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