Yangzijiang Shipbuilding

OCBC on 6 Sept 2012

According to newswires and shipbrokers, Yangzijiang Shipbuilding (YZJ) has secured an order for the construction of four 82,000DWT bulk carriers from Hong Kong-based Everbright Metal. At a price tag of US$26m/unit, these vessel orders are close to newbuild prices in Aug published by RS Platou. We estimate that YZJ has secured new orders worth about US$400m YTD, underscoring a slow year in terms of order flow. In our view, the greatly reduced new order flow for traditional vessels that Chinese yards have been reliant on will only accelerate the transformation of the Chinese shipbuilding industry, and yards that have the balance sheet and resources are likely to emerge stronger if they persevere in the yard transformation process. In the medium term, however, the outlook for Chinese yards remains dim. We have lowered our FY13 gross profit margin assumptions for YZJ’s shipyard operations from 25.8% to 24.2% as vessel values have been trending lower. As such our fair value estimate slips from S$1.08 to S$1.03. Maintain HOLD.

Secures new bulk carriers…
According to Asiasis and shipbroker Compass Maritime, Yangzijiang Shipbuilding (YZJ) has secured a newbuild order for the construction of four 82,000DWT bulk carriers from Hong Kong-based Everbright Metal. The Kamsarmax vessels are scheduled for delivery from 4Q13 to 3Q14. At a price tag of US$26m/unit, these vessel orders are close to newbuild prices in Aug published by RS Platou.

… but still a slow year
The group secured contracts worth US$295.1m in 1H12. Including this latest development, new orders clinched YTD would be around US$400m. However, we do note that the actual figure may be higher due to unannounced contracts that were not picked up by shipbrokers. Recall that the group clinched new orders worth about US$1.16b in FY11, while our new order win estimate for this year is US$800m.

Chinese yards forced to seek new grounds… for the better
In our view, the greatly reduced new order flow for traditional vessels that Chinese yards have been reliant on will only accelerate the transformation of the Chinese shipbuilding industry. The current difficult operating environment will mean 1) consolidation in a currently fragmented industry, 2) greater impetus to develop fuel efficient and eco-friendly vessels, as well as 3) product diversification. Downturns favour the incumbent, and yards that have stronger balance sheets and resources are likely to emerge stronger if management perseveres in the yard transformation process.

Concentrating operations for production efficiency
In the medium term, however, the outlook for Chinese yards remains dim. In anticipation of idle capacity, YZJ will transfer all shipbuilding operations to its new yard (Jiangsu New Yangzijiang Shipbuilding) in 2013 while the Changbo and Xinfu yards remain on standby, so as to enhance production efficiency and cost competitiveness. We have lowered our FY13 gross profit margin assumptions for the group’s shipyard operations from 25.8% to 24.2% as vessel values have been trending lower. As such our fair value estimate slips from S$1.08 to S$1.03. Maintain HOLD.