OSK-DMG higlights Yangzijiang's near-term re-rating catalysts
Analysts: Lee Yue Jer & Jason Saw
![YZJ_propel](/images/stories/Yangzijiang/YZJ_propel.jpg)
We had earlier flagged this as a likely development given YZJ’s market-leading position in building 10,000- TEU vessels, offshore assets, and eco-friendly vessels, on top of its vessel design capabilities.
Stock again oversold on margin fears and chairman’s potential retirement in 3 years. YZJ’s stock was sold down after its 4Q13 results owing to:
i) the high tax rates in 4Q13;
ii) high-margin vessels having been delivered; and
![400_1Ren-Yuan-Lin](/images/stories/Yangzijiang/400_1Ren-Yuan-Lin.jpg)
We note that YZJ’s margins have consistently outperformed street expectations, and that the currently full utilization at its yards will enhance margins. Meanwhile, vessel prices have risen 15-20% y-o-y while steel prices have been on a downtrend.
HTM collateral 3.2x covered in land. Investors were also concerned about the default risks in Chinese property companies, to which YZJ lends 44% of its held-to-maturity (HTM) portfolio. We see two risk mitigation factors:
i) 64% of its overall collateral is in land and only 9% in shares (which may not be shares in property developers), and
ii) the coverage ratio for land is 3.2x.
![steelprice_3.14](/images/stories/Yangzijiang/steelprice_3.14.jpg)
Maintain BUY, with higher SGD1.58 TP. We continue to like YZJ for being the strongest shipbuilder in China in a recovering industry. Other near-term catalysts are: i) exercising options for 10,000-TEU containerships, which will boost utilization and support margins;
ii) receipt of deposits for two semi-submersible rigs, making the contracts effective.
Maintain BUY, with higher SGD1.58 TP (from SGD1.55), raising the shipbuilding multiple to 9.5x vs 9x in our SOP valuation.
Recent story: YANGZIJIANG: FY2013 gross margins widened in shipbuilding slump
Excerpts from analysts' reports