Yangzijiang Shipbuilding: Improving Ship Orders Could Drive Re-rating
(BUY, SGD0.94, TP: SGD1.31)
We upgrade Yangzijiang Shipbuilding (YZJ) from Neutral to BUY with a higher TP of SGD1.31 vs SGD1.00 previously. In our view, the shipbuilding capacity cut in China and the recovery of ship orders in the dry bulk sector arising from improved supply and demand will drive the stock’s re-rating. Our SGD1.31 TP implies 9.5x FY14F P/E.
The Baltic Dry Index jumped 120% YTD and 54% in the past month due to slower supply growth while demand remains steady. Ship prices have risen by 5-12% from the bottom six months ago, and seasoned shipping players are expanding their fleet aggressively.
Strength in dry bulk sustainable as fleet growth is slowing down. Our analysis shows that global dry bulk demand will start outpacing supply by early 2014. We estimate global dry bulk capacity to grow 4.8%/4.4%/3.0% in 4Q13/2014/2015 while global demand is likely to rise by 5-6% annually. We believe the recovery in ship orders and closure of inefficient yards in China will benefit YZJ.
Good visibility from USD3.4bn order book. YTD, YZJ has secured USD1.22bn in new orders for 35 ships - making up 60% of our estimate - and has options for 51 ships worth USD2.87bn. The options are split into 22 container ships (USD1.79bn) and 29 bulk carriers (USD1.08bn). The company’s USD3.4bn (CNY20.9bn) outstanding order book, equivalent to 19 months of shipbuilding output, provides strong visibility in times when other yards are struggling for new orders.
Upgraded to BUY with a higher TP of SGD1.31. We upgrade YZJ from Neutral to BUY and raise our SOP-derived TP to SGD1.31 from SGD1.00. Our TP is based on: i) 12x P/E on FY14F shipbuilding earnings (previously 8x), ii) net cash and financial assets, and iii) less debt and amount due to customers. Our SGD1.31 TP is premised on a 9.5x FY14F P/E.
Publish date: 12/09/13