Graving dock in Yangzijiang's new 793,000 sq m yard.

GAZELLE CAPITAL fund manager Lim Say Hui and Financial PR’s managing director Kathy Zhang braved winter winds last Saturday (Jan 10) to visit the new shipyard of Yangzijiang – China’s largest listed shipyard without state equity.

Yangzijiang has two yards totaling close to a million sq meters in Jiangsu province.  The 793,000 sq-m new Jingjiang yard is about 2.5 hours’ drive away from its old Jiangyin yard, which sits on 200,000 sq m.

”We have yet to receive notice of any order cancellation,” said the yard’s management, responding to the fund manager’s concern over the recent spate of vessel order cancellations announced by other yards.

Yangzijiang specializes in marine logistics vessels - containers and bulk carriers - which are a fraction the value of oil exploration vessels such oil rigs and thus much easier to finance.

Demand for oil exploration support vessels shrank as crude oil prices crashed from a peak of close to US$150 a barrel in July 2008 to less than US$50 currently (Brent Spot) – now much nearer to break even levels of oil production, which are widely reported to be about US$40.

This year, 22 vessels are scheduled for delivery out of Yangzijiang’s new Jingjiang yard while another 19 vessels will be delivered out of the old yard.

Steel cutting in Yangzijiang's yard. Photo by Kathy Zhang

One of China’s most productive and efficient yards

The visitors, Mr Lim and Kathy, saw a well-organised and busy yard on a chilly winter weekend.

That seems to be a reflection of the company’s strong management. In particular, Yangzijiang has demonstrated well-managed cash flow.

Cash and cash equivalents as at end Sep 2008 was a hefty Rmb 5.5 billion while operating cash flow for 9m08 was Rmb 3.4 billion.

The company collected a 20% deposit from clients upon signing contracts and, subsequently, required a 20% banker’s guarantee upon steel cutting, followed by another 20% at keel laying.

(The keel is generally the first part of a ship's hull to be constructed, and laying the keel, or placing the keel in the cradle in which the ship will be built, is a momentous event in a ship's construction—so much so that the event is often marked with a ceremony.)

UBS expects higher margins in 1H09 due to plunge in steel prices

Steel plates comprised 29% of Yangzijiang’s cost of sales for 9m08.

Prices of steel plates have dropped by half to Rmb 4,100 per ton currently from the peak of Rmb 7,800 per ton in mid 2008, significantly reducing the yard’s cost pressure.

The resulting higher margins will be reflected from 1H09 onwards, according to a recent UBS report.

Bulk carrier built by Yangzijiang. Photo by Kathy Zhang.

Why 1H09?  Job modules are usually recognized about 6 months after their respective steel batches are purchased.

Shipyard revenues are recognized using percentage of completion accounting, implying a low possibility of write-downs.

Even though the management concedes that new orders for ships have dried up, UBS reiterated its buy call on the stock this week, maintaing a 12-month price target of S$1.30 - double that of the 67-cent consensus of analysts who cover the stock.

The stock closed at 47.5 cents yesterday (Jan 14).

UBS believes that the industry will bottom over the 12 months from 2H09 to 1H10.

After this period of industry shakeout when less efficient yards are put out of business, a reduced supply plus demand recovery should lead the industry out of its slump, says the broker. Meanwhile, Yangzijiang is sitting on orders that will increase its yard output from now until 2011.

Recent reports
Broker Recommendation Target Price
13 Jan 2009 UBS Buy S$1.30
7 Jan 2009 CLSA Outperform 55 cents

Related stories:

YANGZIJIANG: US$7-b orderbook to keep it busy till 2011

YANGZIJIANG: Bought back $39 million of shares


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