Within expectations, upgrade to HOLD Yangzijiang (YZJ) reported
2Q12 revenue of CNY3.94b (+13% YoY, +7% QoQ) and net profit of
CNY0.88b (-9% YoY, -14% QoQ), coming in within our expectations.
1H12 revenue and net profit respectively made up 45% and 47% of our
FY12F forecast. While earnings for FY12F-13F are relatively secure,
outlook for FY14F remains uncertain given weak orderbook momentum,
margin pressure and cancellation risks. However, valuations have
bottomed since we last called a SELL on the stock. Maintain target
price of SGD1.02 but upgrade to a HOLD on valuation grounds.
Weak orderbook growth. Order win momentum has not improved. YZJ has secured only USD295m in new order wins YTD, against management’s expectation of USD2.0b. Meeting this full-year order win target is highly dependent on Seaspan, a customer, exercising its options for eighteen 10,000-TEU containerships. The initial value of the contract was estimated at about USD1.8b. However, given current depressed shipbuilding prices, Seaspan may be asking for a price reduction. We do not expect Seaspan to execute the full order for 18 vessels. Our order win assumption for FY12F is for USD1.5b. Current orderbook stood at USD3.8b consisting of 80 vessels.
Vessel cancellation risk. YZJ also saw the cessation of 8 shipbuilding contracts due to customers’ failure to meet financial obligations. It has collected an average of 15% in deposits for those vessels and has subsequently sold 3 of the vessels at an average loss of 5%. It is actively sourcing for buyers for the remaining vessels.
Countering shipbuilding lull. Potential positives could come out from its move into offshore which may see some rig-orders by year-end. Its held-to-maturity assets, although often frowned upon, have kept overall profitability up, compensating for the weaker shipbuilding contributions.
At bottom valuation but no positive triggers yet. We believe that current shipbuilding downturn would continue to weigh down on the stock and share price would remain at a depressed level even though valuation is at a bottom. We maintain our SOTP-based target price of SGD1.02 but upgrade the stock from SELL to HOLD.
Weak orderbook growth. Order win momentum has not improved. YZJ has secured only USD295m in new order wins YTD, against management’s expectation of USD2.0b. Meeting this full-year order win target is highly dependent on Seaspan, a customer, exercising its options for eighteen 10,000-TEU containerships. The initial value of the contract was estimated at about USD1.8b. However, given current depressed shipbuilding prices, Seaspan may be asking for a price reduction. We do not expect Seaspan to execute the full order for 18 vessels. Our order win assumption for FY12F is for USD1.5b. Current orderbook stood at USD3.8b consisting of 80 vessels.
Vessel cancellation risk. YZJ also saw the cessation of 8 shipbuilding contracts due to customers’ failure to meet financial obligations. It has collected an average of 15% in deposits for those vessels and has subsequently sold 3 of the vessels at an average loss of 5%. It is actively sourcing for buyers for the remaining vessels.
Countering shipbuilding lull. Potential positives could come out from its move into offshore which may see some rig-orders by year-end. Its held-to-maturity assets, although often frowned upon, have kept overall profitability up, compensating for the weaker shipbuilding contributions.
At bottom valuation but no positive triggers yet. We believe that current shipbuilding downturn would continue to weigh down on the stock and share price would remain at a depressed level even though valuation is at a bottom. We maintain our SOTP-based target price of SGD1.02 but upgrade the stock from SELL to HOLD.
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