Yangzijiang Shipbuilding (YZJ) reported a 16% rise in revenue to RMB15.7b and a 35% increase in net profit to RMB4.0b in FY11 such that the latter was 5.7% and 7.8% higher than ours and the street’s full year estimates, respectively. Gross profit margin was higher at 30.2% in 4Q11 vs. 20.9% in 4Q10; this is due to reclassification of interest income from the group’s investments under total revenue. The group’s yards will be busy this year, but the earnings outlook beyond 2H13 is dimmer. Management is proactively seeking ways to mitigate the effects of a challenging shipbuilding market and if executed well, we believe YZJ will emerge as a stronger after an industry consolidation. However, due to the difficult external environment and inherent risks in some of the group’s initiatives, we lower our peg to 9x FY12F core earnings, resulting in a lower fair value estimate of S$1.51 (prev. S$1.60). Maintain BUY.
FY11 results slightly better than expected
Yangzijiang Shipbuilding (YZJ) reported a 16% rise in revenue to RMB15.7b and a 35% increase in net profit to RMB4.0b in FY11 such that the latter was 5.7% and 7.8% higher than ours and the street’s full year estimates, respectively. Gross profit margin was higher at 30.2% in 4Q11 vs. 20.9% in 4Q10, while other income (mainly interest income) decreased by 38%; this is due to reclassification of interest income from the group’s investments under total revenue.
Challenging external environment
The Baltic Dry Index reached a 25-year low of 647 in early Feb this year, and shipbuilders such as YZJ are also affected. The group’s yards will be busy this year due to its order backlog (50% comprises of orders secured pre-GFC), but the earnings outlook for 2013 and beyond is dimmer. Management has undertaken several steps to secure new orders: 1) development of new vessel types with lower fuel consumption and higher carrying capacity; 2) development of new business segments with product mix of 60% from ship newbuilds, 20% from offshore and 20% from ship demolition in the next three to five years.
Offshore expansion starting with jack-ups
Meanwhile, YZJ has identified an offshore marine base in Taicang, which is next to Shanghai, and yard construction will take place starting this year. Total capital expenditure is around RMB4b (US$635m) with US$350m allocated to the first phase of construction. YZJ’s effective interest in the yard is 78%, as its Middle Eastern partner and another individual also have stakes in it. We understand that two jack-ups are targeted to be built for 2014 delivery, estimated at US$150-200m per unit.
Lowering fair value estimate
Management is proactively seeking ways to mitigate the effects of a challenging shipbuilding market and if executed well, we believe YZJ will emerge as a stronger and more integrated marine group after an industry consolidation. However, due to the current difficult external environment and inherent risks in some of the group’s initiatives, we lower our peg to 9x FY12F core earnings, resulting in a lower fair value estimate of S$1.51 (prev. S$1.60). Maintain BUY.
Yangzijiang Shipbuilding (YZJ) reported a 16% rise in revenue to RMB15.7b and a 35% increase in net profit to RMB4.0b in FY11 such that the latter was 5.7% and 7.8% higher than ours and the street’s full year estimates, respectively. Gross profit margin was higher at 30.2% in 4Q11 vs. 20.9% in 4Q10, while other income (mainly interest income) decreased by 38%; this is due to reclassification of interest income from the group’s investments under total revenue.
Challenging external environment
The Baltic Dry Index reached a 25-year low of 647 in early Feb this year, and shipbuilders such as YZJ are also affected. The group’s yards will be busy this year due to its order backlog (50% comprises of orders secured pre-GFC), but the earnings outlook for 2013 and beyond is dimmer. Management has undertaken several steps to secure new orders: 1) development of new vessel types with lower fuel consumption and higher carrying capacity; 2) development of new business segments with product mix of 60% from ship newbuilds, 20% from offshore and 20% from ship demolition in the next three to five years.
Offshore expansion starting with jack-ups
Meanwhile, YZJ has identified an offshore marine base in Taicang, which is next to Shanghai, and yard construction will take place starting this year. Total capital expenditure is around RMB4b (US$635m) with US$350m allocated to the first phase of construction. YZJ’s effective interest in the yard is 78%, as its Middle Eastern partner and another individual also have stakes in it. We understand that two jack-ups are targeted to be built for 2014 delivery, estimated at US$150-200m per unit.
Lowering fair value estimate
Management is proactively seeking ways to mitigate the effects of a challenging shipbuilding market and if executed well, we believe YZJ will emerge as a stronger and more integrated marine group after an industry consolidation. However, due to the current difficult external environment and inherent risks in some of the group’s initiatives, we lower our peg to 9x FY12F core earnings, resulting in a lower fair value estimate of S$1.51 (prev. S$1.60). Maintain BUY.
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