates
Like other shipping subsegments, product oil tanker freight rates are highly volatile and
swing dramatically depending on market fundamentals; perceptions of tight supply could
also drive freight rates higher.
Product oil tanker freight rates are also seasonal and fluctuate depending on demand.
For example, product oil freight rates can be driven by the driving season during summer
and electricity demand during winter.

Fig. 155: Product oil tanker freight rate seasonality


The Baltic Clean Tanker Index (product oil freight rates index) has declined by 77% from
the peak of 1,509 in June 2008. However, freight rates have bounced back 101% from
the low of 345 in April 2009. Currently, the index is at 695.
For product freight rates, the Baltic Clean Tanker Index provides the spot daily product
tanker freight rates. We estimate product tanker freight rates have bottomed and
estimate average product tanker freight rates will remain flat at the end of the year with
another 6% and 8% increase in 2012 and 2013, respectively.

Fig. 156: Baltic Clean tanker index


Fig. 157: Product oil tanker freight rates (time charter) by
vessel classes
Source: Clarksons

800
850
900
950
1,000
1,050
1,100
-100
-50
0
50
100
150
200
250
0
500
1,000
1,500
2,000
2,500
J
a
n
-
9
9
J
a
n
-
0
0
J
a
n
-
0
1
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
(%)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
J
a
n
-
0
1
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
(US$/day)
Panamax Handysize
Product tanker rates are
seasonally stronger in
December

49
Product tanker shipping demand

Fig. 158: Product oil demand growth

Source: Drewry, Nomura estimates

Fig. 159: Historical multiplier between crude oil ton-mile
demand and product oil ton-mile demand

Source: CEIC

Fig. 160: Product oil import breakdown, FY10


Fig. 161: Product oil export breakdown, FY10


Fig. 162: Product oil demand breakdown, FY10

Source: IEA

Fig. 163: Global refinery breakdown by country, FY10


-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2007 2008 2009 2010 2011F 2012F 2013F
(%) Tonnes Ton-mile
2.8
2.9
3.0
3.1
3.2
3.3
3.4
3.5
3.6
2007 2008 2009 2010 2011F 2012F 2013F
(x)
US
16%
Mexico
4%
S. & Cent.
America
8%
Europe
17%
China
8%
Japan
5%
Singapore
13%
Others
29%
US
13%
Europe
9%
Former
Soviet Union
14%
Middle East
14%
India
8%
Singapore
9%
Others
33%
32%
8%
22%
6%
6%
26%
Gasoline Jet/Kerosene Diesel Other gas oil RFO Other
S. & Cent.
America
7
North
America
23
China
11
Europe
27
Middle East
9
Others
23

50
Product tanker shipping supply

Fig. 164: Product tanker orderbook as percentage to fleet


Fig. 165: Monthly delivery schedule


Fig. 166: Age breakdown (as of end-March 2011)


Fig. 167: Scrapping


Fig. 168: Newbuilding slippages product oil tanker


Fig. 169: Newbuilding slippages Panamax and Handysize


0
10
20
30
40
50
60
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
(%)
0.00
0.50
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64%
77%
67%
0%
10%
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40%
50%
60%
70%
80%
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100%
Handy Panamax Total product
>30 25-29 20-24 10-19 <10
0
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1,500
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(mn dwt)
Baltic Clean Tanker Index (RHS)
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(%) Delays
Cancellations

51
Product tanker shipping freight rates and vessel prices

Fig. 170: Baltic Clean Tanker Index

Source: Bloomberg, Clarksons, Nomura research

Fig. 171: Product oil tanker seasonality

Source: Bloomberg, Clarksons, Nomura research

Fig. 172: Panamax time charter rates


Fig. 173: Handysize time charter rates


Fig. 174: Panamax new and second-hand vessel prices


Fig. 175: Handysize new and second-hand vessel prices

Source: Clarksons, Nomura research. No values during April 2005 -December 2005.

-100
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(US$/day)
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1

52
Appendix A-1
Analyst Certification
We, Andrew Kam Wing Lee and Cecilia Chan, hereby certify (1) that the views expressed in this Research report accurately
reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of
our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this
Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by
Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures
Mentioned companies

Issuer name Ticker Price Price date Stock rating Sector rating Disclosures
MISC Bhd MISC MK MYR 7.28 23-Aug-2011 Neutral Not rated 49
Malaysia Marine & Heavy
Engineering
MMHE
MK MYR 6.55 23-Aug-2011 Reduce Not rated

Disclosures required in the U.S.
49 Possible IB related compensation in the next 3 months
Nomura Securities International, Inc. and/or its affiliates expects to receive or intends to seek compensation for investment banking
services from the company in the next three months.

Previous Rating

Issuer name Previous Rating Date of change
MISC Bhd Not rated 24-Aug-2011
Malaysia Marine & Heavy Engineering Neutral 19-Aug-2011

MISC Bhd (MISC MK) MYR 7.28 (23-Aug-2011)
Chart Not Available
Valuation Methodology Based on sum-of-parts valuation (due to its diverse businesses), our TP for MISC is MYR6.74. We
value its LNG and offshore businesses based on earnings over WACC due to long-term contracts. We value its tankers
business based on average tankers' P/B (0.9x) to FY12F book. We value its container business based on average containers'
P/B (0.9x) and we use Nomura's target price for MMHE MK (MYR5.74/sh) for its heavy engineering business.
Risks that may impede the achievement of the target price Upside risks could come from: 1) a rebound in freight rates, 2)
further divestments and 3) additional LNG contracts. Downside risks include: 1) renewing expired LNG contracts at lower freight
rates and 2) additional funding for capex.


53
Malaysia Marine & Heavy Engineering (MMHE MK) MYR 6.55 (23-Aug-2011)
Rating and target price chart (three year history)
Reduce (Sector rating: Not rated)
Date Rating Target price Closing price
11-Aug-2011 6.75 6.45
11-Aug-2011 Neutral 6.45
07-Jun-2011 9.23 8.08
27-May-2011 9.28 7.30
27-May-2011 Buy 7.30
28-Mar-2011 6.67 6.77
28-Mar-2011 Neutral 6.77
For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our TP of MYR5.74 for MHB is based on: 1) a two-stage EVA, with the first stage ending in FY16F
(WACC of 11-15%, long term growth rate: 2%) to value the Malaysian business; and 2) applying a P/E of 17x to MHB's share of
Turkmenistan earnings.
Risks that may impede the achievement of the target price (1) Substantial acquisition/capital management,(2) delay in the
election, and/or substantially reduced perceived political risk, (3) significantly larger-than-expected orderbook replenishment
and/or higher-than-expected margins.


54
Important Disclosures
Online availability of research and additional conflict-of-interest disclosures
Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and
THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and
BLOOMBERG.
Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page
http://go.nomuranow.com/research/globalresearchportal or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you
have any difficulties with the website, please email grpsupport-eu@nomura.com for technical assistance.

The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a
portion of which is generated by Investment Banking activities.
Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under
FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on
communications with covered companies, public appearances, and trading securities held by a research analyst account.

Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the
sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of
research reports in which their names appear.
Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily
responsible for marketing Nomuras Equity Research product in the sector for which they have coverage. Marketing Analysts may also
contribute to research reports in which their names appear and publish research on their sector.

Distribution of ratings (US)
The distribution of all ratings published by Nomura US Equity Research is as follows:
40% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 10% of companies with this
rating are investment banking clients of the Nomura Group*.
53% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 3% of companies with this
7% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 0% of companies with this
As at 30 June 2011.
*The Nomura Group as defined in the Disclaimer section at the end of this report.

Distribution of ratings (Global)
The distribution of all ratings published by Nomura Global Equity Research is as follows:
49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with this
40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies with
this rating are investment banking clients of the Nomura Group*.
11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 14% of companies with
this rating are investment banking clients of the Nomura Group*.
As at 30 June 2011.
*The Nomura Group as defined in the Disclaimer section at the end of this report.

Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for
ratings published from 27 October 2008
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock.
Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management
discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate
valuation methodology such as discounted cash flow or multiple analysis, etc.

STOCKS
A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months.
A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months.
A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months.
A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable
regulations and/or firm policies in certain circumstances including, but not limited to, when Nomura is acting in an advisory capacity in a merger
or strategic transaction involving the company.
Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks
(accessible through the left hand side of the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal);Global
Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology.

SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months.
A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months.
A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months.
Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging
Markets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from
30 October 2008 and in Japan from 6 January 2009
STOCKS

55
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,
subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock,
based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc.
A 'Buy' recommendation indicates that potential upside is 15% or more.
A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%.
A 'Reduce' recommendation indicates that potential downside is 5% or more.
A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or
firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the
subject company.
Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity
identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or
companies.

SECTORS
A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
absolute recommendation.
A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral
A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative

Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in
Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008)
STOCKS
A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six
months.
A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next
six months.
A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over
the next six months.
A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over
the next six months.
A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months.
Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional
research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other
information contained herein.

SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months.
A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months.
A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months.
Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector -
Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe;
Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg
World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior
to 30 October 2008
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price,
subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of
the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't
think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the
intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our
estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this
horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside
implied by the recommendation.
A 'Strong buy' recommendation indicates that upside is more than 20%.
A 'Buy' recommendation indicates that upside is between 10% and 20%.
A 'Neutral' recommendation indicates that upside or downside is less than 10%.
A 'Reduce' recommendation indicates that downside is between 10% and 20%.
A 'Sell' recommendation indicates that downside is more than 20%.

SECTORS
A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral
A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative

Target Price
A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be
impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the
company's earnings differ from estimates.

56
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contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or elsewhere identified in the
publication. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively, the 'Nomura Group'), include: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan;
Nomura International plc ('NIplc'), United Kingdom; Nomura Securities International, Inc. ('NSI'), New York, NY; Nomura International (Hong Kong) Ltd. (NIHK),
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could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or
omissions in the contents of this publication, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version.

Additional information available upon request
NIPlc and other Nomura Group entities manage conflicts identified through the following: their Chinese Wall, confidentiality and independence policies, maintenance
of a Restricted List and a Watch List, personal account dealing rules, policies and procedures for managing conflicts of interest arising from the allocation and pricing
of securities and impartial investment research and disclosure to clients via client documentation.

Disclosure information is available at the Nomura Disclosure web page:
http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx


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Key company data: See page 2 for company data and detailed price/index chart.

Rating: See report end for details of Nomuras rating system.

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