Yangzijiang with its 52 year track record

Yangzijiang significantly improved the efficiency of its existing yard over the past year. On top of this it started producing larger, more complex vessels at its new yard. The company reduced the production cycles for its containerships and bulk carriers by 7 to 30%. This is the result of extensive new worker training programs and the adoption of new engineering technology. At the new yard it delivered 4,250 TEU containerships and 92,500dwt bulk carriers more than double the size of previous vessels.

Thanks to its 52 year track record Yangzijiang delivered 27 vessels in 2007 or 3% of the total Chinese shipbuilding output. So far this year the company has delivered 16 vessels and is on schedule to deliver another 24 vessels by the end of the year. In 2008 the company was only using 25% of its new yard’s capacity, so it has enough space to deliver 40 vessels in 2009 and 45 in 2010.

Yangzijiang has consistently collected cash for the vessels under construction. Out of its US$6.9 billion order book as of the end of 2008, the company had received US$3B or 44% in cash payments. It had only recognized US$0.7B in revenues for the vessels under construction; the remainder remains a liability on its order book. Hence, we believe that the 6 months delivery delays that the company has been granting to some of its customers should not create a cash constrain especially since Yangzijiang is in a 67% net cash position.

We increased our PE-derived target price from S$050 to S$0.75 as a result of the increase in PE estimate from 6x FY09 to 9x in-line with global rise in valuations of shipbuilding stocks. We think Yangzijiang deserves to trade at a premium to Cosco Corp’s shipbuilding business, which we have valued at 8x FY09, thanks to its efficiency and track record. The stock continues to look attractive relative to its historical PE. Maintain O-PF.

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