OSK-DMG analysts: Lee Yue Jer, CFA (left) & Jesalyn Wong
» Orderbook estimated at a healthy USD4.6bn. Yangzijiang Shipbuilding (Yangzijiang) has won orders worth USD135m to build two liquefied natural gas (LNG) carriers for JHW Engineering and Contracting Ltd, bringing its orderbook to USD4.6bn by our estimate.
» Positive margin upside and revenue growth. While the company may need to move up the learning curve for the first unit, subsequent orders should result in operational efficiencies while gross margins should improve over the medium term. Higher technology assets also generally command better margins due to a smaller number of capable builders. We also note that LNG carriers are high-revenue items – the largest ones go for USD200m each.
» LNG as a medium-term to long-term strategy. There is a growing adoption of natural gas as fuel for power generation and manufacturing activities. According to the International Energy Agency (IEA), 40% of the current global LNG capacity is either under construction or under plans to start over the next four years. IEA also attributed 30% of growth in the global demand for gas to China for 2013-2019 (see Figure 1).
» Denting Korean dominance. With this step up the value chain, Yangzijiang encroaches into yet another space typically dominated by Korean shipbuilders. We continue to like the company as the most efficient and technologically-advanced shipyard in China.
Maintain BUY, with a SOP-based TP of SGD1.68, which values its shipbuilding business at 8x FY14F trough earnings. Current valuations are inexpensive at c.6x FY15/FY16F P/Es, c.3x EV/EBITDA, with a 4.3% dividend yield. We also highlight that the company is trading near book value, at a c.16% ROE.
Recent story: YANGZIJIANG: Breaking Into LNG Carrier Market (BUY)
Excerpts from analysts' report