Yangzijiang Shipbuilding - CIMB Research 2016-04-13: Splashing deal

Yangzijiang Shipbuilding - CIMB Research 2016-04-13: Splashing deal YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI 

Yangzijiang Shipbuilding - Splashing deal 

  • YZJ has secured a US$510m contract for six 400,000dwt very large ore carriers (valemax) from ICBC Leasing. 
  • The order falls within our expected US$2.5bn for 2016. 
  • No change to our EPS and target price (ADD, S$1.10), still based on 0.85x P/BV. 
  • Stronger orders could be the key catalyst. 

US$510m for six VLOC 

  • YZJ secured a contract worth US$510m for six 400,000dwt valemax from ICBC Leasing for delivery in 2018-19. The order is placed as part of the 30 valemax orders by several major Chinese shipowners to support a contract of affreightment (COA) with Brazilian mining group Vale to transport iron from Brazil to China over a period of up to 27 years. 

Contending against other SOE yards 

  • The other shipowner that is also part of this mega deal is China Merchants, which has ordered four valemax each from Shanghai Waigaoqiao Shipbuilding (SWS) and Bohai Shipbuilding and two from CIC Jiangsu. 
  • China Cosco Shipping has also ordered 10 from SWS while ICBC Leasing has given six units to YZJ and four to Bohai. 

Giant vessels 

  • The valemax was introduced in the market in 2010 by Vale and it planned to build around 60 vessels. Only 18 were delivered, including several units from the troubled yard, Jiangsu Rongsheng. Valemax was banned in 2012 for three years from docking at Chinese ports due to technical and safety reasons. The ban was lifted in July 15. 
  • The valemax order for YZJ measures 362 metres in length and 65 metres in width, with enhanced features in structure, energy efficiency and safety. They are twice the size of a capesize vessel. 

Lower margins 

  • The ships are priced at US$85m-90m each across the yards. We estimate a gross margin of 10-12% for these vessels. The vessels were priced at US$140m in 2008. 

Maintain Add 

  • We still expect YZJ to secure US$2.5bn of orders in 2016 and keep our EPS and target price unchanged. 
  • We see stronger-than-expected orders as the key catalyst. 

Lim Siew Khee CFA CIMB Securities | http://research.itradecimb.com/ 2016-04-13
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.10 Same 1.10