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