Monday, September 30, 2013

Yangzijiang Shipbuilding : Share Price S$1.12 Target Price S$1.32(UOBKH)

Yangzijiang Shipbuilding
Share Price S$1.12
Target Price S$1.32
Share Price S$1.12
Target Price S$1.32

We visited YZJ’s New Yangzi and Xinfu yards and attended the launch ceremony of YZJ’s first 10,000TEU containership. We believe it is a milestone for YZJ who has the potential to build larger containerships and compete with leading Korean yards. Its 2013 order target of US$2.5b is well achievable and the recent pick-up in newbuild prices is positive for YZJ. Maintain BUY. Target price: S$1.32.

What’s New
• On 25 September, we visited Yangzijiang Shipbuilding’s (YZJ) New Yangzi and Xinfu yards in Jingjiang, Jiangsu. We also attended the launch ceremony of YZJ’s first 10,000TEU containership and communicated with the Chairman Mr Ren and CFO Ms Liu.

Stock Impact
• Looking at larger containership. The first 10,000 TEU containership for Seaspan is being built in the New Yangzi yard and will be delivered in 1Q13. YZJ aims to build at least twenty 10,000 TEU containerships in New Yangzi and Xinfu yards. With proven product quality and improved efficiency, YZJ would consider taking 14,000 TEU containership orders. Given YZJ’s proven learning ability and the similar designs for 10,000 TEU and 14,000 TEU containerships, we are confident that building larger containerships would not trouble YZJ.

• 2013 order target of US$2.5b is well achievable. Mr Ren is quite confident that YZJ will achieve its 2013 order target of US$2.5b. YZJ still has a number of letter of intentions (LOI) on hand, including the remaining options for fourteen 14,000 TEU containerships from Seaspan. As of 30 Jun 13, these options were worth US$2.54b. Apart from containerships and bulk carriers, other options include six 83,000 cum LPG carriers.

• More on the Xinfu yard. The Xinfu yard is about 1.46m sqm in size and has the largest dry dock (543m x 147m) in the world. As a new yard, Xinfu is not running at full capacity (annual capacity: 3m dwt) and the number of workers would increase from 5,000 currently to 8,000 in 2014. Xinfu is positioned to build large vessels, including very large containerships and Capesize bulk carriers. Fully booked until end-16, Xinfu is scheduled to deliver 6, 10 and 12 vessels in 2014, 2015 and 2016 respectively. When we visited Xinfu, it has four 10,000 TEU containerships being built in the dry dock, of which one will will be launched in Oct 13.

• Recent pick-up in newbuild prices. According to Mr Ren, newbuild prices of a Capesize bulk carrier have recovered by 10% since bottoming out in 2Q13. He attributed the price recovery to: a) prices in 1H13 were below breakeven level so the loss-making situation for shipyards would not last long, b) strong demand for eco-ships lifted newbuild prices, and c) a recovery in the dry bulk shipping market. However, Mr Ren expects limited upside to newbuild prices as both freight rates and steel prices have hardly any upside.

• Financing is getting tighter but would not affect YZJ. Chinese banks are more prudent in ship financing recently on the back of some defaults in the industry. However, with a robust balance sheet and good reputation, YZJ is not affected.

• Industry payment terms to improve. In a heavy-tail payment mode, YZJ’s regular down payment is 30% and YZJ does not accept any payment that is less than less than 20% of the contract value, while some other yards like Waigaoqiao and New Century offered an extreme 2-3% down payment. Mr Ren expects the industry payment terms to improve since most SOE Chinese yards secured enough orders with tough payment terms and have started to be picky.

• Held-to-maturity financial assets will be maintained at current size. YZJ believes the held-to-maturity (HTM) financial assets is a good diversification and would like to maintain the size of HTM financial assets at the current level of Rmb12b. However, more cash will be allocated to its property development from buying HMT financial products going forward. Given YZJ’s strict risk control (comprehensive due diligence and a voting committee) and a high coverage ratio of more than 2 times, we believe there is no need to worry about the safety of its HTM financial assets.

Earnings Revision/Risk
• None.

• An upcycle in newbuild orders is confirmed. 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 than to the earnings cycle.

• YZJ remains our only BUY within the Chinese shipyard sector with a target price of S$1.32, based on 1.3x 2014F PB. We expect a midcycle valuation to be applicable to YZJ. Current valuation of 1.1x 2014F PB is still attractive despite recent share price rally.

Share Price Catalyst
• Contract wins and recovery in newbuild prices.

Source/Extract/Excerpts/来源/转贴/摘录: UOBKH-Research,
Publish date:26/09/13

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