Valuations treading bottom. Yangzijiang (YZJ) reported 3Q12 revenue of CNY3,612m (-1% YoY, -8% QoQ) and corresponding net profit of CNY877.2m (-14.1% YoY, -0.1% QoQ), generally within expectations. 9M12 net profit makes up about 70% of our previous fullyear forecast. Order win outlook is bleak although valuations are treading the bottom. We lower SOTP-based TP to SGD0.90, maintaining Hold.

Margins to trend lower. Shipbuilding gross margin was marginally lower at 23% this quarter but we reckon that it would continue to decline as the high margin contracts (40% of existing orderbook) get depleted. Outstanding orderbook stood at USD3.58b with 75 vessels yet to be delivered. Most of these vessels would be delivered in FY13F and FY14F earnings are at risk unless orderbook is replenished.

Maintaining rationality in taking new orders. No new orders were added in 3Q12 although there were also no further order cancellations. However YZJ has deliberately delayed deliveries for customers with financing difficulties. Management also explained that they have turned down loss-making orders, and only willing to accept orders that are cash-flow positive. YZJ expressed confidence in turning some of the 18 Seaspan options and the MOU for offshore orders into firm contracts by year-end, but we cut FY12 order win assumption to USD1.0b as YTD orders secured amounted to only USD295m.

Consolidating yards for efficiency. Yard consolidation should see YZJ improve its overall efficiency and cutting cost by additional 5%. It is already one of the most efficient Chinese yards, being able to execute shipbuilding projects with about 5% better margin than peers.

The worst is not over yet. YZJ has outlined plans for combating the downturn but management highlighted that 2H13 to 1H14 would be the most trying times for the company. We cut FY12F-14F earnings by 2- 14% due to weaker order win assumptions. Maintain Hold with TP lowered to SGD0.90.

Source: Maybank Kim Eng Research - 08 Nov 2012