Yangzijiang
Whats up with this recent IPO? Heard from a friend who got 1 lot of this and he is sitting on a tidy profit from this. Why is it so hot?
UBS Writes:
Sailing to the top [EXTRACT]
Niche player on the cusp
Chinese shipbuilders are rising and gaining market share, and Yangzijiang
Shipbuilding (Holdings) Ltd. (YZJ) is leading the trend. New orders received in the
first four months of 2007 (4M07) have already hit 58% of the full 2006 figure,
compared with China’s 39% and South Korea’s 23%. We expect YZJ to continue
distancing itself from the crowd and deliver 63% sales CAGR and 53% earnings
CAGR in 2007-09.
Well defined strategy and solid execution
YZJ’s industry-leading gross margin of 21% in 2006 highlights management’s
strategy and execution. In addition to an expanding market share in containership,
the company recently secured 4% of the global share in Panamax bulker. We
believe YZJ is likely to explore more ways to strengthen its leadership position.
Risks
A dramatic industry slowdown and capacity glut would take their toll on all
players. We believe currency fluctuation and raw material prices are two
operational risks and gauge that a 1% change in the renminbi/US dollar exchange
rate and steel cost could swing the company’s earnings by 3.4% and 0.6%,
respectively.
Valuation: initiate coverage with Buy 2; price target of S$2.35
We derive our price target of S$2.35 from a DCF method, assuming a WACC of
8.9% and terminal growth of 3%. Our price target implies an estimated 2008 PE of
30.1x and EV/EBITDA of 23.8x. We foresee 29% upside potential from the
current level and initiate coverage with a Buy 2 rating.
Summary and investment case
We initiate coverage of Yangzijiang Shipbuilding (Holdings) Ltd. (YZJ) with a
Buy 2 rating. The company is China’s second largest non-state owned
shipbuilder, focusing on containerships and bulk carriers. It has an order book of
containerships and bulkers that accounts for 15% and 4% of China’s market
share, respectively.
In our view, YZJ is one of the best ways to capitalize on China’s ascent to
become the world’s largest shipbuilding nation. The company has demonstrated
its ability to attract new orders at a faster pace, maintain industry-leading
margins, and move upscale effectively. We expect management to explore ways
to strengthen the company’s leadership, and we forecast YZJ to deliver a 63%
sales CAGR and 53% earnings CAGR, as well as an average 34% ROE in 2007-
09, all of those the highest in the industry.
YZJ is currently trading at 22.1x estimated 2008 earnings, or 16.6x estimated
2008 EV/EBITDA. Our price target of S$2.35 is 30.1x estimated 2008 PE and
23.8x EV/EBITDA, which we believe is justified by the company’s industryleading
earning growth, margins, and returns.
Well defined strategy and solid execution
YZJ has crafted a two-step strategy:
(1) To develop its core competency in cost control and efficiency improvement
by focusing on a niche segment, ie, small/medium-sized vessels, especially
handysize containership feeders (1,000-2,000 TEU) for exports, which
typically requires higher technical and design standards than other vessel
types.
(2) To leverage on its experience, track record, and economies of scale to
gradually move upscale, building larger vessels that include containerships
up to 6,000 TEU, Panamax, and Aframax oil tankers, and bulk carriers of
up to 300,000 DWT. The company will also explore opportunities in
offshore vessel markets.
Company risks
Currency
YZJ receives nearly 100% of its revenues denominated in US dollars and
purchases 70-80% of raw materials and services in China in renminbi terms. As
such, should there be strong appreciation of the renminbi against the US dollar
and euro, margins will be hurt. YZJ is exploring ways to reduce renminbi
exposure by requiring a 20% down-payment, increasing imported equipment in
US dollar amounts, and entering currency hedge contracts. Based on a UBS
forecast of the average renminbi/US dollar exchange rate of 7.63 in 2007, we
estimate a 1% increase in the exchange rate would trim earnings by 3.4%.
Raw materials
As raw materials and equipment have accounted for 65% of cost of goods sold
(COGS), YZJ is subject to any supply shortages and/or price fluctuations. Steel
is the single largest cost item, contributing 20% COGS in 2006. As the company
usually signs a contract to secure steel quantities two or three years ahead of
delivery, then purchases steel from the spot market during the construction
period, any large fluctuation in steel prices will affect its bottom line. Our
calculation shows every 1% change in the steel cost would cause a 0.6% change
in its earnings.
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