Macquarie Equity Research (MER) recently upgraded Yanzijiang (YZJ) to Outperform (from Neutral) as they see YZJ’s significantly improved orders visibility driving YZJ’s rerating. MER believes YZJ is attractively valued at 1.1x P/B (vs Korean yards’ 1.3x) with superior ROE profile and also sees strong support from 5% dividend yield and balance sheet strength.
 
MER raised their target price for YZJ to S$1.45 (from $0.85 previously) as they roll forward into FY14 with a target P/B multiple of 1.4x. EPS was upgraded by 12% on average for 2013-15E. The 12-month target price of S$1.45 was based on a Price to Book methodology. New orders announcements, especially Seaspan contracts could be catalyst for YZJ’s share price movements going forward.
 
Macquarie Equity Research issued a report on Yangzijiang Shipbuilding on 2 Oct. Here are some excepts from the report.
 
MER upgrades YZJ to Outperform, upon turning more positive on YZJ’s orders outlook, witnessing the launch of YZJ’s maiden 10,000TEU vessel and meeting with management. MER expects a stronger pipeline for new orders as YZJ bagged US$1bn in new orders in 3Q, benefitting from the flight to quality yards and improving vessel demand. MER expects YZJ to rerate on increased order visibility as investors refocus on new orders flow instead of the lagged earnings cycle. Thus, MER believes YZJ’s valuations have bottomed and raise their TP to S$1.45 on 1.4x P/B, compared to S$0.85x on 0.9x P/B previously.
 
Slot availability to be a unique advantage in YZJ’s favour. After analysing the orderbooks of top regional yards, MER finds that YZJ is one of the few to still have available slots for 2015 delivery. YZJ will also benefit from the pricing recovery that has taken place since June. Many of the 1H2013 orders within China were concentrated at Sinopacific Offshore & Engineering (SOE) yards on highly onerous terms, and MER expects this irrational competition to dissipate with top yards already having their fill. BoCom Leasing’s potential order at YZJ (after earlier ordering at other SOE yards) is testament to this emerging trend. MER expects YZJ to show a convincing rebound in new orders to US$2.3bn for 2013 (2012: US$294m).
 
Pivoting towards larger vessels and higher-value product. YZJ has highlighted that they are increasing efforts to move away from building smaller vessels, given the unfavourable pricing dynamics at the lower end. This also coincides with the mothballing of capacity at the smaller Changbo yard. During MER’s visit, they also learnt that YZJ is looking to offer new product types in Capesize, 100,000dwt Panamaxes and LPG carriers.
 
Seaspan deliveries progressing well as new yard Xinfu ramps up. MER understands that the first SAVER vessel will be delivered in 1Q14. YZJ plans to ramp up Xinfu utilisation to eventually deliver 12 SAVER vessels annually with the workforce reaching 8,000 by June 2014. In MER’s view, the first delivery of YZJ’s SAVER vessels will also convince sceptics of its top-notch execution among Chinese yards, especially on the demanding Ultra Large Container Ships vessels.

Source: Macquarie Research - 4 Oct 2013