Yangzijiang Shipbuilding

OCBC on 5 Aug 2015

Yangzijiang Shipbuilding (YZJ) reported a 34% YoY rise in revenue to RMB5.7b but saw a 17% decline in PATMI to RMB1.0b, due to a lower gross profit margin of 15% vs. 24% in 2Q14 for the shipbuilding business; 2Q14 was also boosted by a one-off tax refund of RMB349m to the new Jiangsu yard. Excluding one-off items, 1H15 core net profit accounted for 51% of our full year estimates, in line with expectations. The group secured new shipbuilding contracts in Jul and Aug worth US$510m, adding to its outstanding order book of US$4.14b as at end 2Q15. However, we expect shipbuilding margins to be weak, and lower our earnings estimates for FY16. Along with lower valuations of Chinese banks, we also decrease our multiple for the held-to-maturity segment in our SOTP-based valuation. Downgrade to HOLD with lower fair value estimate of S$1.36.

2Q15 results in line
Yangzijiang Shipbuilding (YZJ) reported a 34% YoY rise in revenue to RMB5.7b but saw a 17% decline in PATMI to RMB1.0b, due to a lower gross profit margin of 15% vs. 24% in 2Q14 for the shipbuilding business; 2Q14 was also boosted by a one-off tax refund of RMB349m to the new Jiangsu yard. Excluding one-off items, 1H15 core net profit accounted for 51% of our full year estimates, in line with expectations. 

Secures new orders worth US$510m
The group secured new shipbuilding contracts in Jul and Aug worth US$510m, adding to its outstanding order book of US$4.14b as at end 2Q15. YTD, the group has won US$810m of new orders, comprising 10 containerships, two LNG carriers, and two bulk carriers. Management is still sticking to its US$2b new order win target for this year, as it expects options of certain vessels to be exercised as well. 

Reduces exposure to the property sector
As part of the strategy to reduce exposure to the real estate industry, YZJ recently disposed of its entire interest in Jiangsu Hengyuan Real Estate Development, leaving it only with one real estate project, which is the land development of residential buildings on the former shipyard in Jiangyin city. The one-off government compensation of RMB715m for yard relocation will be recognized as a gain in the next 12 months after risk of any potential government claim is removed. Meanwhile, investments in held-to-maturity financial assets decreased to RMB10.8b as at end 2Q15 compared to RMB11.7b in 1Q15. 

Downgrade to HOLD
With the lower valuations that Chinese banks are now trading at, we decrease our multiple for the held-to-maturity segment from 0.95x to 0.8x, and also lower our multiple for the development property segment to be in line with peers. We also tweak our margin assumptions for FY16 lower, due to the weak market outlook. As such, our fair value estimate drops from S$1.54 to S$1.36. Downgrade to HOLD.

Yangzijiang Shipbuilding

UOBKayhian on 4 May 2015

FY15F PE (x): 8.3
FY16F PE (x): 8.4
1Q15 results were within our expectation. Yangzijiang Shipbuilding’s (YZJ) reported a net profit of Rmb708m for 1Q15, which was 23% of our full-year forecast. Earnings were boosted by: a) other income of Rmb127m (recognition of Rmb88m advances from shipowners in contracts that were cancelled, in accordance to its accounting policy), other gains totalling Rmb129m (Rmb55m gain from disposal of financial assets available-forsale) and a 23% yoy decline in administrative expense to Rmb69m while interest expense fell 54% yoy to Rmb50m on reduced borrowings. Maintain BUY and raise target price from S$1.39 to S$1.67, based on 1.2x 2016F P/B (previously 1.2x 2015F). YZJ has proven its leadership among non-SOE shipyards throughout the years with its strong order win and project execution capabilities and a robust balance sheet. The stock is expected to pay a decent annual dividend yield of 3.6- 3.8%.

Yangzijiang Shipbuilding

OCBC on 30 Apr 2015

Yangzijiang Shipbuilding (YZJ) reported a 14% YoY fall in revenue to RMB3.0b and a 12% drop in net profit to RMB706.9m in 1Q15, such that the latter formed about 24% of our full year estimate, in line with expectations. Held-to-maturity assets totaled RMB11.7b in the quarter vs RMB12.8b a year earlier, and management looks to lower this to less than RMB10b by end 2015. The group has clinched new orders of US$373m to date, but we expect more to come, as six new options with Seaspan are likely to be exercised by the end of the year. With an order book with a total contract value of US$4.6b, YZJ expects its yards to be utilized till at least end 2016. Rolling forward our valuations and updating our SOTP table, our fair value estimate rises from S$1.42 to S$1.54. Maintain BUY.

1Q15 results in line
Yangzijiang Shipbuilding (YZJ) reported a 14% YoY fall in revenue to RMB3.0b and a 12% drop in net profit to RMB706.9m in 1Q15, such that the latter formed about 24% of our full year estimate, in line with expectations. The group’s shipbuilding business registered a healthy gross profit margin of 21% in 1Q15, compared to 24% in 1Q14, mainly due to the delivery of 10,000TEU containerships with higher contract prices. 

Moving from direct lending to partnerships with govt-related funds
Held-to-maturity assets totaled RMB11.7b in the quarter vs RMB12.8b a year earlier, and YZJ shifted a greater proportion of its investments into lower-yield government-related projects, lightening its exposure to the private sector. Management looks to lower the total to less than RMB10b by end 2015, and may pursue partnerships with government-related fund managers to manage its excess cash.

US$373m new orders to date; more to come
Further to the two LNG carriers order worth US$135m announced on 16 Feb, YZJ has entered into an agreement with Seaspan for the options of six additional units of 10,000TEU containerships (~US$93m apiece). In addition, options comprising two 36,500DWT bulk carriers and two 10,000TEU containerships worth US$238m were exercised in Apr 2015. YZJ is keeping its US$2b new order target for FY15.

Market leader in China
This brings the outstanding shipbuilding orderbook to 114 vessels worth a total of US$4.6b as of 30 Apr 2015. With the new effective orders, the group’s yards will be utilized till at least end 2016. According to Clarksons Research, as of end Feb 2015, with 2.9m CGT orders at hand, Yangzijiang Shipbuilding ranked the first in China and eighth in the world in terms of outstanding orders.

Higher FV of S$1.54
We roll forward our valuations to blended FY15/16F earnings for the shipbuilding related segment, and increase our peg for the held-to-maturity segment from 0.85x P/B to 0.95x P/B with higher valuations of Chinese banks. We also include the group’s development properties in our SOTP valuation. This increases our fair value estimate from S$1.42 to S$1.54. Maintain BUY.

Yangzijiang Shipbuilding

OCBC on 24 Mar 2015

Since we upgraded our rating to Buy in Nov last year, the share price of Yangzijiang Shipbuilding (YZJ) has appreciated by ~10% compared to the STI’s ~4% rise over the same period. In comparison, most of the other O&M stocks under our coverage have seen a significant drop in their value with the oil price rout, and the FTSE Oil and Gas index has dropped by about 13% over the same period. Besides the group’s small exposure to the oil and gas segment, we note that expectations for its core bulk carrier and containership markets have already been low for long. In addition, the group’s good track record and cash pile instill confidence in customers to place orders with them. Meanwhile, the SGD has depreciated about 10% against the RMB since Jul 2014, and as we update our SGD/RMB assumptions, our fair value estimate rises from S$1.33 to S$1.42. Maintain BUY.

Outperformer in current environment
Since we upgraded our rating to Buy in Nov last year, the share price of Yangzijiang Shipbuilding (YZJ) has appreciated by ~10% compared to the STI’s ~4% rise over the same period. The group also declared a 5.5 S cents dividend in its FY14 results that was released in late Feb. In comparison, most of the other O&M stocks under our coverage have seen a significant drop in their value with the oil price rout, and the FTSE Oil and Gas index has dropped by about 13% over the same period.

Low expectations had been priced in
There are several possible reasons for the outperformance, with the most important one likely being YZJ’s small exposure to the offshore oil and gas sector – the group is currently building its first jack-up rig, though it will further develop its LNG carrier capabilities. The group’s core bulk carrier market is also in the doldrums, but expectations for this market have already been low for a long time. Containerships, another key segment, is also weak but there could still be some orders for large, fuel-efficient vessels. 

In a good position to weather the storm
YZJ had an order book comprising 118 vessels worth a total of US$4.75b as at 27 Feb 2015. For FY15, the group is hoping to secure new orders worth about US$2b vs. US$1.8b that was clinched last year, and we believe that YZJ’s good execution track record and significant cash pile (including the held-to-maturity assets) instill confidence in customers to place orders with them.

Upside of ~16%
Meanwhile, the SGD has depreciated about 10% against the RMB since Jul 2014, and as we update our SGD/RMB assumptions, our fair value estimate rises from S$1.33 to S$1.42 (based on 1SGD = 4.5RMB). In our SOTP valuation, we use an 8x P/E for the shipbuilding segment and a 0.85x P/B for the held-to-maturity segment, lower than the average 1.15x valuations of Chinese banks. Maintain BUY with 16% upside (this includes a dividend yield of ~4%).

Yangzijiang Shipbuilding

OCBC on 2 Mar 2015

Yangzijiang Shipbuilding reported a 12% YoY rise in revenue to RMB3.8b but a 15% fall in net profit to RMB636.6m in 4Q14; still, full year net profit of RMB3.48b was in line with ours (RMB3.47b) and the street’s expectations (Bloomberg cons: RMB3.35b). Gross margin for the shipbuilding business was 17.0% in 4Q14 vs. 19.9% in the preceding quarter. More cash was freed as the total amount of held-to-maturity assets continued to fall for a third consecutive quarter. However, the overall shipbuilding industry outlook remains weak and we lower our P/E for this segment from 9x to 8x, while increasing our P/B from 0.65x to 0.85x for the group’s HTM assets under our SOTP valuation. As such, our fair value estimate rises slightly from S$1.31 to S$1.33. Maintain BUY.

FY14 results in line
Yangzijiang Shipbuilding reported a 12% YoY rise in revenue to RMB3.8b but a 15% fall in net profit to RMB636.6m in 4Q14; still, full year net profit of RMB3.48b was in line with ours (RMB3.47b) and the street’s expectations (Bloomberg cons: RMB3.35b). Gross margin for the shipbuilding business was 17.0% in 4Q14 vs. 19.9% in the preceding quarter.

Continues to wind down HTM assets
Meanwhile the group’s held-to-maturity (HTM) assets fell from RMB12.6b in 3Q14 to RMB10.8b in 4Q14; this is the third consecutive quarter of decline and management plans to continue the reduction on a gradual basis. In 4Q14, an additional provision of RMB315m was made with regards to HTM assets in view of the weakening outlook of China’s real estate industry. According to management, the default rate for its HTM assets currently remains low at 1%. 

Seeking growth in a challenging environment
Given the poor industry outlook, YZJ has received requests to defer deliveries for a few vessels, and management is likely to accede to them. For FY15, the group is hoping to secure new orders worth about US$2b vs. US$1.8b that was clinched last year. Management is also seeking to develop its LNG shipbuilding capabilities. Recently, YZJ secured two orders worth US$135m from a unit JACCAR Holdings (which owns EVERGAS) for two LNG carriers. 

Upside of ~13%
Chinese banks are now trading at 1.1x FY15F P/B, and we increase our peg from 0.65x to 0.85x for the group’s HTM assets under our SOTP valuation. However, given that chances of a recovery in the commercial shipbuilding industry look lower with 1) the BDI hovering at record lows and 2) containerships still in an oversupply, we lower our P/E for this segment from 9x to 8x. As such, our fair value estimate rises only slightly from S$1.31 to S$1.33. Maintain BUY. Meanwhile, with more cash freed from HTM assets, the group has declared a dividend of 5.5 S cents for the year, compared to 5 S cents in FY13.

Yangzijiang Shipbuilding

OCBC on 11 Nov 2014

Yangzijiang Shipbuilding (YZJ) reported a 2% YoY rise in revenue to RMB3.7b and a 1% fall in net profit to RMB811.2m in 3Q14. Excluding a one-off tax credit of RMB349m in 2Q14, 9M14 core net profit accounted for 77% of our full year estimate. According to management, compared to last year, the Chinese shipbuilding industry is starting to show signs of a recovery as the industry consolidates. This should benefit yards that are “left standing” such as YZJ. The fall in oil prices should also support the shipping industry, in terms of lower fuel costs. Meanwhile as Chinese banks are now trading at a higher industry average of about 0.8x P/B, we increase our peg from 0.55x to 0.65x for the group’s HTM assets under our SOTP valuation. This increases our fair value estimate from S$1.24 to S$1.31. With the greater upside potential, we upgrade the stock to BUY.

Healthy 3Q14 results
Yangzijiang Shipbuilding (YZJ) reported a 2% YoY rise in revenue to RMB3.7b and a 1% fall in net profit to RMB811.2m in 3Q14, bringing 9M14 net profit to RMB2.85b. Excluding a one-off tax credit of RMB349m in 2Q14, 9M14 core net profit accounted for 77% of our full year estimate. Shipyard’s gross margin was 19.9% in 3Q14 vs. 22.3% in 3Q13 and 21.6% in 2Q14.

HTM assets at RMB12.6b in 3Q14
Income from the group’s HTM assets was 21% higher QoQ at RMB381m, representing 36% of 3Q14’s gross profit. According to YZJ, this was mainly due to investments with higher interest rates. The group’s HTM assets were RMB12.6b in 3Q14 vs. RMB13b in 2Q14, and as mentioned in our earlier report, we expect YZJ to pare this down to about RMB12b by the end of this year. 

US$1.4b order book to keep yards busy
The group delivered eight vessels in 3Q14, similar to 3Q13, and its order book stands at 114 vessels worth a total of US$4.6b, comprising 94 bulk carriers (US$3.1b) and 20 containerships (US$1.5b). YTD, the group has secured 32 effective shipbuilding contracts worth a total of US$1.4b, and these will keep its yards busy till end 2016. According to management, compared to last year, the Chinese shipbuilding industry is starting to show signs of a recovery as the industry consolidates. This should benefit yards that are “left standing” such as YZJ. The fall in oil prices should also support the shipping industry, in terms of lower fuel costs. 

Upgrade to BUY
YZJ’s share has traded within the range of $1.10-$1.18 since we downgraded the stock to Hold in late Sep. However, as Chinese banks are now trading at a higher industry average of about 0.8x P/B, we increase our peg from 0.55x to 0.65x for the group’s HTM assets under our SOTP valuation. This increases our fair value estimate from S$1.24 to S$1.31. With the greater upside potential, we upgrade the stock to BUY.

Yangzijiang Shipbuilding

Kim Eng on 7 Nov 2014

• 3Q14 PATMI beat on strong shipbuilding revenue and margins. Raise FY14E EPS by 6%.
• Strong beneficiary of Chinese shipbuilding restructuring.
• Reiterate BUY with SOTP-based TP raised to SGD1.40 from SGD1.38. Catalysts from new shipbuilding orders.

Commendable shipbuilding performance
3Q14 PATMI of CNY811.2m, down 1.2% YoY and 34.4% QoQ, beat expectations on strong shipbuilding revenue and margins. 9M14 PATMI rose 21.1% YoY to CNY2,846.4m, or 87% of our FY14E forecast and 94% of the market’s. Shipbuilding gross margins of 21% (2Q14: 24%, 1Q14: 24%) surprised us as we were looking for a steeper decline. This was credited to the delivery of its first batch of 10,000 TEU containerships secured at higher prices. We still expect margin declines in FY15E-16E on a depletion of high-priced contracts.

No new orders announced, but we stay optimistic
Our positive view is premised on a potential funnelling of shipbuilding orders to YZJ as weaker yards fail in the government’s push for capacity restructuring. While we are disappointed that there were no new orders in the quarter with a flat order win of USD1.4b, we remain optimistic. YZJ has four outstanding options for 10,000 TEU containerships with a value of c.USD320m. Improving shipping dynamics on lower oil prices may also trigger an order cycle. We predict USD2.0b of orders for FY14E.

Separately, YZJ’s disposal of stakes in several property businesses should be positive, allowing it to refocus on its core shipbuilding. Its main risk still lies in the realisable value of its HTM assets, but we believe that has been priced in. Lower margin forecasts for FY15E-16E due to the execution of lower-priced contracts. We see improving order momentum for shipbuilding as key stock catalyst.
We raise FY14E EPS by 6% to factor in its 3Q strength. Our SOTP TP rises from SGD1.38 to SGD1.40 accordingly. Reiterate BUY.

Yangzijiang Shipbuilding

OCBC on 24 Sept 2014

Having weathered the recent shipbuilding slowdown well, Yangzijiang Shipbuilding (YZJ) has amassed a cash pile of RMB7.6b, in addition to its held-to-maturity (HTM) assets of RMB13b as at 2Q14. At the same time, the group also has borrowings of about RMB11.4b. It may take some time before the group is able to unwind most of its HTM assets, during which the risks from its financing business will still be present. We update our CNY/SGD exchange rate assumptions, and our fair value estimate is tweaked from S$1.21 to S$1.24. Meanwhile, YZJ’s share price has appreciated by about 11% since we upgraded the stock to Buy on 6 Aug, compared to the STI’s flattish performance over the same period. As we now see limited upside potential after its good price performance, we downgrade our rating to HOLD.

Earning from entrusted loans
Having weathered the recent shipbuilding slowdown well, Yangzijiang Shipbuilding (YZJ) has amassed a cash pile of RMB7.6b, in addition to its held-to-maturity (HTM) assets of RMB13b as at 2Q14. At the same time, the group also has borrowings of about RMB11.4b. From our understanding, a significant portion of Yangzijiang’s held-to-maturity assets are entrusted loans, in which an agent bank (trustee) arranges a loan between two commercial enterprises. In addition to allowing companies with idle funds to earn higher rates of interest, it may also allow stronger borrowers to borrow from banks at lower rates and lend out to weaker companies at higher rates, thereby pocketing a spread. 

Valuing the HTM assets
Looking ahead, we expect YZJ to pare its RMB13b HTM assets down to about RMB12b by the end of this year. It may take some time before the group is able to unwind most of its HTM assets, and we value them on 0.55x book, at a discount to Chinese banks which are trading at an average of 0.74x P/B. We believe a lower multiple is justified given YZJ’s relatively short track record in the financing business and its likely less developed system of credit control compared to Chinese banks.

Lower asymmetries of information?
Huang Yukon, a senior associate at the Carnegie Endowment and former World Bank director for China, mentioned that the risks of entrusted loans may be lower compared to other forms of shadow banking due to lower asymmetries of information . For YZJ, we note that 38% of borrowers in its HTM assets (as at 2Q14) were in real estate, 30% were in manufacturing and 25% in “others”. It is hard to determine how deep an understanding YZJ, a shipbuilder so far, has in real estate and other unrelated industries.

Limited upside now
We update our CNY/SGD exchange rate assumptions, and our fair value estimate is tweaked from S$1.21 to S$1.24. Meanwhile, YZJ’s share price has appreciated by about 11% since we upgraded the stock to Buy on 6 Aug, compared to the STI’s flattish performance over the same period. As we now see limited upside potential after its good price performance, we downgrade our rating to HOLD.

Yangzijiang Shipbuilding

Kim Eng on 6 Aug 2014

• 2Q14 PATMI beat expectations on better revenue and margins.
• Raise EPS on higher margin and order-win forecasts.
• Upgrade to BUY from HOLD, with higher SOTP-based TP of SGD1.38.

Revenue and margin surprise
2Q14 PATMI of CNY1,236.0m (+52.3% YoY, +54.7% QoQ) beat expectations even after accounting for one-offs (CNY130m interest and CNY349m tax refund). The outperformance came from better revenue and margins. 1H14 PATMI formed 70% of our initial FY14E and 76% of consensus forecasts. Shipbuilding gross margins held up at 24.0% (1Q14: 24.0%, 2Q13: 27.4%), aided by the delivery of its first batch of 10,000 TEU containerships secured at higher prices. Margins are expected to decline over FY15E-16E.
Core shipbuilding outlook brighter than peers’
YZJ secured USD1.4b of orders in 1H14, close to our USD1.5b full-year forecast. It is optimistic on 2H14 but will focus on more sophisticated and larger products (eg 14,000 TEU containerships and LPG carriers). Despite our view on shipbuilding’s muted recovery this year, YZJ has secured contracts at the expense of its peers, thanks to its expertise, execution and balance-sheet strength. We raise FY14E/15E new-contract assumptions to USD2.1b/2.5b (from USD1.5b/2.4b) and shipbuilding-related gross margins by 1-2ppts.
YZJ said it would cap its investment portfolio at CNY13b, not much lower than FY13’s CNY14b. We remain concerned about HTM asset risks and believe their actual collateral value may be lower than the 2-3x coverage reported. Nevertheless, core shipbuilding strength should outweigh those risks, which have probably been priced in. We raise FY14E-16E EPS by 13-14%. Our SOTP-based TP rises from SGD1.19 to SGD1.38, as we now value its core shipyard business at 1.6x FY15E P/BV, its 5-year mean (from 1.3x, -1SD of mean), due to our more positive view. Upgrade to BUY.

Yangzijiang Shipbuilding

OCBC on 6 Aug 2014

Yangzijiang Shipbuilding (YZJ) reported a 3% YoY fall in revenue to RMB4.3b but a 52% increase in net profit to RMB1.24b, such that 1H14 revenue and net profit accounted for about 55% and 63% of our full-year forecasts, respectively. Excluding a one-off tax credit of RMB349m in 2Q14, 1H14 core net profit accounted for about 52% of our full year estimate. To date, YZJ has secured better-than-expected new order wins of US$1.4b, comprising a total of 32 effective shipbuilding contracts. After tweaking our estimates (including a 9% rise in FY15F earnings), and rolling forward our valuations (9x blended FY14/15F earnings for the shipbuilding business), our fair value estimate rises from S$1.04 to S$1.21. Upgrade to BUY.

2Q14 boosted by one-off tax credit
Yangzijiang Shipbuilding (YZJ) reported a 3% YoY fall in revenue to RMB4.3b but a 52% increase in net profit to RMB1.24b, such that 1H14 revenue and net profit accounted for about 55% and 63% of our full-year forecasts, respectively. Excluding a one-off tax credit of RMB349m in 2Q14, 1H14 core net profit accounted for about 52% of our full year estimate. Gross profit margin in the quarter remained healthy at 27.7% vs. 27.5% in 2Q13, while gross profit margin for the shipyard business was 21.6% in the quarter vs 20.6% in 2Q13. 

A rich man’s problem?
In its plans, YZJ has allocated a cash pile of ~RMB13b to its non-shipbuilding related businesses, of which the bulk is under financial investments and the rest under property development. Management is not keen to pay out a special cash dividend to shareholders, as it sees the need to hold significant cash to help attract new orders from customers that shy away from cash-poor shipyards. Yet management sees it as a “waste” to park the funds in low-yielding fixed deposits, and hence has invested in financial products such as held-to-maturity assets. 

Shipyard continues to secure orders
To date, YZJ has secured new orders worth US$1.4b, comprising a total of 32 effective shipbuilding contracts. The group plans to deliver 30 vessels this year, and plans to ramp up to more than 50 vessels in 2015 as production capacity from the Xinfu and Changbo yards come online again. The group is also keen to penetrate the LPG carrier market, having come up with a new vessel design. Meanwhile, YZJ is keen to build up an experienced shipping team; its current fleet includes five 92,500DWT vessels under bareboat hire purchase and another five that are self-managed.

Bumping up FY15F estimates
Meanwhile, the group unwound a significant portion of its restricted cash in the quarter, paying back about RMB2b worth of debt and lowering its net debt position. After tweaking our estimates (including a 9% rise in FY15F earnings), and rolling forward our valuations (9x blended FY14/15F earnings for the shipbuilding business), our fair value estimate rises from S$1.04 to S$1.21. Upgrade to BUY.

Yangzijiang Shipbuilding

UOBKayhian on 7 Aug 2014

Yangzijiang Shipbuilding’s 2Q14 net profit surged 54% yoy, above expectations. Revenue declined 3% yoy on fewer vessels delivered, while shipbuilding margin remained at a healthy 22%. HTM investment continued to play a key part of pre-tax profit. One-off interest income of Rmb130m from restricted cash and one-off tax refund of Rmb349m boosted earnings. Maintain BUY. Target price: S$1.39.

Shipbuilding margin to see an upswing. Despite most of the deliveries in 1H14 were vessels secured in 2010-11 at low margins, YZJ managed to maintain a healthy shipbuilding margin of 22% in 2Q14. We believe gross margins for orders secured in 2014 would be at a higher 25-30%, thanks to a non-stop decline in ship plate prices.We expect gross margins to rise from 2014 onwards and therefore, its earnings cycle should have bottomed in 2013.

Yangzijiang Shipbuilding

Kim Eng on 19 June 2014

• Secured contract to build four 260,000DWT VLOC, its largest ever bulk carrier contract.
• Value estimated at USD275m, bringing YTD order win to about USD1.35b.
• Maintain HOLD, SOTP-based TP of SGD1.19.

What’s New
Yangzijiang has secured a contract to build four 260,000DWT very large ore carriers (VLOC) for an Australia-based ore company listed on the Australian Securities Exchange. This is Yangzijiang’s largest ever bulk carrier to be built. Delivery is scheduled from 2016 to 2017, but the identity of the customer and price of the contract was not disclosed.

What’s Our View
We believe that the customer is Fortescue Metals Group who announced on 16 Jun that it had signed a contract with a Chinese shipyard for four VLOCs valued at USD275m. Delivery dates as disclosed by Fortescue are from Nov 2016 to May 2017.

This contract win came as a positive surprise and would bump up Yangzijiang’s YTD order win to about USD1.35b, approaching our full-year forecast of USD1.5b. We may need to review our order win assumption if current momentum continues.

We maintain our HOLD call on the company with SOTP-based TP of SGD1.19. We believe the recovery for the Chinese shipbuilding sector would be mild in 2014 as vessel and yard overcapacity issues are unresolved. The alleged misdeeds involving the chairman’s investment vehicle could be an added near-term overhang. We are also concerned about its HTM investments as default risks in China seem to have increased following several bond defaults. The company added that it intends to gradually reduce its HTM investments in this contract win announcement.

Yangzijiang Shipbuilding

UOBKayhian on 6 June 2014

FY14F PE (x): 6.4
FY15F PE (x): 6.2
Yangzijiang Shipbuilding (YZJ) made an announcement via SGX, regarding the 10.6%
share price decline on 30 May. As per the announcement, a possible reason could be
allegations of misdeeds made by Tianjin Guoheng Railway Holding (000584 CH), a
company listed on the Shenzhen Stock Exchange (SZE), on 26 May 14 against Mr
Ren Yuanlin, the Executive Chairman and controlling shareholder of YZJ and Taixing
Liyuan Investment, his investment vehicle.
Core shipbuilding business remains intact. Despite YZJ only securing three 82,000
dwt dry bulk carriers in April and May, YZJ’s 2014 newbuild orders target of US$2.0b
(2013A: US$2.9b) is still doable, given 1Q14 orders already fulfilled 50% of full-year
target. As the capacity has been fully booked into 2016, YZJ has turned conservative
and only targets orders with higher margins and more favourable payment terms.
Maintain BUY with target price of S$1.39 unchanged, based on 1.3x 2014F P/B. YZJ
has proven its leadership among non-SOE shipyards throughout the past years with
its strong order winning/project execution capability and robust balance sheet.
Concern over risk of HTM financial assets is overestimated and share price weakness
offers buying opportunity

Yangzijiang

OCBC on 3 June 2014

Following Chinese news reports that Yangzijiang Shipbuilding’s (YZJ) Chairman, Mr. Ren Yuanlin, has been accused of illegal activities by Tianjin Guoheng Railway Holding (Tianjin), YZJ’s share price fell 10.6% last Friday but subsequently rose 3.0% to close at S$1.04 yesterday after Mr. Ren dismissed the allegations. Given the limited information on hand and the possibility that Tianjin may or may not come up with proof substantiating its claims, it is not up to us to ascertain the veracity of the allegations. However, this development means that a protracted battle may weigh on the sentiment of the stock. More importantly, this development only goes to show the difficulty in controlling companies that may land on YZJ’s plate in the future by virtue of its financing business. Ascribing a 0.5x P/B on YZJ’s held-to-maturity assets in our SOTP-based valuation, we lower our fair value estimate on the stock from S$1.29 to S$1.04. Downgrade to HOLD.

What happened
Following Chinese news reports that Yangzijiang Shipbuilding’s (YZJ) Chairman, Mr. Ren Yuanlin, has been accused of illegal activities by Tianjin Guoheng Railway Holding (Tianjin), YZJ’s share fell 10.6% last Friday but subsequently rose 3.0% to close at S$1.04 yesterday after Mr. Ren dismissed the allegations. Mr. Ren had acquired 12% equity in Tianjin in Jan this year through one of his controlling companies, Liyuan Investment, and became the largest shareholder of Tianjin. Liyuan tried to reconstitute Tianjin’s board, but faced resistance, and we subsequently saw this recent development. On Liyuan’s part, it has confidentially submitted its responses and rebuttals to these allegations to the Shenzhen Stock Exchange. Mr Ren refers to these allegations as “mischievous”, and calculated to damage him and thwart Liyuan’s corporate objectives in relation to Tianjin. Meanwhile, no allegations have been made against YZJ.

What we think
Given the limited information on hand and the possibility that Tianjin may or may not come up with proof substantiating its claims, it is not up to us to ascertain the veracity of the allegations. However, this development means that a protracted battle may weigh on the sentiment of the stock. More importantly, this development goes to show the difficulty in controlling companies that may land on YZJ’s plate in the future by virtue of its financing business. 

Re-pricing YZJ
We value YZJ using the sum-of-parts method and ascribe a 0.5x P/B to the group’s held-to-maturity assets. Chinese banks are currently trading at about 0.7x blended FY14/15F P/B and we believe that 1) YZJ’s shorter track record in the financing business and 2) its likely less developed system of credit control compared to licensed Chinese banks warrant a greater discount to its book value. Meanwhile, Chinese regulators have also issued stricter rules on interbank financial transactions as part of their continuing efforts to curb shadow banking and to deleverage the banking sector. Reforms, while necessary, could lead to a “turbulent period in which funding could dry up as the domestic market struggles to re-price risk”, to borrow the words of S&P. As such, we lower our fair value estimate from S$1.29 to S$1.04, and downgrade our rating to HOLD.

Yangzijiang Shipbuilding

DBS Group Research, June 2

YANGZIJIANG's share price took a toll following headlines that Mr Ren is under investigation for misconduct relating to his personal investment in China-listed Tianjin Guoheng Railway Holding (Guoheng).

Yangzijiang has released an announcement to clarify that the allegations are against Mr Ren and not Yangzijiang. In addition, Mr Ren has reassured shareholders that the accusations are unfounded and he is taking necessary actions to set matters straight.

The selldown on Yangzijiang seems overdone. The allegations were against Mr Ren and have no impact on Yangzijiang's operations and financials. While sentiment may be hit, it is premature to jump to any conclusions especially with Mr Ren dismissing these allegations.

It appears that the motive behind the accusations seems ambiguous as Guoheng's board of directors has resisted Mr Ren's attempts to reconstitute the board and restructure Guoheng.

Lastly, based on interactions with Mr Ren over the past seven years, he has been forthcoming in his guidance and outlook on the company and industry during both good times and the downcycles.

In fact, he cautioned investors when the market was overheated during the 2007/2008 superboom.

Reiterate "buy"; target price unchanged at S$1.55. Valuation has fallen to an attractive six times FY2014 PE estimate and 1.0 times P/B following the knee-jerk reaction to the news last Friday, presenting buying opportunities for investors who remain positive on Yangzijiang's fundamentals.

BUY

Yangzijiang Shipbuilding

Kim Eng on 2 May 2014

• 1Q14 results beat expectations on higher contributions from HTM investments.
• Shipbuilding margin decline inevitable but bottom-line profitability to be held up by non-core businesses. 
• Upgrade to HOLD with higher SOTP-based TP of SGD1.18.

What’s New
Yangzijiang’s (YZJ) 1Q14 PATMI of CNY799.2m (+11.4% YoY, +7.1% QoQ) beat expectations, forming 34% and 33% of our and consensus forecasts. It was bolstered by higher contributions from HTM investments, which accounted for more than half of overall gross profit. Shipbuilding gross margin held up well at 24% with the delivery of its first 10,000TEU containership, but a decline to  the  15% level appears inevitable in the subsequent quarters as its higher price contracts get depleted.

What’s Our View
Despite strong order win momentum with USD1.07b orders secured in 1Q14 (1Q13: USD0.6b), YZJ has no intention to revise its USD1.5– 2.0b order win target for the year. It prefers to focus on quality rather than quantity as shipbuilding prices are unlikely to show significant uptick in FY14E and current orders are sufficient to keep its capacity utilised. We forecast USD1.5b/2.4b/2.5b in order wins for FY14E/15E/16E as we believe shipbuilding recovery in 2014 would be mild. In the offshore segment, YZJ said its contract for two semisubs worth USD825b has not been made effective as the owner could not secure funding.

We are neutral on YZJ’s strategy to rely on other businesses (investment, shipping and property) to sustain bottom-line profits. While this could hold up earnings, it may not sit well with investors who see it as moving away from its core shipbuilding business. We raise our FY14E/15E/16E net profit forecasts by 24%/5%/2% on earnings beat and expect a tax reversal of CNY300-400m in 2Q14. Our SOTP-based TP thus rises from SGD1.05 to SGD1.18, where we peg the core shipyard business to 9x FY14E P/E. Upgrade to HOLD.

Yangzijiang Shipbuilding

OCBC on 2 May 2014

Yangzijiang Shipbuilding (YZJ) reported a 24% YoY rise in revenue to RMB3.55b and a 11% increase in net profit to RMB799.2m, such that 1Q14 revenue and net profit accounted for about 25% and 29% of our full-year forecasts, respectively. This was due to a higher-than-expected gross profit margin of 29.5% in the quarter vs our expectations of 28%, as well as a lower tax rate of 21%. For the next few quarters, management prefers to be more circumspect on the outlook for margins, while there should be a tax credit in 2Q14 to bump up earnings. Looking ahead, management’s focus will be on order execution. Rolling forward to 9x blended FY14/15F core earnings, our fair value estimate rises from S$1.21 to S$1.29, and with the relatively weak stock performance YTD, we now see an upside potential of about 21% (includes 3.6% dividend yield). Upgrade to BUY.

1Q14 PATMI slightly above
Yangzijiang Shipbuilding (YZJ) reported a 24% YoY rise in revenue to RMB3.55b and a 11% increase in net profit to RMB799.2m, such that 1Q14 revenue and net profit accounted for about 25% and 29% of our full-year forecasts, respectively. The latter was slightly better than our expectations, as well as that of the street’s (forming 33% of Bloomberg’s full year consensus). This was due to a higher-than-expected gross profit margin of 29.5% in the quarter vs our expectations of 28%, as well as a lower tax rate of 21%. We understand that several large ships with better margins were delivered in the quarter, and the group also released contingencies with the delivery of its first 10,000 TEU containership (previously recognized single-digit margins on this 15%-margin project). For the next few quarters, management prefers to be more circumspect on the outlook for margins. 

Expect tax credit in 2Q14
Meanwhile, YZJ’s subsidiary, Jiangsu New Yangzi Shipbuilding, has been accredited as a High/New Tech Enterprise, allowing it to enjoy a preferential corporate tax rate of 15% (from 25%) for a period of three years starting from 2013. We expect a tax credit of about RMB350m which will bump up earnings in 2Q14. 

Focus on order execution
Despite an improving shipbuilding market, YZJ has limited capacity to take on new orders – its yard capacity will be highly utilized till 2016 (US$5.19b orderbook). As such management’s focus is now on the successful execution of projects rather than securing new orders. We have adjusted our earnings estimates, taking into account the lower tax rates. Rolling forward to 9x FY14/15F core earnings, our fair value estimate rises from S$1.21 to S$1.29, and with the relatively weak stock performance YTD, we now see an upside potential of about 21% (includes 3.6% dividend yield). Upgrade to BUY on valuation grounds. 

Yangzijiang

DMG & PARTNERS RESEARCH, March 20

YZJ has been accredited a "High/New Technology Enterprise" (HNTE), which will reduce its tax rate from the prevailing 25 per cent corporate rate to a preferential rate of 15 per cent. We had earlier flagged this as a likely development, given YZJ's market-leading position in building 10,000-TEU vessels, offshore assets and eco-friendly vessels, on top of its vessel-design capabilities.

The stock again oversold on margin fears and the chairman's potential retirement in three years. YZJ's stock was sold down after its Q413 results owing to:

• the high tax rates in Q413;
• high-margin vessels having been delivered; and
• indications from chairman Ren Yuanlin that he will retire in three years.

We note that YZJ's margins have consistently outperformed street expectations, and that the currently full utilisation at its yards will enhance margins. Meanwhile, vessel prices have risen 15-20 per cent y-o-y while steel prices have been on a downtrend.

Investors were also concerned about the default risks in Chinese property companies, to which YZJ lends 44 per cent of its held-to-maturity (HTM) portfolio. We see two risk-mitigation factors:

• Sixty four per cent of its overall collateral is in land and only 9 per cent in shares (which may not be shares in property developers); and u the coverage ratio for land is 3.2 times.

We believe that the company can easily recover its principal plus interest via sale of the land at a more than 50 per cent discount.

We continue to like YZJ for being the strongest shipbuilder in China in a recovering industry.

Other near-term catalysts are:

• exercising options for 10,000-TEU containerships, which will boost utilisation and support margins; and
• receipt of deposits for two semi-submersible rigs, making the contracts effective.

Maintain "buy", with higher $1.58 target price (from $1.55), raising the shipbuilding multiple to 9.5 times versus nine times in our sum-of-parts valuation.

BUY

Yangzijiang Shipbuilding

OCBC on 28 Feb 2014

Yangzijiang Shipbuilding (YZJ) reported a 5% YoY fall in its 4Q13 revenue to RMB3.38b and a 8% decrease in PATMI to RMB746.3m, such that FY13 revenue and PATMI declined by 3% and 14% to RMB14.3b and RMB3.10b, respectively. This was within our expectations. A first and final dividend of 5 S cents/share was declared, similar to FY12, and translates into a yield of 4.4%. Management remained cautious on its outlook this year, but expects to see a rebound in vessel deliveries in 2015. Current order book stands at US$4.6b, comprising 111 vessels. Looking ahead, YZJ is seeking to clinch new order wins of US$2b in 2014 (FY13: US$2.9b). We make some minor adjustments to our FY14 PATMI forecast, and trim our fair value estimate from S$1.22 to S$1.21, still pegged to 9x FY14 core earnings. Maintain HOLD.

FY13 PATMI down 14%
Yangzijiang Shipbuilding (YZJ) reported a 5% YoY fall in its 4Q13 revenue to RMB3.38b and a 8% decrease in PATMI to RMB746.3m, such that FY13 revenue and PATMI declined by 3% and 14% to RMB14.3b and RMB3.10b, respectively. This was within our expectations, as PATMI came in 2% above our FY13 forecast. Revenue for its shipbuilding related segment slipped 5% to RMB12.8b in FY13, but gross margin rose 3 ppt to 27.4% due to an exceptionally high gross margin of 43.5% in 4Q13. This was boosted by the delivery of higher margin shipbuilding contracts secured before the financial crisis, discounts from its steel suppliers and write-back of provisions upon vessel deliveries. For its investment segment, revenue rose 15% to RMB1.51b. YZJ also declared a first and final dividend of 5 S cents/share, similar to FY12, and translates into a yield of 4.4%. 

“Darkness before the dawn”
Management described 2014 as the “darkness before the dawn”, choosing to remain cautious on its outlook this year, but expects to see a rebound in vessel deliveries in 2015. Current order book stands at US$4.6b, comprising 111 vessels. Looking ahead, YZJ is seeking to clinch new order wins of US$2b in 2014 (FY13: US$2.9b). YTD, YZJ has secured eight effective shipbuilding contracts worth a total of US$260m. It also recently signed orders to build two semi-submersible rigs for US$825m, although the contracts will only be made effective upon collection of deposit from its customers. YZJ’s first 10,000 TEU containership underwent its trial voyage in Feb this year, and the success of this trial gives management optimism that its customer Seaspan will exercise its option for the remaining seven units.

Maintain HOLD
We make some minor adjustments to our FY14 PATMI forecast and introduce our FY15 projections. Our fair value estimate inches down marginally from S$1.22 to S$1.21, still pegged to 9x FY14 core earnings. Maintain HOLD.

Yangzijiang Shipbuilding

DBS Group Research, Feb 27

YANGZIJIANG registered strong Ebit in Q4, rising 45 per cent y-o-y and 29 per cent q-o-q, on the back of record gross margins of 42 per cent.

This was offset by the high tax rate of 46 per cent in the quarter. As a result, net profit was in line at 746 million yuan (S$154 million). We believe the strong margins were attributable to the delivery of the last batch of high margin pre-crisis orders.

Yangzijiang secured US$511 million contracts, comprising two units of 36,000 deadweight tone (dwt) bulkers, three units of 64,000 dwt bulkers, three units of 82,000 dwt bulkers, three units of 208,000 dwt bulkers, two units of 1,100 twenty foot-equivalent unit (TEU) containerships and one unit of 10,000 TEU containership.

Second consecutive quarter of orderbook growth is commendable, rising from US$3.87 billion three months ago to US$4.6 billion as of end-December, signifying the end of its orderbook decline since Q1 2012.

This translates into a healthy 2.7 times book-to-bill ratio. With 11 options worth US$0.83 billion on hand and favourable shipping dynamics, we expect more contracts to be finalised in the near future.

As the new yard is full till 2016, Yangzijiang intends to re-commence the Changbo yard in Q1 2014, which will be able to take on an additional 6-7 small-medium sized vessels for delivery by 2015. This could lift FY2014 revenue by about 5 per cent.

Upstream reported at end-January that Yangzijiang has bagged 2+2 semi-submersible drilling rigs contracts, to be built to Moss CS50 design. If effective, this will be Yangzijiang's second rig deal. Positives of this deal: estimated contract value of US$1.7 billion would be a boost to orderbook; we can expect economies of scale from the 2+2 orders for similar designs; and customer PrimePoint is an established drilling company.

However, although Yangzijiang has demonstrated an impressive track record in shipbuilding, scepticism could remain until Yangzijiang delivers its first jackup on time and on budget by August 2015.

Reiterate "buy" on the most competitive and profitable listed shipbuilder in China. At current 1.1 times P/B, earnings and margin downtrend in the next two years are largely priced in. We believe investors should look beyond near- term earnings, to order win momentum and quality alongside the shipping recovery.

Yangzijiang remains our preferred pick to play the shipbuilding recovery, given its excellent track record, reputable management, and balance sheet strength. We maintain our sum-of-the-parts- based target price of S$1.33.

BUY