YZJ

YZJ: HSBC is concerned about rapid growth in YZJ’s rapid growth in the financial business with investments in China’s shadow lending sector, venture capital etc. YZJ started investing in these areas due to headwinds in shipbuilding, but HSBC thinks high returns in this area have now made it part of the core business. Assets deployed in this area have grown by 1.65x in 2010-13, reaching Rmb14.3b or 80% of net assets. This materially changes YZJ’s risk profile as these businesses carry higher balance sheet and execution risk and divert management focus from shipbuilding. At the same time, the average price of a vessel in YZJ’s order backlog fell by 25% in 2013, which compares to a relatively milder 9% y/y fall in 2012. With such steep fall in the average price of the order backlog, HSBC expects shipbuilding margins to fall in coming quarters. A bright spot is that 1H14 orders were at US$1.4b, or 70% of annual target. HSBC maintains U/W on YZJ, but raises TP to $0.98 from $0.86, after adjusting for new orders, delivery and margin assumptions.