Friday, May 22, 2009

Yangzijiang - Underperform by Macquarie Research (22 May 09)


We revise our earnings forecasts for Yangzijiang Shipbuilding (YZJ) on the back of improved margin due to larger vessels under construction in 2009. We maintain Underperform but increase our target price to S$0.38 from S$0.28.


Holding up better than peers: YZJ’s profitability is holding up relatively well compared with its Chinese peers, with 1Q09 EPS up 17% YoY. We think the key driver is larger vessels under construction. The average vessel size under construction rose from 14,360cgt/vessel in 2008 to 20,575cgt in 2009, up 43%. The expanded vessel size improves production scale and margin. We
think the larger vessels will help YZJ to maintain a high margin this year; however, we expect the average vessel size under construction to pull back to 15,567cgt in 2010.

Revision of current contracts: YZJ has seen 6–12 month delays in delivery and revision of vessel prices for current contracts. The company denies cancellations so far. We estimate a six-month delivery delay would decrease the company’s margin by about 2% and a price renegotiation range of 15–20%. Our commodity team’s recent visits to steel plate companies indicated that some ship plate plants are seeing delays of up to two years. 􀂃 Decreasing utilisation: Having expanded in 2007, YZJ’s new capacity is scheduled to be fully deployed by 2012. However, without new orders, the company’s capacity utilisation will shrink to below 50% after 2010, in our view.

We believe the decreasing utilisation will put pressure on the yard’s margin. Earnings and target price revision. We raise our EPS forecast for 2009 by 23%, leave our 2010 EPS forecast unchanged and cut our 2011 EPS forecast by 7%. We increase our target price to S$0.38 from S$0.28.

Price catalyst

12-month price target: S$0.38 based on a Price to Book methodology.

Catalyst: No new orders and more revision of the current backlog.

Action and recommendation
We maintain our Underperform recommendation, but increase our target price to S$0.38 from S$0.28. We think current cancellations or revision of the previous contracts will impact YZJ’s earnings starting in 2010. We maintain our negative view on the shipbuilding industry. We believe the recent rally of the shipbuilding company shares is not supported by a fundamental recovery of the industry.

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