We believe lower margins are unavoidable for YZJ due to the increasing price gap with top-tier players and an increased portion of lower-priced contracts in its revenue mix. We assume coverage with a Neutral rating and a Dec-14 PT of S$1.00.
■ Successful survival and strengthened position Despite a period of significant turmoil and restructuring for the shipbuilding industry, Yangzijiang survived successfully and strengthened its position, helped by stronger financials and a more stable order book than its local peers?.
■ Time required to narrow price gap from top-tiers In the previous shipbuilding cycle, ship demand came from China, and early delivery slots secured a decent premium. In this cycle, the key driver is fuel efficiency. Only top-tier players can secure profitable contracts, and proven fuel efficiency and technology will be the most important drivers, in our view. Therefore, YZJ may see lower-priced contracts over the next several years until it improves fuel efficiency.
■ Need to lower margin outlook With the final delivery of high-priced contracts and the upcoming burden of lower-priced contracts, we believe YZJ will see a declining top line and declining margins over the next two to three years. We expect a noticeable turnaround of margins to come with a one- to two-year lag vs top-tier players.
■ Assume coverage with a Neutral rating and Dec-14 PT of S$1.00 Considering the company?s falling margin trend and consistent price gap among global peers, we assume coverage with a Neutral rating and a PT of S$1.00. Downside risks include a slower-than-expected recovery of global shipbuilding demand potential execution risk in shipbuilding and delivery, and strengthened environmental regulations. Upside risks include crude oil price increases, greater-than-expected order wins, and continuous price increases for newbuild ship orders.
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