22 NOVEMBER 2013
China’s Shipbuilding Industry Consolidation – The Start Of A Revival For Yangzijiang?
By Nicholas Tan
On the stock market front, investors have reacted well to the actions taken by the Chinese authority to consolidate the shipbuilding industry by showing a bout of confidence for Yangzijiang Shipbuilding (Holdings), which will be a likely beneficiary of the government’s revised twelfth five-year plan. So how will the political intervention shape the future of Yangzijiang
In recent months, the highly competitive Chinese shipbuilding industry which has been bore down by overcapacity issues has been shaken up following a series of yard closures and capacity cuts. This comes after the Chinese government took a stance towards conducting a major overhaul of the industry to weed out a large number of smaller inefficient yards. The nascent consolidation has led to a flight to quality yards and improving vessel demands at state-owned yards as customers seek to place their orders at reputable yards so as to ensure timely delivery.
Big yards in China have performed well this year, winning 39.5 percent of global orders in the first half of the year compared with 36.5 percent for South Korea, reversing last year’s anaemic trend, according to shipbroker Clarkson. State-owned yards won almost three-quarters of those deals as they are at an advantage due to their easier access to credit terms for raw materials and new vessels financing. However, private yards with strong financial position such as Yangzijiang have also fared well by benefitting from a positive spillover effect by clinching the bulk of the new orders not claimed by state-backed builders.
Over the last decade, China has overtaken South Korea to become the world’s leading shipbuilder as numerous private yards strung up to compete with state-owned yards, helped by China’s insatiable appetite for raw materials. However, this has led to global ship orders peaking in 2007, resulting in a saturated market which coincided with China’s diminishing gross domestic product growth rate.
Has the administrative intervention come a bit too late? The Chinese government has now somehow woken up to realise that it is better to have a few strong yards under its control and help them to be globally competitive rather than have too many. Thus, it is posturing to firm up control of the industry as it announced its three-year plan for the industry on 4 August that included capacity control.
Considering the large number of yards in China, industry experts have predicted that for the industry to stabilise, 30 to 50 percent of all yards in China will probably have to shut down operations over the next five years. This is supported by Yangzijiang’s executive chairman Ren Yuanlin statement that a third of the nation’s yards face the danger of closure in about five years after failing to win orders. “The flight towards strong players should be apparent with the implementation of the Chinese government’s restructuring and consolidation plan, which may result in a higher market share for Yangzijiang,” he added.
While it is still early times to predict the ultimate effects of the consolidation, it is surely a step in the right direction for the industry and will help the government achieve its target for the nation’s top ten yards to account for 70 percent of the total output in China by 2015. China also aims to have more than 50 brands of different types of ships by that period, according to a five-year plan released last year. In comparison to that goal, the nation’s top ten shipbuilders accounted for 48 percent of the total output in 2011, according to Clarkson.
Silver Lining Ahead
In the latest set of financials, Yangzijiang reported tepid 3Q13 results with revenue up 1.6 percent to Rmb3.7 billion primarily driven by its investment segment rather than its core shipbuilding-related segment. Core gross margin held up strong at 22.3 percent compared to 22.9 percent a year ago on the back of stronger new build prices and the construction of higher specification vessels. However, net profit was down 6.4 percent to Rmb820.7 million, dragged by higher taxation. On a nine-month basis, the Chinese shipbuilder reported that revenue was down 2.5 percent while net profit fell 15.3 percent.
Notably, its topline was maintained by delivering a lower number of vessels (3Q13: 8 vessels versus 3Q12: 9 vessels) due to higher revenue recognition from construction and delivery of larger vessels during the quarter. We expect this trend to continue because of Yangzijiang’s high yard capacity utilisation rate until 2016. With a limited capacity for new orders, the Chinese shipbuilder will be selective and focus on the construction of more technologically advanced vessels to upgrade its capabilities and remain ahead of competition.
Year-to-date, Yangzijiang has secured 67 new ship order contracts valued at a total of US$2.6 billion, taking its outstanding order book as at 30 September to US$3.9 billion, comprising 88 vessels. The group also has a total of 30 outstanding options worth a total of US$1.5 billion
To mitigate the industry down cycle effects, the Chinese yard has moved into different sectors to maximise shareholders’ return thus significantly improving its overall margins. Ren said, “While we cannot completely eliminate the adverse impact of the shipbuilding slump, the group has undertaken a number of measures to strengthen its earnings and preserve profitability to ensure that shareholders are well protected even during industry downturns.”
Among its other businesses are investments in held-to-maturity assets which stand at approximately Rmb12.5 billion as at 30 September, attributing to about 10 percent of 3Q13 revenue. The group also has invested Rmb840.5 million into lands for property development as well as ventured upstream into the offshore and marine (O&M) sector, which forms part of its continuous bid to improve its technical capabilities and move up the value chain. Construction of its sole jack-up rig is progressing according to schedule with delivery targeted in mid-2015.
Rather than building the O&M arm as an independent pillar, the group prefers to combine it as part of the core shipbuilding segment as the firm believes that the risk of entering this business now is too high, exacerbated by the low down payments of less than 10 percent offered by certain Chinese yards. This cautious approach was picked up by OCBC Investment Research favourably.
Thus, the brokerage house favours Yangzijiang’s decision to divert its resources meant for O&M and focus on its competitive strengths for now, while looking to develop its other business pillars. Therefore, it expects more vessels to be delivered in 2014, raising its FY14F earnings estimate with a revised fair value of $1.22 (previously $1.04) based on 9 times FY14F earnings.
In all, with the on-going rejuvenation of the Chinese shipbuilding sector leading to good order book visibility of 1.6 times historical FY12 revenue for Yangzijiang, coupled with its strong financial position, diversified income stream and high margins, the Chinese yard does warrant a closer look. The horizon ahead does sparkle with a glimpse of light as it begins to display subtle signs of recovery.
Publish date: 22/11/13