3Q13 above expectations, but maintain Sell. 3Q13 PATMI beat our expectation at CNY826.4m (-4% YoY, +2% QoQ) on revenue of CNY3,668m (+2% YoY, -17% QoQ), attributed to deliveries of more large vessels (five out of eight delivered). 9M13 net profit made up 85% of our initial FY13 forecast. 3Q13 shipbuilding gross margins held up at 22.3% (2Q13:20.6%, 3Q12:22.9%), but we expect margins to decline over FY14-15 as high-value contracts deplete.

Stronger-than-expected order wins unsustainable. With USD2.1b of contracts secured YTD, management raises its FY13 guidance to USD3.0b(from USD2.0b), and expects more of the 28 outstanding options (worth USD1.36b) to be converted. This phenomenon could be due to (1) ship owners fearing price hikes, (2) the urgency to secure yard slots, and (3) near expiration of options. We expect FY14 new orders to drop to USD1.5b on the back of soft demand for new vessels and limited yard capacity after a strong order intake in FY13.

Improved pricing but we remain cautious. YZJ indicated that the average shipbuilding pricing has improved 10% YoY, albeit from loss-making levels. YZJ is trying to negotiate for better pricing (~3% higher) on existing contracts/options by offering earlier delivery dates. We are less optimistic and see limited pricing power considering the mixed sector outlook. The benefits of the capacity restructuring at China yards will be offset by an unsustainable market recovery amid an oversupplied industry, strong competition and an uncertain global economic outlook. As such, the magnitude of price increase is insufficient to arrest a declining margin trend over FY14-15.

Valuations still rich, TP SGD1.05. We raise our FY13 forecast by 6% on strong 3Q13. Consequently, our SOTP-based TP is lifted to SGD1.05, partly also due to higher value of the Held-to-Maturity (HTM) assets. We reiterate our Sell call as valuation looks rich. Note that about half of YZJ’s earnings still come from HTM and Micro-financing business which we remain wary of.

Source: Maybank Kim Eng Research - 14 Nov 2013