Yangzijiang (YZJ) reported 3Q earnings before the start of yesterday’s trading session. Despite falling 4% YoY, the company’s EPS was strongly ahead of Macquarie Equities Research’s (MER) expectation. MER believes this is mainly due to shipbuilding margins holding up better than expected (3Q13:22% vs 3Q12:23%) and stronger contribution from interest income.

MER maintains its Outperform rating on YZJ due to the company’s higher orders visibility, unique leverage to dry bulk ordering recovery, and it remains attractively valued at 1.2x 2014E P/B with 4% dividend yield. MER also has a 12-month price target of $1.45 on the shipping company.

Impact
3Q earnings impressed on yard margins strength and interest income. 3Q revenue grew 2% YoY to RMB3.67bn while earnings before interest and tax (EBIT) were also +2% YoY to RMB 1.24bn. Gross shipbuilding margins was well-defended at 22% (3Q12:23%) despite the broader pricing weakness. The bottom line was also boosted by interest income forming 11% of pretax compared to 6% in 1H13, due to higher concentration of maturing bank deposits this quarter.

US$1.4bn of newbuild options portends well for 2014. Of this US$1.4bn of options, MER believes the market will especially be watching out for Seaspan’s outstanding 10,000TEU containership options that account for US$800m. New orders YTD are now at US$2.1bn, half of which were won in 3Q13 alone. With its maiden capesize vessel wins in 3Q13 worth US$220m, MER sees YZJ as well-leveraged to the nascent recovery in dry bulk shipbuilding demand, which has started to see vessel pricing growth.

Top balance sheet strength still a stark contrast to most yards. Borrowings were little changed at RMB11bn as YZJ continued to collateralise much of its restricted cash against borrowings, thus net gearing (including restricted cash) now stands at 6%. The held-to-maturity lending portfolio was essentially flat (+3% QoQ) at RMB 12.4bn and interest income from this was RMB313m or 10% on an annualised basis. Management updated that RMB2.5bn of deposits were redeemed as per maturity schedule in 3Q13 with zero bad loans so far.

MER’s action and recommendation
Outperform reiterated. MER believes YZJ’s current 1.2x P/B valuation (1.8x 3yr-historical mean) does not sufficiently account for the much-improved ordering visibility, superior ROE profile compared to peer yards and balance sheet strength with net gearing <10%.

Source: Macquarie Research - 14 Nov 2013