Yangzijiang (YZJ) announced fourth quarter 2014 results on 27th February and Macquarie Equities Research (MER) released a research report on the same day. MER maintained its ‘Outperform’ rating on the company with a 12-month price target of $1.55, which is +27.6% away from YZJ’s closing price of $1.215 yesterday. Read on for more excerpts…..
 
Event
YZJ reported strong 4Q14 profits of RMB 636m, ahead of MER’s estimates of RMB 481m (+32%) and consensus (+22%). FY14 profit was 8% higher than MER’s forecasts.
 
The upside surprise came from a better-than-expected gross margins on recognition of lower value post-08 contracts (25% vs 12% expected GM). A combination of good cost controls and the fall in steel prices contributed to this, in MER’s view.
 
A strategic focus on building very large vessels differentiates YZJ from other Chinese yards, while a lower cost base and abundant labour supply gives it a leg up vs Korean/Japanese yards. MER remains optimistic about YZJ’s prospects.
 
Impact
Results’ highlights:
Margins surprises on the upside: MER expected lower value contracts to crimp margins for the year, but FY14 gross margins surprised at 30% (vs 26% estimated), despite recognition for a lower margin jack-up project. This is a big positive.
 
What’s in store for 2015:
An imminent industry shakeout bodes well for YZJ: As both a ‘white-listed’ yard and having cost leadership in its core segments of building bulkers and containerships, YZJ could gain from synergistic M&A activities in the next two years.
 
Bidding for even larger vessel contracts: YZJ continues focusing on very large vessels with plans to tender for >400,000 DWT and 14,000 TEU new build contracts; these will be the largest vessels YZJ has built to date should they win the orders.
 
MER estimates US$1.6bn of new orders in 2015: New orders of US$135m already won since the start of 2015. MER expects about 28 bulkers and 5 containership orders for the year. Larger, higher value contracts could provide upside surprise to MER’s estimates.
 
MER’s price catalyst
12-month price target: S$1.55 based on a revalued net asset valuation (RNAV) methodology.
 
Catalyst: New high-value orders
 
MER’s action and recommendation
Management execution; Very large vessel order wins; Market share gains from a China shakeout will drive the stock in 2015/16: At 8x 2015E price per earnings (P/E) and 1.0x 2015E price per book value (P/B) with 13-14% return on equities (ROEs), YZJ appears attractively priced in MER’s view. Maintain Outperform.
 

Source: Macquarie Research - 12 Mar 2015