1Q14 results beat expectations on higher contributions from HTM investments.

Shipbuilding margin decline inevitable but bottom-line profitability to be held up by non-core businesses.

Upgrade to HOLD with higher SOTP-based TP of SGD1.18.

What’s New

Yangzijiang’s (YZJ) 1Q14 PATMI of CNY799.2m (+11.4% YoY, +7.1% QoQ) beat expectations, forming 34% and 33% of our and consensus forecasts. It was bolstered by higher contributions from HTM investments, which accounted for more than half of overall gross profit. Shipbuilding gross margin held up well at 24% with the delivery of its first 10,000TEU containership, but a decline to the 15% level appears inevitable in the subsequent quarters as its higher price contracts get depleted.

What’s Our View

Despite strong order win momentum with USD1.07b orders secured in 1Q14 (1Q13: USD0.6b), YZJ has no intention to revise its USD1.5– 2.0b order win target for the year. It prefers to focus on quality rather than quantity as shipbuilding prices are unlikely to show significant uptick in FY14E and current orders are sufficient to keep its capacity utilised. We forecast USD1.5b/2.4b/2.5b in order wins for FY14E/15E/16E as we believe shipbuilding recovery in 2014 would be mild. In the offshore segment, YZJ said its contract for two semisubs worth USD825b has not been made effective as the owner could not secure funding.

We are neutral on YZJ’s strategy to rely on other businesses (investment, shipping and property) to sustain bottom-line profits. While this could hold up earnings, it may not sit well with investors who see it as moving away from its core shipbuilding business.

We raise our FY14E/15E/16E net profit forecasts by 24%/5%/2% on earnings beat and expect a tax reversal of CNY300-400m in 2Q14. Our SOTP-based TP thus rises from SGD1.05 to SGD1.18, where we peg the core shipyard business to 9x FY14E P/E. Upgrade to HOLD.

Source: Maybank Kim Eng Research - 2 May 2014