Pride of the Yangtze River Delta
OUTPERFORM - Maintained |
▊ As fireworks lit the morning sky, YZJ was standing tall as it launched not only its first but also China’s first 10,00 TEU containership. As the Chinese shipbuilding sector consolidates over the next couple of years, YZJ is poised to become the face of the sector, thanks to its proven track record and healthy financial position. We maintain our Outperform rating and target price – still based on 1.4x CY13 P/BV, 1 s.d. below its 5-year mean. Our earnings estimates are also intact. We like YZJ as it is one of the last privately-owned Chinese shipyards with decent profitability. The stock could be catalysed by more shipbuilding orders.
We witnessed the ground-breaking ceremony of YZJ's launch of its first 10,000 TEU containership. The vessel will undergo a 100-day sea trial before delivery in 1Q14. In his usual assertive and candid way, Chairman Ren Yuanlin and CFO Liu Hua welcomed the sell-side investment community to visit both the New Yangzi yard (where the vessel was launched) and Xinfu yard, which started operations earlier this year.
What We Think
To recap, the 10,000 TEU containership is for Seaspan, which has 11 identical orders with YZJ for a total order of US$1.06bn. The 11 vessels are scheduled for delivery in 2014-15 (six in 2014, five in 2015). Seaspan has another 14 options of 10,000 TEU containerships with YZJ. Management is in final talks with the ship owner and expects to announce some contracts before end-2013 (possibly more than five units at US$85m-90m/vessel). Furthermore, there could be scope for YZJ to secure even larger containership orders as it proves itself and moves up the value chain. Its YTD order win (US$1.2bn) is about 50% of our FY13 order target of US$2.5bn. We expect its order book to grow by 16% yoy to US$3.5bn by end-2013 (2012: US$3bn). We were also impressed by the hive of activity at YZJ’s new Xinfu yard. Spanning 150ha with 5,000 employees, the yard is now occupied with the construction of three 10,000 TEU containerships in its dry dock – one of the largest in China.
What You Should Do
For investors looking for winners from an industry shakeout, YZJ is our clear-cut preference among Chinese shipbuilders. It is trading at 1.2x P/BV, cheaper than Cosco’s 1.4x but with much superior returns (20% ROE vs. Cosco’s 4%).
Publish date: 26/09/13