"Keep YZJ As An Outperform With Increased Target Price Of S$1.55"

YANGZIJIANG SHIPBUILDING was a surprise outperformer in the Singapore industrials sector in 2014 (up 2% vs peers down 20-30% each) on the back of strong order inflows and better-than-expected margin performance.

We expect the trend to continue into 2015 and keep YZJ as an Outperform with a slightly increased target price of S$1.55, up from S$1.45.

Surprises in 2014

» Orders: New high value orders for 4x260,000 dwt bulk carriers and 6x10,000 TEU containerships allude to the inroads YZJ is making into the very large bulk and container segment.

» Margins: Gross margins were better-than-expected on the back of pre-2008 vessel order deliveries. We now expect FY14 gross margins to be in the region of ~26% vs a previously expected ~23%.

What’s in store in 2015

Executive chairman Ren Yuanlin. NextInsight file photo» Starts with a robust order book of US$4.6bn with 41 new vessel orders: With 13 new orders for very large vessel types, YZJ is fast becoming a serious player in a segment previously dominated by Korean yards. Yards will be highly utilized up till 2016.

» Has 6 large outstanding options which could convert into new orders: These options comprises 2 x 36,500 dwt bulk carriers, 2 x 10,000 TEU and 2 x 2,700 TEU containerships and estimated to be about US$300m.

» We estimate US$1.6bn of new orders in 2015: YZJ will continue making inroads into the very large vessel segment, in our view. We estimate 28 bulk carriers and 5 containership orders in 2015.

» Margins will come down a bit but could surprise on the upside: We expect margins to fall as lower value post-08 contract options were exercised but higher value contracts may mitigate this. We are estimating 23.2% EBITDA margin in 2015 and 22.7% in 2016 which have upside risk.