2Q13 within expectations, maintain Hold. Yangzijiang (YZJ) reported 2Q13 revenue of CNY4,422m (+12% YoY, +54% QoQ) with corresponding PATMI of CNY812m (-8% YoY, +13% QoQ). 1H13 PATMI made up 54% of our FY13F forecast. We had forecasted 2Q13 PATMI of CNY707m in our results preview, but we view this set of results as within expectations as we attribute the variance to recognition timing of shipbuilding contracts. We maintain our Hold call with unchanged TP of SGD0.93.

Superior shipbuilding margins. While shipbuilding gross margin dipped sequentially to 21% (1Q13:26%), this is still higher than industry given the single-digit margins we see for many Chinese shipbuilders. We attribute YZJ’s superior margins to its discipline in order intake, resisting taking in loss-making orders. However, we expect margins to continue to decline sequentially as yard utilisation trends lower due to depletion of its outstanding orderbook.

Potential order wins from outstanding options. YZJ has secured about USD1.0b of new orders in 1H13, bringing net orderbook to about USD3.24b. Our full-year forecast is for USD1.3b in new orders. There are 47 outstanding options worth about USD2.54b that are not yet exercised by its customers, and this could support part of its order intake. Management is optimistic that more of these options would be exercised in 2H13.

Maintaining its HTM investment strategy. The company will continue to invest in HTM assets to counter the shipbuilding downturn. HTM asset now stands at CNY12.2b. About 60% of the capital is recycled and reinvested every year. YZJ states that default rates were less than 5% and most could be recovered through sale of collaterals, but we remain cautious.

No much downside but no catalysts to re-rate yet. We do not see much downside given the low valuations (7.0x FY14F PER, 1.0x P/B) of the stock. However, we also do not see any near-term re-rating catalysts given that the outlook for Chinese shipbuilding sector remains depressed. No changes in our estimates and TP. Maintain Hold.

Source: Maybank Kim Eng Research - 12 Aug 2013