• Share price has corrected
• Remains dominant in the industry
• Upgrade on valuations

Share price has corrected 8.1% since earlier report

Since our earlier 3 May 2016 report “Hard to beat the tide” in which we downgraded the stock of Yangzijiang Shipbuilding (YZJ) to hold, its share price has corrected 8.1%, compared to the STI’s 1.5% fall over the same period. Eight vessel orders were cancelled in 1Q16, which did not help sentiment, as there were also worries that more cancellations could come during this shipping downturn.

Amidst the weak shipbuilding industry, however, YZJ has fared relatively well compared to its peers. It has been turning in net profit of at least RMB2b per year for the past seven years, and was in a net cash position in 1Q16 (excluding held-to-maturity assets of about RMB10.6b).

Industry consolidation underway

According to the China Association of the National Shipbuilding Industry (CANSI) and World Maritime News, 51 leading shipyards, out of around 300 in China, booked 900,000 dwt of the overall order intake in Jan and Feb 2016, representing 94.7% of the country’s market share .

The trend also illustrates an inclination of ship owners to order at fewer shipyards which portends further industry consolidation. This is especially after the Chinese government identified a “white list” of ship yards (YZJ included) that will enjoy policy support, such as bank credit and export tax rebates.

Based on various news reports and channel checks, there are now only about 100 yards that have active day to day operations, and this number is likely to fall over time.

Upgrade to BUY on valuations

As with any consolidating industry, the ones that remain will benefit from the enlarged market share eventually. Ship owners, who themselves are cash-strapped and cautious with placing new orders, are reluctant to approach unknown and less reputable yards. YZJ, with its established track record, good execution abilities and large cash pile, is able to inspire confidence among customers.

Given the share price correction, we now see an upside potential of 18.7%, and upgrade our rating to BUY with an unchanged SOTP-based fair value estimate of S$1.04.

Source: OCBC Research - 27 May 2016