20131003-Maybank_KERPL-Yangzijiang_Shipbuilding_Wary_of_a_False_Dawn_13页_830kb

Summary of Yangzijiang Shipbuilding (YZJSGD SP) - Sell Recommendation

Core Content

Yangzijiang Shipbuilding is one of the largest non-state-owned publicly listed shipbuilders in China, with a significant market presence. The company has seen a recent rise in its share price, but the report expresses caution about the sustainability of this increase. The analysis concludes with a Sell rating and a target price of SGD0.98, which is slightly below the previous target of SGD0.93.

Main Points

Market Conditions and Recovery Concerns

• Sector Recovery Uncertain: Despite a recent surge in the Baltic Dry Index (BDI), the report is skeptical about a broad-based recovery in the shipping market, particularly for Chinese shipbuilders.
• BDI Surge Not Sustained: The increase in BDI was primarily driven by capsize vessel rates and is not indicative of a full market recovery. Container freight rates remain weak.
• Yard Overcapacity: The Chinese shipbuilding industry still faces overcapacity issues, which could delay the recovery in shipbuilding prices and earnings.
• Supply-Demand Imbalance: The recent surge in new vessel orders may not lead to a significant recovery due to the imbalance between supply and demand.

Share Price and Valuation

• Recent Share Price Surge: The rise in YZJ's share price is seen as potentially overdone and may face downward pressure if the shipping market recovery story fails to materialize.
• Valuation Concerns: The current valuation is considered fragile and not supported by future EPS growth. The report uses a SOTP (Sum of the Parts) model to value the stock at SGD0.98.
• Peer Comparison: YZJ is compared to other shipbuilders in China and globally, with lower valuations and EPS growth expectations than some peers.

Order Win and Earnings Projections

• Order Win Momentum: There has been a surge in order wins, mainly from the exercise of options. However, this is viewed as temporary and may not lead to sustained EPS growth.
• EPS Declines Expected: Despite increased order wins, the report forecasts EPS declines of 3-23% for FY13-15F due to margin contractions and the impact of lower shipbuilding prices.
• Gross Margins: YZJ maintains higher gross margins (above 20%) compared to many Chinese shipyards, due to its disciplined approach to order intake and execution.

Business Highlights

• First 10,000teu Container Vessel: YZJ is the first Chinese shipyard to launch a 10,000teu containership, showcasing its expertise in the sector.
• HTM Assets and Micro-Finance: HTM assets and micro-finance operations account for almost half of YZJ's total gross profits, but they are valued at a 10% discount to NAV due to risks.
• Financials and Cash Flow
  • Revenue and net profit are projected to decline in the short term.
  • Free cash flow is expected to fluctuate, with a net cash flow of SGD494.1m in FY13F.
  • The company has a strong balance sheet, with a net gearing of 7.0% and a low default risk in its HTM assets.

Key Information

• Share Price: SGD1.135
• Target Price: SGD0.98
• Market Cap (USD m): 3,474.8
• Free Float: 46.7%
• Major Shareholders:
  • Ren Yuanlin: 26.1%
  • Wang Dong: 10.3%
• Key Financial Indicators:
  • ROE: 18.8%
  • Net Gearing: 7.0%
  • NAV/shr (CNY): 4.2
  • Interest Cover: 12.2x
  • EPS Growth: Negative for FY13-15F
  • PER: 7.9x (FY13F), 9.3x (FY14F), 9.7x (FY15F)
  • EV/EBITDA: 4.1x (FY13F), 4.8x (FY14F), 5.7x (FY15F)
  • P/B: 1.2x (FY13F), 1.2x (FY14F), 1.1x (FY15F)
  • Net Profit (CNY m): 2,759.2 (FY13F), 2,331.4 (FY14F), 2,252.5 (FY15F)

Conclusion

The report concludes that while Yangzijiang Shipbuilding is a standout yard in China due to its expertise and recent successes, the recent price surge may be a false start. The report recommends a Sell rating due to the fragility of current valuations and the lack of convincing evidence for a broad-based recovery in the shipping market. Investors are advised to Sell into strength and wait for more sustainable recovery data points.