Rating: Neutral (price target: S$1.21)
As a result of a strong pick up in order book wins in H213, YZJ will end 2013 with good revenue visibility for 2014. Year-to-date, YZJ has secured over around US$2.6bn of contracts, and the company expects another US$500m by the end of 2013. These contracts materialise at a critical juncture. The 2014 order book had been running down after very low order volumes in 2011 and 2012. In response to difficult market conditions, YZJ had cut capacity at Changbo and Xinfu shipyards. Even then, 2015 was looking quite bare. To illustrate, YZJ had started 2013 with just 64 vessels left in its order book, of which about half would have been delivered by the end of this year. This is also the first year since 2007 where orders secured surpass revenue recognised. With these orders in hand, YZJ has secured its best order book wins since 2007, and heads into 2014 in less dire circumstances.
YTD, YZJ achieved around an 8% market share of bulk newbuild jobs awarded to Chinese yards and 17% of containership contracts. These are solid numbers, in our view, as many tier-2 yards are quite empty. However, because spare capacity is still sizeable, we believe prices and margins will for the most part remain under pressure, especially for smaller and less complex vessel types. There could be slightly firmer prices for larger vessels; for example, YZJ secured jobs for eight capesize bulk carriers, where prices have risen around 10% since early 2013.
In our view, the order pace means YZJ now has sufficient work to tide the yard through the worst part of the cycle in 2014. Assuming the yard is able to deliver on its promise of not accepting unprofitable jobs, we expect a decline in shipbuilding revenue in 2014, alongside a sharp correction in margins, but the business should still be profitable overall. 2014 strategy: Non shipbuilding businesses should boost net profit. We expect contributions from held-to-maturity products to be large. Other plans include ramping up its shipping logistics and chartering division, pursuing the development of the land related to its old yard. We expect also gains from sales of some shipping assets held under inventories. Shipping and property gains are not in our forecasts.
Outstanding options to customers: Total of 30 options worth US$1.48bn, of which 11 are options for containerships (US$0.85bn) and 19 are for bulk carriers US$0.63bn. YZJ has secured US$2.6bn of orders YTD and expects to reach US$3.1bn new orders by end 2013. 2013 results will be announced in Feb 2014.
We use a sum of parts methodology to value YZJ as we believe this is the best way to account for the value of its shipbuilding business separately from the yield on its investments. We use DCF on the shipbuilding business (COE: 11%) and a 5x multiple on earnings from its investment portfolio.