ASL Marine and Yangzijiang among 12 constituents to form new Maritime Index

ASL Marine and Yangzijiang are among the 12 constituents of the new FTSE ST Maritime Index launched by Singapore Press Holdings (SPH), Singapore Exchange Limited (SGX) and FTSE Group (FTSE).

FTSE ST Maritime Index – ASL Marine Holdings, Cosco Corp, Courage Marine Group, First Ship Lease Trust, Jaya Holdings, JES International Holdings, Mercator Lines, Neptune Orient Lines, Rickmers Maritime, STX Pan Ocean, Swissco International, Yangzijiang Shipbuilding Holdings.

The index reflects the strength of the maritime component of companies in the energy, offshore and shipping industries listed on SGX; underlines the Exchange’s efforts in enhancing this sector.

The FTSE ST Maritime Index comprises 12 companies that have at least 55% of their revenue derived from maritime related activities including the manufacturing, ownership, operation and repairing of commercial and/or cargo vessels.

The new index provides investors and analysts a benchmark tool to track and measure the performance of SGX listed companies in the maritime industry that meet the indexing standards required by international investors.

Sponsored Links

Yangzijiang Shipbuilding - Holding up well in a tough environment

Established shipbuilder in the PRC. Yangzijiang Shipbuilding (Holdings) Ltd (Yangzijiang) is an established shipbuilder in the PRC with operations dating back to the 1950s.The group operates two yards in Jiangsu province, one in Jiangyin city and the other in Jingjiang City. Yangzijiang has delivered more than 100 vessels including bulk carriers and containerships and is looking to expand its product range as well. In 2Q09, group revenue rose 41% YoY to RMB2.5bm while net profit rose 80% to RMB607.4m, aided by higher gross margins and other gains.

Large order book with no order cancellations so far. Yangzijiang has a strong order book of 139 vessels worth a total of US$6.1b as at 30 Jun 09. This comprises 66 containerships worth US$3.8b and 73 bulk carriers worth US$2.3b. More noteworthy is the fact that management said that the group has not received any order cancellations so far while peers such as Cosco Corp have been hit. We do not discount the possibility of order cancellations, but order delays are more likely, given the group's determination to preserve orders.

Gross margins have held up. Despite tougher business conditions, the group's gross margins have held up with the construction of higher margin vessels (24% in 2Q09 and 20% in 1Q09). This compares with 1% shipbuilding margin for Cosco in 2Q09, which was affected by longer-thanexpected delivery delays and higher-priced raw materials. However the shipbuilding industry is now out of the boom period and normalised margins are expected to fall in the long run.

Looking at new areas amid weak orders. The last time that Yangzijiang received new orders was in 2Q08, and management expects minimal new orders given low demand and customers' difficulties in securing financing. Hence, the group is proactively looking into new areas such as the vessel scrapping market which is relatively buoyant now. We view this possible development positively, given the resulting business model.

Initiate with BUY. We initiate coverage on Yangzijiang with a BUY rating with fair value estimate of S$1.20 based on 11x blended FY09/10F earnings, in line with peers. Project execution has been good with relatively strong margins compared to peers. Its strong order book of US$6.1b which extends to 2012 also lends earnings visibility though we note that new order flow may be minimal going forward. We have not factored in possible contributions from the vessel scrapping business.

Yangzijiang Shipbuilding - 2Q09 beats estimates, raising our expectations

2Q09 beat our estimates with net income for 1H09 coming at 56% of our FY09 forecast. 2Q09 net income was up 26% QoQ and 80% YoY with shipbuilding gross margin of over 24%.

Revenue recognition for 1H09 was below our estimates, likely as a result of reschedulings of 18 vessels and a 5% rebate on eight high contracts, but overall YZJ's strategy of defending its order book and margins appears to be working.

Bottom-line was also supported by non-operating income, largely from interest income on cash and short-term investments. YZJ’s total cash and short-term investments totalled Rmb10.3 bn (S$2.1 bn) at 30 June, or S$0.59/share. Total borrowings were Rmb1 bn.

We have pushed out revenue recognition schedule (rescheduling), increased gross margins to approximately 20% (1H09: 22.5%) and raised non-operating income (1H09 was 116% of FY09E), resulting in an 11-24% increase in our 2009-11E earnings (Fig. 2).

Target price is revised to S$1.29 from S$0.6 based on 2010E P/E of 10x (previously 5x). Maintain OUTPERFORM.

Yangzijiang: A strong ship

Consistent earnings delivery albeit tough operating environment. Our conviction in Yangzijiang was raised with its better-than-expected 2Q09 results. The group’s net profit was RMB607m in 2Q09, vs. our expectation of RMB550m.

Improved earnings visibility in 2010. We have previously expected a sharp dip in 2010 earnings in anticipation of high cancellation/rescheduling of order book in 2009. As the jittery is soothed with no cancellation and relatively low deferment to date, we increase our 2010 delivery assumption from 30 to 40 vessels. Gross margin has also been lifted by 2.7ppt to 20% on better operational efficiency. As a result, our FY10 net profit estimate is raised by 50% to RMB1.8bn.

One of the few privileged yards supported by government’s stimulus package. Yangzijiang is one of the three private yards in Jiangsu province that is singled out under the government’s stimulus package. The funding access given to Yangzijiang and its foreign customers reduces ship owners’ default risk and enhances Yangzijiang’s financial capability to pursue M&A opportunities.

The listing of CSIC may provide potential price catalyst to Yangzijiang. China Shipbuilding Industry Co (CSIC), one of the largest shipyards in China, has obtained approval from securities regulatory to list in the A-share market last week. A successful launch of CSIC at good valuation could drive up the values of Chinese shipbuilders, which now trade at an average 16.6x FY10 PE. This could result in a re-rating of Yangzijiang.

Yangzijiang Shipbuilding - summary and update

YZJ reported 80% yoy increase in 2Q09 PATMI of Rmb607.4m (+26% qoq; 1Q09: Rmb483.3m).

This is mainly due to an improvement in productivity from the new yard and higher profit recognition from three high margin vessels delivered in 2Q09.

Eleven vessels were delivered in the quarter as compared to six in 2Q08.

Orderbook stands US$6.1b comprising of 139 vessels or 2.54m CGT (66 containerships, 73 dry bulk carriers)

Excluding restricted cash of Rmb3.2b, YZJ has a net cash of Rmb4.8b.

Till date, YZJ has not received any order cancellation of vessels.

Eighteen vessels will be rescheduled by five to 24 months after the Group has received 40% prepayment in cash.

A total rebate of US$38m was provided for eight high margin vessels (GP margin >30%) in which the amount accounts for 5% of vessel costs.

Out of the eight high margin vessels, three have been delivered in 2Q09. The rest will be delivered by 2010.

In view of the numerous enquiries on multi-purpose cargo vessels from customers, YZJ has begun construction on two 92,500 dwt vessels.

The new shipyard is currently operating at 50% capacity utilization rate while the old yard is at full capacity.

YZJ plans to deliver 40 vessels in 2009, 45 in 2010 and 45 in 2011.

Based on consensus forecasts, YZJ is trading at 10.2x 2010 PE (9.5x 2009 PE) and 2.3x 2010 PB (2.8x 2009 PB).

Yangzijiang - Pure shipbuilder in a prolonged downturn

In line with Nomura’s negative macro view on the merchant shipping and shipbuilding sector, we suggest that investors should avoid pureplay shipbuilders since the oversupply in both bulk and container ships (particularly in the mid-sized segment), following the past three years of strong new-building orders, is likely to lead to prolonged weakness in the commercial new-building orders.

Also, while the privately owned Chinese shipbuilder has managed to keep cancellations at bay, with no announcements made as of yet, we believe these risks remain. Management stated the group has secured significant upfront payments, which will likely deter cancellations, although for those customers who are hard put to secure financing, the decision to cancel the project may be the only option, in our view.

The group has highlighted it is one of a few shipbuilders in China which is eligible for the shipbuilding stimulus scheme, and that the group will actively work with banks to help its customers apply for financing. However, we believe the stimulus measures, for which there are still very few details, are more likely to favour the stateowned yards, and could turn out to be too little, too late or not relevant for some shipowner customers, particularly the overseas shipowners, which make up the bulk of Yangzijiang’s customers.

YZJ’s order backlog stands at US$6.7bn as of 1Q09, with 149 vessels scheduled for delivery into 2011-12, according to management. In FY08, the group delivered 27 vessels, amounting to 850,000 deadweight tonne (DWT), which makes it one of China’s top 10 most productive yards.

The group expects to deliver 41, 45 and 50 vessels in FY09, FY10 and FY11, respectively, from its US$6.7bn backlog, which we believe should be achievable based on its execution track record but only if there are no cancellations or delivery postponements. Its US$6.7bn orderbook comprises 76 containerships (1.73mn CGT at US$4.3bn) and 73 bulk carriers (1.03mn CGT at US$2.4bn), according to the group’s management.

With a sound shipbuilding history going as far back as the mid-1950s when it started as a state-owned shipyard, YZJ has built up a reputable business and claims strong client relationships with its major customers, which include Canadry (Italy), Carisbrooke Shipping (UK), Cosco (China), D’amato (Italy), Formasa Taiwan, Guangdong Yudean (China), Hansa Shipping of Germany, IMS Shipping (Italy), Reederei B. Rickmers, Peter Dohle Sciffahrts KG and Seaspan of Canada.
While we have raised our FY09F and FY10F earnings by 17.3% and 8.8%, respectively, to account for the group’s 1Q09 results, we still expect the group’s earnings to show a decline from FY08, given the continued drought in new shipbuilding orders.

We maintain our REDUCE rating on YZJ, with a price target at S$0.48 (from S$0.37) based on our upward earnings revision for FY09-10F on the back of strong 1Q09 results. Our price target is based on a discounted cashflow valuation, with a WACC of 12%, which is the same as that used for Cosco Corp. YZJ is trading on FY09F and FY10F PE of 10.4x and 11.5x, respectively, which is ahead of its Korean counterparts. Given our bearish view on shipbuilding as a whole, we believe YZJ’s valuations are not at a significant discount to warrant a Neutral rating, and retain our REDUCE rating. While we appreciate that management has raised dividends, the yields remain relatively less attractive vs the Singapore yards, although we highlight that FY09F and FY10F average ROE remains creditable at 20% and 15%, respectively.