The strong gets stronger
•Yangzijiang is emerging as a stronger player
•Cosco's diversified product range is a drag on earnings
•Rongsheng's recovery path is long and bumpy
•Reiterate BUY on Yangzijiang with imminent catalyst from contract wins
Reasons for Yangzijiang's success. Our visits to a number of leading shipyards in Jiangsu point to contrasting outlook. The strength of Yangzijiang‘s management foresight, prudent strategy, timely delivery of quality products, dedicated top and middle management, well trained skilled labour force, and strong balance sheet have positioned Yangzijiang as the most well run, cost efficient and profitable private shipbuilder in China.
Positive voices from management. Our private discussion with one of Yangzijiang's division managers who had held managerial positions in Singapore and other China offshore yards upholds this conviction. The manager and his team are impressed by the company’s renowned industry reputation, sound strategy, company structure, growth potential, emphasis on R&D and engineering capabilities, solid balance sheet as well as attractive employee share scheme. They are confident that Yangzijiang will emerge as the leading Chinese offshore yard in the medium term with Chairman cum CEO, Mr Ren Yuanlin at the helm.
Cosco can do better. Cosco Nantong / Qidong are undoubtedly one of the most competitive and advanced offshore yards in China. Cosco has successfully developed its own jack up design that will be rolled out and marketed in the near future. However, its overly diversified product range has become a stumbling block for the company and is lengthening its learning curve, in our view.
Rong Sheng is on a long and bumpy recovery path. While we welcome Rong Sheng’s (NOT RATED) restructuring exercise, the journey to recovery will face many challenges. There have been contract cancellations and rescheduling. To illustrate, the group was contracted to deliver 48 vessels this year but in reality, it would probably deliver 10-15 vessels a year in these two years. Underutilised shipyard capacity and potential massive penalties put the group in high risk of incurring further operating losses.
BUY Yangzijiang; HOLD Cosco. Reiterate BUY on Yangzijiang with unchanged S$1.32 TP. We see an imminent catalyst from the potential exercise of Seaspan's remaining 14 options for 10K TEU containerships in the coming 1-2 months. Earnings and valuation re-rating are possible if contract wins surpass our assumption and positive industry developments continue. Maintain HOLD on Cosco and S$0.83 TP as we would like to monitor for improvements in its execution and earnings delivery.
Publish date: 30/09/13