Sector recovery not convincing. There recent surge in BDI has fuelled rising anticipation for a recovery in the shipping market, and expectations for a return in shipbuilding orders. We do not see a broadbased recovery for Chinese shipbuilders yet as (1) rise in BDI was led mainly by rate hikes for capesize vessels, (2) container freight rates remain weak, and (3) yard overcapacity issue lingers. We fear that YZJ’s recent rise in share price may meet with downward pressure when shipping market recovery story disappoints. Downgrade to Sell, SOTP-based TP at SGD0.98.

Shipbuilding prices not likely to rise significantly yet. The new wave of shipbuilding orders is expected to be driven by structural switch to fuel-efficient vessels rather than the need for new capacity. Korean shipbuilders hold the lead for such vessels while competitiveness for Japanese shipbuilders have re-emerged with the lower Yen. Therefore we do not see shipbuilding prices picking up significantly. In comparison to 2008 peak, average price is at least 30% lower currently. Thus, while there may be some short-term spike in new orders, we still see margin contraction and EPS decline for YZJ’s core shipbuilding business for FY13-15F as higher margin contracts are depleted from orderbook.

YZJ is a still a standout yard. We have no doubt that YZJ stands out among the Chinese shipyards. This view was reinforced after our recent visit to its JNYS and Xinfu yards in Jiangsu, PRC. We witnessed vessel launch of Chinese shipyards’ first 10,000teu containership, which is being built by YZJ. This clearly demonstrates its superior expertise relative to many Chinese shipyards. It is building a total of 16 such units for Seaspan which includes an option for 9 more.

But lift in sector valuation level is fragile. We agree YZJ would be the best proxy to ride a shipbuilding recovery cycle, but we disagree that this is the turn. We think that the recent lift in valuation is fragile as it is not supported by future EPS growth with margin decline still in the cards. We argue that order win pickup is still not sufficient to drive EPS growth in the core shipbuilding business for FY13-15F as shipbuilding prices would remain capped.

Source: Maybank Kim Eng Research - 3 Oct 2013