Yangzijiang Shipbuilding - Cheapest Chinese shipbuilder (CIMB)

OUTPERFORM Maintained

S$1.33 Target: S$2.05

Mkt.Cap: S$5,085m/US$4,183m

Higher interest income and gains in 2Q11

Maintain OUTPERFORM. Despite a +30% yoy earnings guidance for 1H11, we believe qoq earnings could be 5-10% lower given fewer deliveries of high-margin vessels. Interest income and forex gains could also be key drivers for 2Q11, contributing about 40% of earnings. We commend YZJ for its ability to keep its gross margin high at about 24% from the execution of pre-crisis orders. YZJ’s current valuation of 6x CY12 P/E looks undemanding as it is 50% below its Chinese peers’ average of 12x and its own historical average of 11x since listing. Its US$6bn order book is also firm with low cancellation risk. Catalysts include firm contracts from Peter Döhle (US$800m) and the potential exercise of options by Seaspan for a series of 10,000 TEU containerships. We maintain our OUTPERFORM call and target price of S$2.05, still based on 14x CY12 core shipbuilding earnings.

The news

In response to a recent share price plunge and a news article about European exposure, YZJ announced that 1) it has no immediate plans for convertible bonds, 2) there has been increasing diversification in its order book with more Asian ship owners while existing long-term European customers have strong financial standing and payment track records, 3) it projects 30% yoy earnings growth in 1H11, and 4) management is considering share buybacks to protect minority interests.

Comments

+30% yoy for 1H11 but weaker; strong margin track record maintained. Despite the positive earnings guidance for 1H11 (results to be announced on 11 Aug), we believe qoq earnings could come in 5-10% lower at about Rmb870m from fewer deliveries of high-margin vessels. Recall that four of the 17 vessels delivered in 1Q11 were secured pre 2008 with higher gross margins. Management clarified that several high-margin projects were completed in beginning-Jul instead of Jun 2011, resulting in a lower number of vessels delivered qoq. However, we believe YZJ should continue to keep its gross margin high at about 22% in 2Q11 (1H11: 24%) on the back of efficient yard utilisation and a strong execution track record.

Non-shipbuilding income to climb. We expect interest income and gains from marked-to-market valuations to contribute about 40% of 2Q11 earnings (1Q11: 42% of net profit) on the back of higher investment in financial assets (above Rmb10bn) and gradual YTD appreciation of Rmb.

Order book intact. Although 60% of its order book (estimated at about US$6bn) is dominated by European customers, we see low risk of cancellation as 1) most of its containerships were clinched pre 2008 with at least 20% deposits received, backed by additional 20% bankers’ guarantees, which have survived the crisis, and 2) bulk orders were mostly clinched post crisis at low market prices.

Valuation and recommendation

Cheaper than peers. YZJ’s current valuation of 6x CY12 P/E is 50% below the Chinese peer average of 12x CY12 P/E and its own historical average of 11x since listing, which we deem as undemanding. We see catalysts from Peter Döhle’s firm contracts (US$800m) and the potential exercise of options by Seaspan for a series of 10,000 TEU containerships. We keep our target price of S$2.05, still based on 14x CY12 core shipbuilding earnings.