Share Price S$0.935
Target Price S$1.32
2Q13: Solid Results And Strong Order-winning Momentum
YZJ delivered solid 2Q13 results with only an 8% yoy net income decline. Order-winning momentum was still very strong with a remarkable market share of 7.5% in China and over 30% among non-SOE Chinese yards. In addition, YZJ will benefit from recent supportive policies. Maintain BUY and raise target price to S$1.32.
• Yangzijiang Shipbuilding’s (YZJ) 2Q13 revenue was Rmb4.42b (+12% yoy), of which shipbuilding revenue was Rmb4.0b (+12% yoy). Overall gross margin (including investment business) slid to 27.4% from 2Q12’s 30.5%, of which shipbuilding margin was still stable at a relatively healthy 21% (2Q12: 24%). Net income was Rm811.7m (-8% yoy), including interest income of Rmb383m generated from financial products, cash and Runyuan micro financing (1Q13: Rmb394m, 2Q12: Rmb331m).
• Shipbuilding revenue improved as a result of delivering large vessels. Although less vessels were delivered in 2Q13 (11 vs 15 delivered in 2Q12), shipbuilding revenue still improved 12% yoy, thanks to higher revenue recognition from the delivery of large vessels.
• New contracts secured in 2Q13. YZJ secured six 82,000dwt bulk carriers, eight 64,000dwt bulk carriers and one 94,000dwt transload vessel. The total contract value secured in 2Q13 was US$414m and the total value of orderbook reached US$3.24b (29 containerships and 42 bulk carriers). The group has also converted four options into effective orders worth US$103.7m in Jul 13.
• Strong order-wining momentum. In 1H13, YZJ’s newbuild orders accounted for 7.5% of China’s total orders, in terms of contract value. Among SOE shipyards, YZJ’s market share in 1H13 was a remarkable 30%. We expect the order-winning momentum to persist in 2H13. YZJ have options for 47 vessels worth US$2.5b, and some of them will be exercised in 2H13. In such a case, its full-year order target of US$2.5b is well achievable.
• Held-to-maturity (HTM) financial assets - A good diversification and no worries about safety. The size of HTM assets increased to Rmb12.2b from Rmb11.4b as of end-12 and average yield is consistently at 10-12%. We expected a downsize of HTM assets due to more working capital needed alongside construction of more vessels signed with heavy-tail payment terms, but now found YZJ took a better strategy, which is to keep borrowing from banks at a 6% interest rate and maintain
its current size of HTM assets to get a 4% net interest margin (NIM). We believe there is no need to worry about the safety of HTM assets. The average coverage ratio is still more than 2x and the percentage of the government’s and financial institutions’ guaranteed financial assets have climbed to 29%. Apparently, YZJ is no longer in a net cash position but its balance sheet remained quite robust considering the well protected and highly liquid HTM financial assets.
• Benefits from supportive policies. Despite the State Council’s supportive policy benefitting large SOE shipyards more, management believes YZJ will also be a beneficiary in the future. YZJ has been active in acquiring small yards to expand capacity, such as Changbo and Xinfu. Given such supportive policies and a robust balance sheet, we expect YZJ to have no difficulty in getting loans from banks, which could create consistent profit from sizeable HTM financial assets and bring in more newbuild orders.
• Newbuild order cycle has bottomed out. Despite the earnings cycle is still trending down on lower margins for orders secured since 2012, we believe the newbuild order cycle has bottomed out, which is more correlated to share prices compared to earnings cycle.
• YZJ remains our only BUY within the Chinese shipyard sector and we lift target price from S$1.22 to S$1.32, based on 1.3x 2014F P/B. We expect a mid-cycle valuation is applicable to YZJ. Current valuation at 0.9x 2014F P/B is still within the trough range and looks very attractive.
Share Price Catalyst
• Contracts win.
Publish date: 12/08/13