Event
Yangzijiang Shipbuilding (YZJ) posted a 20.4% YoY increase in 2Q11 net earnings to RMB963.9m, broadly in line with its profit guidance. The increase, however, was boosted by forex gain and interest fees from held‐to‐maturity investments (accounting for 27% of 1H11 pre‐tax profit). We continue to maintain that YZJ’s non‐core investments have helped the group to diversify its income stream, thus providing a buffer for its more cyclical shipbuilding business. Reiterate BUY.
Our View
Second‐quarter revenue grew by 2.9% YoY to RMB3,161.9m, mainly due to an increased contribution of RMB229.9m from Changbo yard. To date, the group has delivered 29 vessels altogether, with 17 in 1Q11. This means it is on track to meet its vessel delivery target of 65 for the full year (versus 50 in FY10).
Gross margin narrowed by 2.7ppt YoY and 5.0ppt QoQ to 22.1% in 2Q11 (GPM of 24.6% in 1H11 vs 24.1% a year ago) as fewer higher‐priced vessels secured prior to the financial crisis were delivered. However, with about 50% of its US$5.5b order backlog still consisting of these highly‐profitable contracts, we reckon YZJ will be able to maintain its margins at above‐industry average at least until FY12.
So far, five out of the seven units of 10,000 TEU containerships with Seaspan have been made effective, with options for another 18 identical vessels likely to be exercised in the next 12 months. While order flow will inevitably slow down amid the global economic uncertainty, YZJ remains optimistic that it can capture a bigger market share as it moves up the value chain to produce larger ships.
Action & Recommendation
Management has taken steps to streamline operations and improve productivity to counter escalating costs. The stock currently trades at less than 7x PER, supported by a dividend yield of about 4%. YZJ Chairman Ren Yuanlin has bought back 500,000 shares each on two occasions, at $1.27 and $1.10 per share, respectively. We maintain our BUY call and SOTP‐based target price of $1.65.
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