Yangzijiang Shipbuilding -
YZJ's stock could be range-bound after its 21% appreciation since our upgrade in Aug on the back of stronger orders. Although we believe its order momentum can be sustained in the next six months, lower earnings and margins in FY14 could limit further near-term upside.
We downgrade the stock to Neutral from Outperform. 9M13 net profit was in line at 70% of our FY13 forecast though above consensus at 85%. 9M13 order book was US$3.87bn (wins of US$2.1bn by 1 Oct). We raise our EPS for FY15 on higher revenue recognition and roll over our target price to end-FY14, still based on 1.4x P/BV (-1 s.d. of its 5-year mean).
High tax in 3Q13; more "other income" in 4Q13
3Q13 revenue declined 17% qoq as YZJ delivered eight vessels vs. 11 in 2Q13. Gross margins of 22% were slightly ahead of our 20%. 3Q13 net profit would have been higher if not for a high tax rate (29%) from withholding taxes for Chinese subsidiaries' distributable profits and higher taxes for its new yard (25% vs. 12.5% in FY12). 4Q13 revenue could dip qoq with fewer high-value vessels scheduled for delivery. Net profit, however, should still be on track as YZJ expects to receive government subsidies in compensation for yard relocation and tax incentives.
Strong order outlook
Our 2013 order target is still US$2.5bn, although management is bullish that YZJ may close 2013 with more than US$3bn of orders. YZJ has 28 outstanding options (US$1.36bn). Its order strength has in fact encouraged management to reopen its Changbo yard (shut in 2012), adding 10% capacity to handle smaller vessels (60k dwt bulkers and 1,000 teu containerships). Payment terms have also improved to 30/70 or 40/60 from 20/80.
Weak FY14 before a recovery in FY15
YJZ may lack further near-term catalysts in view of weaker quarterly earnings widely expected for FY14 as it executes lower-margin vessels with most of its high-value pre-GFC vessels delivered in FY13.
Publish date: 13/11/13