Amid the broad-based selloff in the Singapore market on Friday, some names escaped unscathed. One such name is Yangzijiang which recorded gains for three straight days, after reporting a strong set of second quarter 2014 results on 6 August. Macquarie Equities Research subsequently (MER) released a research report on the same day with an Outperform rating on the stock, stating that the stock was a good play on the improving shipbuilding tide…

Event
Yangzijiang reported a second quarter 2014 profit of RMB1,236m (+52% year-on-year) due to a few one-off items (RMB130m interest income and RMB349m tax refund). Excluding these one-offs, recurring profit was RMB757m (-7% year-on-year), still 15% ahead of MER’s estimates.
 
 
Impact
Profit beat due to higher revenues and margins: Revenues beat MER estimates by 10% due to delivery of the first batch of 10,000TEU containerships, which had higher contract prices. Recurring earnings before interest and tax margin of 27.3% also came in 250bps higher due to these containership deliveries.
 
Overpayment of tax on new yard reversed: In line with management’s guidance in the first quarter 2014 conference call, RMB349m of taxes paid on Jiangsu shipyard in 2013 was reversed. The new yard received approval in Mar 2014 for a three year tax concession of 15% from 25%. This lower tax rate allows the company to compete effectively with the other shipbuilders.
 
Robust order wins of RMB1.4bn in 1H14 with the largest ever bulk carriers:  Yangzijiang secured 32 shipbuilding contracts in the first half of 2014 – 26 bulk carriers and 6 containerships. Notably, the group secured its largest ever bulk carriers contracts consisting of four 260,000DWT very large ore carriers in June 2014.
 
Peak order book of RMB5.02bn: Yangzijiang now has a historically high order book containing 122 vessels – 25 containerships and 97 bulk carriers. This will keep the group’s yard capacity 100% utilized until end-2016. The group also has 4 options remaining from 10,000TEU containerships.


Looking forward
Yangzijiang redirecting focus to shipbuilding to capitalize on the upswing: Yangzijiang disposed its stakes in some property development subsidiaries in the quarter, thus reiterating its renewed focus on shipbuilding. The group is enthused by the 32 high value containerships and bulk carrier contracts it won in the first half of 2014.
 
Stable time charter rates supportive of shipbuilding price recovery. Rates for both bulk carriers and containerships continue to be above full year 2012 and full year 2013 rates. This is despite the Baltic Dry index’s continued decline.


MER’s action and recommendation
A play on improving shipbuilding prices: The improving macro trends, both domestically in China and in the West, continue to support MER’s view of higher margins. MER likes Yangzijiang’s diversified revenue, management’s measured approach and ability to deliver superior margins relative to its peers.
 
MER has an Outperform rating on Yangzijiang with a 12-month target price of $1.45.

Source: Macquarie Research - 11 Aug 2014