• Healthy 1Q14 results
• Tax credit in 2Q14
• Upgrade to BUY

1Q14 PATMI slightly above

Yangzijiang Shipbuilding (YZJ) reported a 24% YoY rise in revenue to RMB3.55b and a 11% increase in net profit to RMB799.2m, such that 1Q14 revenue and net profit accounted for about 25% and 29% of our full-year forecasts, respectively. The latter was slightly better than our expectations, as well as that of the street‟s (forming 33% of Bloomberg‟s full year consensus). This was due to a higher-than-expected gross profit margin of 29.5% in the quarter vs our expectations of 28%, as well as a lower tax rate of 21%. We understand that several large ships with better margins were delivered in the quarter, and the group also released contingencies with the delivery of its first 10,000 TEU containership (previously recognized single-digit margins on this 15%-margin project). For the next few quarters, management prefers to be more circumspect on the outlook for margins.

Expect tax credit in 2Q14

Meanwhile, YZJ‟s subsidiary, Jiangsu New Yangzi Shipbuilding, has been accredited as a High/New Tech Enterprise, allowing it to enjoy a preferential corporate tax rate of 15% (from 25%) for a period of three years starting from 2013. We expect a tax credit of about RMB350m which will bump up earnings in 2Q14.

Focus on order execution

Despite an improving shipbuilding market, YZJ has limited capacity to take on new orders – its yard capacity will be highly utilized till 2016 (US$5.19b orderbook). As such management‟s focus is now on the successful execution of projects rather than securing new orders. We have adjusted our earnings estimates, taking into account the lower tax rates. Rolling forward to 9x FY14/15F core earnings, our fair value estimate rises from S$1.21 to S$1.29, and with the relatively weak stock performance YTD, we now see an upside potential of about 21% (includes 3.6% dividend yield). Upgrade to BUY on valuation grounds.

Source: OCBC Research - 2 May 2014