Core PATMI surpassed estimates. Full-year DPS of SGD5.0 cents proposed.

Expect shipbuilding margin pressures from depletion of highmargin contracts and foray into offshore space; unknown risk of held-to-maturity assets an added concern.

Maintain SELL with an unchanged SOTP-based TP of SGD1.05.

What’s New

Stripping out various lumpy and/or one-off items, YZJ’s 4Q13 results beat expectations. Shipbuilding gross margin spiked up to 43.5% (3Q13: 22.3%, 4Q12: 24.1%) due to provision write-backs and cost savings from steel suppliers. We estimate that this added about 10ppt to gross margin and will not recur in subsequent quarters. But the positive effect was offset by (1) impairment of about CNY346m for vessels held by its shipping subsidiaries, and (2) higher effective tax as Jiangsu Newyangzi’s corporate tax rate was raised to 25% in FY13 from 15% in FY12.

What’s Our View

With the successful sea trial of its 10,000TEU containership, YZJ believes Seaspan will likely exercise its options for seven more units. While this would enhance the orderbook, it would also take up yard capacity and withhold YZJ from participating in any price upside (those units are at crisis-level price of USD85-90m each).

YZJ has also signed orders for two mid-water semi-subs worth USD825m, with options for two more units as it forays into offshore space to ensure its future competitiveness. We expect learning curve issues in the initial stage to heighten pressure on shipyard margins which are anticipated to decline. The unknown risk of its held-to-maturity assets (CNY14.1b) and venture into property development are added concerns. Excluding the semi-sub orders, we see lower order wins for FY14E at USD1.5b (FY13: USD2.9b, YTD: USD0.26b). Maintain SELL and SOTP-based TP of SGD1.05.

Source: Maybank Kim Eng Research - 28 Feb 2014