• ~10% price appreciation since Nov 2014
• Outperformer in poor environment
• Past track record instills confidence

Outperformer in current environment

Since we upgraded our rating to Buy in Nov last year, the share price of Yangzijiang Shipbuilding (YZJ) has appreciated by ~10% compared to the STI’s ~4% rise over the same period. The group also declared a 5.5 S cents dividend in its FY14 results that was released in late Feb. In comparison, most of the other O&M stocks under our coverage have seen a significant drop in their value with the oil price rout, and the FTSE Oil and Gas index has dropped by about 13% over the same period.

Low expectations had been priced in

There are several possible reasons for the outperformance, with the most important one likely being YZJ’s small exposure to the offshore oil and gas sector – the group is currently building its first jack-up rig, though it will further develop its LNG carrier capabilities. The group’s core bulk carrier market is also in the doldrums, but expectations for this market have already been low for a long time. Containerships, another key segment, is also weak but there could still be some orders for large, fuel-efficient vessels.

In a good position to weather the storm

YZJ had an order book comprising 118 vessels worth a total of US$4.75b as at 27 Feb 2015. For FY15, the group is hoping to secure new orders worth about US$2b vs. US$1.8b that was clinched last year, and we believe that YZJ’s good execution track record and significant cash pile (including the held-to-maturity assets) instill confidence in customers to place orders with them.

Upside of ~16%

Meanwhile, the SGD has depreciated about 10% against the RMB since Jul 2014, and as we update our SGD/RMB assumptions, our fair value estimate rises from S$1.33 to S$1.42 (based on 1SGD = 4.5RMB). In our SOTP valuation, we use an 8x P/E for the shipbuilding segment and a 0.85x P/B for the held-to-maturity segment, lower than the average 1.15x valuations of Chinese banks. Maintain BUY with 16% upside (this includes a dividend yield of ~4%).

Source: OCBC Research - 24 Mar 2015