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Yangzijiang Shipbuilding Holdings Ltd. - Too many bulk carrier orders to itself; downgrade to Underweight

Shared By Stock Fanatic on Monday, March 2, 2015 | 2.3.15

We see increasing business risks for YZJ amid sharp BDI correction and owned vessels. We downgrade our rating to UW from N with a S$1.00 PT.

Weak 4Q14 results
Sales came in at Rmb3.8bn (12% y/y), mainly helped by increased vessel delivery (9 ships in 4Q14 vs. 6 in 4Q13) and full operations of Yangzi Xinfu yard. However, gross profit fell 41% y/y (GPM of 22% vs. 42% in 4Q13), due to the lowered margins of its jackup projects. FX-related losses and additional provisions from its HTM investment business were reflected in the bottom-line figures.

■ Too many orders to itself
Out of the 116 ship orders in its order book, YZJ has 12 ships ordered to itself. These 12 ships are all 64K DWT bulk carriers (Supramax) contracted in 2013 and 2014 in addition to 9 bulk carriers delivered from itself (Figure 2). YZJ said that it is diversifying business to ship lease with the intention to increase ship assets to U$800mn at 28 ships. But it cannot be regarded as a typical ship lease business as YZJ relies solely on one shipyard for ship supply. Ship lease is usually led by independent firms with long business records, with the ability to secure cheap financing and good priced customers.

■ Doubled risks & increasing concerns
Along with the weak freight rates of bulk carriers, we see doubled risks for YZJ. BEP of Supramax bulk (62~65K DWT) is estimated at U$10,890/day vs. current rates at U$4,600/day. Without long-term charters, we estimate it will have a negative impact on YZJ earnings in the short term, as well as a possible slowdown in bulk carrer orders. YZJ already has very high exposure to bulk carriers (96 bulk carriers out of 116 ships in its order book).

Technical Analysis
Daily Chart
■ Downgrade to UW with S$1.00 PT
We downgrade YZJ to Underweight from Neutral and lower our Dec-15 price target to S$1.0. Our new price target is based on the target multiple of 0.8x, which is SD-1 level of YZJ's 5-year historical P/B, reflecting the expected earnings downside from low-priced orders and falling bulk freight rates. (Read Report)

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Source : JP Morgan Asia Pacific Equity Research

Posted on Monday, March 2, 2015 | 2.3.15
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