Yangzijiang/Cosco

Chinese Shipbuilders (Yangzijiang/Cosco): Citi note that Rongsheng’s profit warning is a timely reminder of the sharp risks to sector earnings in 2H13-2014 once the existing order backlog is depleted. The profit warning reinforces negative outlook on shipbuilding sector, especially given context that Rongsheng was among the most successful co’s in securing new orders over the past few difficult years (No.1 in China and No.3 in the world in 2011, measured in dwt). Overall, house maintain cautious outlook on the sector and our ‘Sell’ recommendations on both Yangzijiang and Cosco in view of potential downside risk to earnings and absence of any sustainable catalysts (order wins and newbuild prices likely to remain depressed in the foreseeable future). Despite undemanding valuations, particularly for leading shipyard YZJ (4-5x forward P/E and 1.1x FY12E P/B), believe it is too early to turn positive as valuations are unlikely to re-rate given the structural decline in profitability expected in coming yrs.