Yangzijiang (YZJ) announced their full year results yesterday and Macquarie Equities Research (MER) released a research report shortly after. MER has an ‘Outperform’ rating on the company with a 12-month price target of $1.45. The shipbuilder rallied 0.4% yesterday and closed at $1.135, which is 28% below MER’s target price.

Event
YZJ reported full-year net profit of RMB 3.10b, 6% above consensus estimates (MER: in-line). With majority of high-margin contracts secured pre financial crisis now delivered, MER expects lower margins in FY14. Nonetheless, strong management execution, and a recovery in newbuilding prices should bode well for YZJ moving forward.
 
Impact

The Good:
High 35.1% EBITDA margins (FY12: 32.0%), with numerous one-offs including reversal of 8% impairment on high–margin vessel deliveries.
 
More potential 10,000 twenty-foot equivalent unit (TEU) orders as it received favourable reviews per management during the trial voyage. Management also intends to offer 16,000 TEU and 18,000 TEU building capabilities.
 
Strong US$2.9b order wins in FY13 highest since FY07. This adds visibility to the order book. Yards are highly utilised till 2016.
 
The Bad:
33% tax rates for FY13 high (FY12: 19.1%), as tax incentives for the new yard expire. Management is confident of renewal of the tax incentive, which will see tax rates back to previous lower levels.
 
Looking forward:
Near term margins to be weak, as YZJ delivers on the low-margin contracts made post financial crisis, and from low-margin offshore orders.
 
Prospects for newbuilding gradual price recovery to help improve falling net margins: This is based on a slowed pace of new ships being built, and robust demand growth from higher sea trades.
 
Offshore, while not loss-making, is not expected to contribute meaningfully to earnings in the short term. YZJ sees a potential for entry into mid-water semi-subs in the absence of fierce competition.
 
MER’s action and recommendation
A play on recovery in shipbuilding prices: YZJ’s dependence on offshore rigs orders is declining which works in its favour in a volatile offshore rig orders’ scenario. MER thinks YZJ could surprise consensus with better than expected shipbuilding orders at higher prices. At 1.0x 2015E price to book (P/B) and 11-12% return on equity (ROEs), the stock looks attractively priced in MER’s view.

Source: Macquarie Research - 28 Feb 2014