Yangzijiang Shipbuilding - Hard times

■ New orders at China shipyards plunged 68% in 8M15

■ Lower margins to be expected as competition intensifies

Maintain Underperform (4) and target price of SGD1.18

What's new:
Newbuild orders have slowed substantially in China where, according to figures from the China Association of the National Shipbuilding Industry (CANSI), shipbuilding orders won from January to August 2015 amounted to only 15.05m dwt, a sharp 68.3% plunge compared to the previous corresponding period. This can be explained by China’s large exposure to the declining bulker sector, with YTD orders of 0.5m CGT vs. 9.2m CGT in 2014.

What's the impact:
Large exposure to dry bulk risks order cancellations. Of Yangzijiang’s (YZJ) USD4.1bn of outstanding order backlog, around 61% is for the construction of bulk carriers. We see this segment facing the largest risk of order cancellations given a subdued dry-bulk outlook as a result of falling global commodities demand. According to China Customs Statistics, China’s coal imports by volume were down 31% YoY, with iron-ore imports largely flat. The Baltic Dry Bulk Index is down 33% from the high of 1,222 achieved in early August, with demand faltering amid a burdensome glut of new vessels.

Focus on containerships could be futile. YZJ intends to re-focus its efforts on garnering more containership orders in the quarters ahead, in particular mega-size vessels, in which the Japanese and Korean yards have historically been dominant. However, such efforts might prove to be futile, in our view, as the containership sector is also facing its own overcapacity crisis. In the event that YZJ does manage to secure new orders as a result of its aggressive pricing strategy, its operating margins would be negatively impacted, in our view.

Lower margins to be expected. We expect the current shipbuilding downturn to result in significantly lower operating margins for YZJ’s core shipbuilding segment. The company’s past 10-year average operating margin for its shipbuilding segment stood at around 22%, aided by the upcycle in China shipbuilding order wins, which ended in 2013. We forecast operating margins in this segment to decline to 15% for 2016-17.

EPS Changes. We trim our 2017E EPS by 4% as a result of our lower new order wins forecast in 2016-17 (previous: USD2.0bn; new: USD1.5bn)

Technical Analysis
Daily Chart
What we recommend:
We reiterate our Underperform (4) rating with an unchanged 12-month target price of SGD1.180, based on an unchanged 2015E EPS and target PER of 6.9x (YZJ’s 5-year average PER). Our target price also corresponds to a shipbuilding forward PER of 11.8x, 1.0SD above its past 5-year average. The key risk to our call: a better-than-expected operating margin.

How we differ:
We are 0-6% below the 2016-17E Bloomberg consensus EPS due to our lower operating-margin assumptions. (Read Report)

Source : Daiwa Capital Markets

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