Has Nam Cheong’s Bold Business Strategy Paid Off?

Nam Cheong Ltd (SGX: N4E) is a Malaysia-based offshore marine company. Its main business is in building ships (the company’s actually the largest offshore support vessel builder in Malaysia and provides vessels to industry giants like Bumi Armada Berhad), though it does have a small ship chartering operation as well which serves the offshore marine sector.

The company is unique because it decided to embark on a somewhat unorthodox strategy for its shipbuilding division a few years back: Instead of building a vessel after orders are received from customers, Nam Cheong decided to build new vessels first and store them as inventory in the hope that there would be customers for those vessels. With vessels costing many millions of dollars to build, it’s easy to see how this is a risky strategy especially when Nam Cheong had to take on debt to finance the building.

But, that bold move seems to be paying off for Nam Cheong especially when we consider that its top-line had grown by 18.4% per year between 2013 and 2010. And just yesterday, the company announced that it had sold four of its build-to-stock vessels for a total sum of US$90 million. For some perspective, the contract value is almost one quarter of its annual revenue in 2013.

A new joint venture

In the same day as the new contract was announced, Nam Cheong also revealed a new joint venture with fellow ship builder Marco Polo Marine Ltd (SGX: 5LY). Under the terms of the JV, the former would be buying a 50% stake in a wholly-owned subsidiary of the latter. The JV has already purchased one of Nam Cheong’s vessels, a 200-men accommodation work vessel (AWV). With the vessel already securing a five-year US$27 million bare-boat charter contract, it seems that the JV would be busy from the get-go.

Nam Cheong and Marco Polo Marine also believe that there are synergies that can arise from their partnership: Nam Cheong is strong in shipbuilding while Marco Polo Marine can provide expertise in ship chartering. It would be interesting to see how the JV can grow for both companies.

Foolish Summary

Today, Nam Cheong has a book order of about RM2.0 billion for 29 vessels (inclusive of the new contract mentioned earlier). In just six months’ time, Nam Cheong’s order book had grown by a third from RM1.5 billion as of 26 February 2014. As the monetary value in Nam Cheong’s order book would be showing up as future revenue, there’s reasons to be optimistic about Nam Cheong’s business for the rest of the year at least.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn't own any shares of companies mention above