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Analysts Breakdown: Yangzijiang’s Foray Into Offshore
Tradeable | 13 December 2012
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By: Simeon Ang
Articles (125) Profile

Two years have passed since Yangzijiang (YZJ) bid for a stake in Singapore’s PPL Holdings to acquire rig-building capabilities. On 3 December 2012, YZJ finally announced that it had clinched its maiden offshore order worth US$170 million for a rig. The contract also includes an additional option for YZJ to construct an additional identical rig, resulting in the contract being worth a potential US$340 million. YZJ’s client is Explorer I, which is ultimately owned by Offshore Logistics (Asia Pacific) – one of the largest oil and gas equipment suppliers to the Asian market.

Separately, YZJ also announced that it had entered into a letter of intent (LOI) with SSP Asia, an affiliate of SSP Offshore, to commence construction of an SSP unit.

Here are some snippets of what the various analysts had to say:

Jason Saw at OSK DMG:

“We are neutral to the news. The rig contract is not a surprise as management (previously) guided that they are looking to close two jackup orders by the end of the year.”

Jason went on to say that the pricing of the rig falls under the lower end of similar designed rigs and thus feels that operating margins derived from the contract may not be attractive. He thus remains unmoved by the news and maintains his call on the stock.

Jason’s Call: Neutral, with target price of $0.95/share

Ho Pei Hwa at DBS Vickers:

“… it is, nevertheless, a significant breakthrough for a new player like YZJ to secure the contract orders. Moving (into) offshore is an inevitable move in enhancing its product mix and combatting the shipbuilding downturn.”

Insofar as the contracts were concerned, Ho recognises that the orders were not from typical operators and the existence of back-to-back charter contracts were still wanting. However, Ho continues to appreciate the management team behind YZJ and its track record. In the face of undemanding valuation. Ho feels that YZJ could potentially yield 4-6 percent for investors over the next 12 months.

Ho’s Call: Buy, with target price of $1.20/share

Low Pei Han & Chia Jiun Yang at OCBC:

“Time will be needed for significant earnings contribution from YZJ’s offshore division, and we still expect 2H13 and 1H14 (YZJ’s financial year ends on 31 December) to be the most difficult period for the group, based on its order book… Nevertheless, building offshore capabilities is a step in the right direction.”

Both Low and Chia points out that the order flows for various ships (bulk carriers and containerships) have been greatly reduced. This background underpins their belief that YZJ was forced to seek new grounds as Chinese shipbuilders have been reliant on such orders. Low and Chia believe that earnings will hit bottom as a substantial amount of high margin projects will be completed by 2H13. As such, they keep a pessimistic view of the counter.

Low & Chia’s call: Hold, with target price of $0.95/share

Elsewhere, UOB KayHian seems to have viewed the developments favourably and increased its target price for YZJ to $1.43.

While the contracts may not have bought over all analysts, the market has given the stock a slight boost of around 3.3 percent since the announcement as compared to the STI’s 2.4 percent rise. However, it is worthwhile to note that YZJ’s foray into the offshore market comes at a time where various other offshore rig builders have already secured large contracts.

Could YZJ be too late to the party? This development will have to be supported by other new contracts or as OCBC points out, 2013 and 2014 will be a dismal period for YZJ.

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Simeon, an LSE graduate, is currently the editor of Aspire. He specialises on topics surrounding trading psychology, politics and macroeconomics.

Please click here for more information about this author.

Yangzijiang Shipbuilding (Hldgs)  1.080 -- --   
Business: Co is one of the largest non-state owned shipbuilders in China. [FY18 Turnover] Shipbuilding (58.1%), trading (32.8%), investments (6.7%), others (2.4%).

Insight: Apr-19, 1Q19 revenue jumped 26.8% to Rmb6.3b due t... Read More

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