Steadily yet quietly prepares for next newbuilding upturn
Yangzijiang (YZJ) undertook another low-profile yard expansion plan last week. It spent RMB60mn to buy 310,000sqm of land in Jiangsu – the land size is about 50% larger than its oldest yard in the same province – from the Chinese government. However, we observe that this announcement went largely unnoticed by the market. Together with YZJ’s series of corporate actions since February (refer page 3 for details), we believe this latest land acquisition reflects its steady, but quiet, build-up of shipbuilding capacity and capabilities. In our view, YZJ is getting itself positioned for the containership newbuilding upcycle in 2011.
Met with management – our optimism continues
We met with management again recently, and do not envisage any near-term execution risks. YZJ’s earlier yard expansion and technology/business collaboration plans are also on schedule. As such, our earnings estimates stay at 5% above consensus for FY10, 14% for FY11, and 31% for FY12.
Most investors are unaware of two important facts on YZJ
Our communications with investors since late October show up two surprisingly unknown facts about YZJ that are worth highlighting again: 1) YZJ has very high exposure to the coming containership order upswing, as 56% of group revenue came from containerships in FY09. We expect containership new order exposure at 42-53% in FY10-12E. 2) YZJ’s market cap is US$5.2bn, vs. the perceived S$1-
3bn market cap by most investors polled by us. We see an increasing awareness of YZJ as a large-cap shipyard to boost its ownership among institutional funds.
Maintain Buy & S$2.49 PO
We believe YZJ’s low 10x FY11 P/E, vs. peers at 14x, will be reversed, as it delivers our FY10-11 earnings expectations, and containership new orders expectedly return to a sustainable upcycle from mid-2011.
Company update - Preferred Chinese yard - by Lim Siew Khee
• Maintain Outperform with higher target price of S$2.57 (from S$2.15). YZJ had secured US$1.3bn worth of orders in 3Q10 with pockets of orders in 4Q10. We believe the strength in containership orders could make up for softer demand for bulk carriers in 2011.
As such, we upgrade our order assumption from US$800m to
US$1bn for 2011 and our FY11-12 earnings estimates by 3%. Our higher target price takes into account our earnings upgrade and a higher P/E of 14x (from 11x, its average since listing), now set in line with the average for Chinese peers in view ofthe revival in the containership sector. Stock catalysts could include stronger-thanexpected order wins and margins, in our view.
• Containership orders could return to 2007 peak. The container sector’s order book to fleet ratio of 13% is much lower than its 4-year average of 20%. There are only 277 containerships scheduled for delivery in 2011, adding 6% to the global fleet.
If more cash-rich owners are indeed out on a newbuild spree and assuming orders match the 2006/2007 order peak, the supply-demand balance by end-2011 could still be favourable with an estimated order book ratio of 15%.
• Top privately-held Chinese yard by container orders. Excluding state-owned yards, YZJ ranks first in terms of contract wins with about US$150m worth of containership orders YTD. Given this leading position, we believe YZJ should benefit from any further uptick in the containership sector.
Revival of containerships
Can orders return to 2007 peak?
A spike in containership newbuilding occurred in 3Q10 with 62 vessels ordered globally. Low 4Q10 orders (35 units) may be caused by seasonality, and we believe in an order resurgence from the containership sector in 2011, potentially back to 2007 levels on the back of:
1) strong utilisation rates;
2) disciplined addition of new capacity in recent years; and
3) ship owners’ cash-rich positions.
Global order book to fleet ratio on the way down.
The container sector’s order book to fleet ratio of 13% is much lower than its 4-year average of 20% due to the newbuild
order drought since 4Q08. There are only 277 containerships scheduled for delivery in 2011, adding 6% to the global fleet capacity. This is so much lower than the bulk carrier sector’s 1,353 vessels up for delivery in 2011 with an order book to fleet ratio of 38%. If more cash-rich owners are indeed out on a newbuild spree and assuming orders match 2007 levels (about 500 units), the supply-demand balance by end-2011 could still be favourable with an estimated order book ratio of 15%.
Ranks first among privately-held Chinese yards.
The crisis may have booted out smaller shipyards from the industry, leaving state-owned and quality private yards behind. YZJ ranks first among Chinese private yards in terms of contract wins, securing
10,184 TEU of new containership orders or about US$150m YTD. Given this leading position, we believe it should benefit from any further uptick in the containership sector.
Upgrade in order-win assumptions.
YZJ had secured about US$1.3bn worth oforders in 3Q10 with pockets of orders in 4Q10. Given an expected strength in
containership orders in 2011, we upgrade our order assumption from US$800m to US$1bn for 2011 and our FY11-12 earnings estimates by 3%. We keep our FY12 orderassumption of US$1.2bn intact.
Moving up the value chain
Win-win partnership with CSBC. We believe YZJ’s dual listing in Taiwan as well as its impeccable track record in the shipbuilding industry has made it the preferred yard for Taiwanese shipbuilder, CSCB, in the latter’s first-ever partnership with a Chinese
shipbuilder.
CSBC has the strength in shipbuilding design and technology while YZJ’s production capacity is twice that of CSBC’s total production capacity from yards in Keelung and Kaohsiung. We believe further collaboration is on the way between the two.
CSCB is considering diverting part of its shipbuilding process to the mainland in view of the lower labour costs there (one-third of Taiwan’s) while YZJ is moving up the value chain hoping to secure orders for larger containerships (above 4,500 TEUs).
Riding consolidation wave in China.
Recently, China Shipbuilding Economy Research, an affiliate of state-owned China State Shipbuilding Corp, declared that the Chinese shipbuilding industry will encounter a wave of consolidation with more M&As over the next few years, eliminating 30% of the existing players.
With YZJ’s strong balance sheet, we expect more M&As as YZJ can take on several smaller yards to expand its capacity. This year alone, it has been building up capacity and capabilities through joint ventures and M&As and the acquisition of new land in preparation for more order wins and larger vessel wins.
Valuation and recommendation
Expect upgrades in consensus estimates.
YZJ is our preferred Chinese shipbuilder for its quality execution and strong financials. FY11-12 consensus estimates appear too
low and a blanket upgrade by the Street is very possible as the market could have underestimated YZJ’s profit margins and revenue recognition.
Maintain Outperform with higher target price of S$2.57 (from S$2.15), now based on 14x (from 11x, average since listing) CY12 P/E, in line with the average for Chinese
peers. Stock catalysts could include stronger-than-expected order wins and margins, in our view.
Yangzijiang Shipbuilding: JV company for marine electrical systems
Yangzijiang Shipbuilding (YZJ) announced that its subsidiary has entered
into an agreement with four other companies to establish a joint venture
company (YZJ to invest 20% of the RMB100m registered paid-up capital)
that will provide marine electrical systems for shipbuilding of commercial
vessels and marine engineering projects. The JV will develop, produce and
sell marine electronic products, besides providing technical consultation
and services to the marine industry. Huge emphasis will be placed on
research and development. The other four companies are Beijing Highlander
Digital Technology (listed company that is a specialist in marine electronics
technology), Jiangsu Hantong Ship Heavy Industry (shipbuilding enterprise),
Taizhou Sanfu Ship Engineering (shipbuilding enterprise) and Jiangsu Yichun
Group (owns shipyards). We are positive on this latest development as
YZJ is likely to have an edge over competitors should this JV be successful
in providing high quality marine electrical systems to customers. The JV
may also enable YZJ to tap on Highlander's clientele. Finally, this may also
provide an alternative source of income from marine electrical systems,
though we put off adjusting our earnings estimates as we will be obtaining
more details from management. Maintain BUY with fair value estimate of
S$2.36 for now. (Low Pei Han)
