Momentum picking up
The re-rating catalyst for YZJ is the potential for more shipbuilding orders, backed by a sustained climb in the Baltic Dry Index. The BDI is supported by the stronger steel production and macro fundamentals in China.
The heightened order momentum and FY15 delivery slots being quickly snapped up suggest that YZJ’s order drought has bottomed out. We like YZJ as it is one of the last privately-owned Chinese shipyards with decent profitability. We keep our Outperform rating and target price (based on 1.4x FY13 P/BV; 1 s.d. below its 5-year mean). The stock has the highest dividend yield of 4.8% among the ship/rig builders.
BDI spike may lead to more shipbuilding orders
With about half of its order book (US$3.24bn as at end-Jun) dominated by bulk carriers, we believe YJZ can benefit from more shipbuilding orders if the BDI’s climb is sustained. A high BDI also lowers the risk of order cancellations.
The BDI spiked recently to its 52-week high of 1,478, driven primarily by the increase in Chinese steel production that spurred demand for shipping vessels mainly in the Capesize sector. China's macro fundamentals have stabilised with the recent data showing that the real economic activity is starting to improve. Iron ore inventories are also relatively low and we expect the import demand to remain relatively strong in 4Q13, which can lead to further upsides in the BDI.
US$1.22bn orders secured; more likely by end-13
New orders have rebounded sharply from US$300m in FY12 to US$1.22bn YTD. YZJ has been consistently getting new orders, with another US$241m (eight shipbuilding contracts) in the bag during the first two months of 2H13. The YTD order win is about 50% of our FY13 order target of US$2.5bn. We look forward to more orders in 2H13 as YZJ has 51 options worth US$2.87bn, of which 22 are for containerships (US$1.79bn) and 29 for bulk carriers (US$1.08bn).
The stock is trading at its trough of 0.98x FY13 P/BV, an unwarranted 20% discount to its peers despite a stronger ROE of 20%. In comparison, Cosco is trading at 1.23 P/BV with an ROE of 3.7%.
Publish date: 11/09/13