• Healthy results
• US$1.4b order book
• Upgrade to BUY

Healthy 3Q14 results

Yangzijiang Shipbuilding (YZJ) reported a 2% YoY rise in revenue to RMB3.7b and a 1% fall in net profit to RMB811.2m in 3Q14, bringing 9M14 net profit to RMB2.85b. Excluding a one-off tax credit of RMB349m in 2Q14, 9M14 core net profit accounted for 77% of our full year estimate. Shipyard’s gross margin was 19.9% in 3Q14 vs. 22.3% in 3Q13 and 21.6% in 2Q14.

HTM assets at RMB12.6b in 3Q14

Income from the group’s HTM assets was 21% higher QoQ at RMB381m, representing 36% of 3Q14’s gross profit. According to YZJ, this was mainly due to investments with higher interest rates. The group’s HTM assets were RMB12.6b in 3Q14 vs. RMB13b in 2Q14, and as mentioned in our earlier report, we expect YZJ to pare this down to about RMB12b by the end of this year.

US$1.4b order book to keep yards busy

The group delivered eight vessels in 3Q14, similar to 3Q13, and its order book stands at 114 vessels worth a total of US$4.6b, comprising 94 bulk carriers (US$3.1b) and 20 containerships (US$1.5b). YTD, the group has secured 32 effective shipbuilding contracts worth a total of US$1.4b, and these will keep its yards busy till end 2016.

According to management, compared to last year, the Chinese shipbuilding industry is starting to show signs of a recovery as the industry consolidates. This should benefit yards that are “left standing” such as YZJ. The fall in oil prices should also support the shipping industry, in terms of lower fuel costs.

Upgrade to BUY

YZJ’s share has traded within the range of $1.10-$1.18 since we downgraded the stock to Hold in late Sep. However, as Chinese banks are now trading at a higher industry average of about 0.8x P/B, we increase our peg from 0.55x to 0.65x for the group’s HTM assets under our SOTP valuation. This increases our fair value estimate from S$1.24 to S$1.31. With the greater upside potential, we upgrade the stock to BUY.

Source: OCBC Research - 11 Nov 2014