Yangzijiang Shipbuilding

Kim Eng on 2 Mar 2012

Earnings could peak in FY11. Yangzijiang Shipbuilding’s (YZJ) 4Q11 results were slightly above our expectations and almost 8% above market consensus. On a full-year basis, net profit hit a record high of RMB4.0b, driven by the delivery of a higher number of better-margin vessels and a sharp jump in investment income. Nevertheless, considering the difficult and challenging shipping outlook going forward, we downgrade the stock to Sell with a SOTP-based target price of $1.15.

Shipbuilding margins not sustainable. In FY11, YZJ’s gross margin from the shipbuilding segment expanded by 3ppt to 26%, due mainly to efficiency gains in its new yard and continued delivery of high-margin vessels secured prior to the global financial crisis. While about 50% of its US$4.7b order backlog still consists of these highly profitable contracts, we expect margins to taper off progressively over the next few years given the current depressed pricing for new contracts.

Expect slower order momentum. The group announced last month that it has clinched seven new bulk carrier contracts worth about US$206.2m since the beginning of the year. We have assumed an order win of US$1.5b in FY12, which is lower than YZJ’s internal target of US$1.9-2.4b. Notably, management expects some of the 17 outstanding options to build 10,000 TEU container vessels for Peter Dohle to be confirmed later this year.

Set sights on offshore marine sector. YZJ has set up a joint venture company, YZJ Offshore Engineering Pte Ltd, with Qatar Investment Corporation to penetrate the offshore marine sector. It has already identified a yard space for its marine offshore base near Shanghai and construction is expected to take place from 2012 to 2013. The new Taicang yard will be developed in phases – with initial capex estimated at around RMB350m – so that parts of the yard can commence production while it is being built out progressively.

Sell into the recent rally. The declining orderbook supports our cautious view that the slower demand is raising the risk of a capacity glut in the industry. Downgrade to Sell.