Yangzijiang Shipbuilding - Holding up well in a tough environment

Established shipbuilder in the PRC. Yangzijiang Shipbuilding (Holdings) Ltd (Yangzijiang) is an established shipbuilder in the PRC with operations dating back to the 1950s.The group operates two yards in Jiangsu province, one in Jiangyin city and the other in Jingjiang City. Yangzijiang has delivered more than 100 vessels including bulk carriers and containerships and is looking to expand its product range as well. In 2Q09, group revenue rose 41% YoY to RMB2.5bm while net profit rose 80% to RMB607.4m, aided by higher gross margins and other gains.

Large order book with no order cancellations so far. Yangzijiang has a strong order book of 139 vessels worth a total of US$6.1b as at 30 Jun 09. This comprises 66 containerships worth US$3.8b and 73 bulk carriers worth US$2.3b. More noteworthy is the fact that management said that the group has not received any order cancellations so far while peers such as Cosco Corp have been hit. We do not discount the possibility of order cancellations, but order delays are more likely, given the group's determination to preserve orders.

Gross margins have held up. Despite tougher business conditions, the group's gross margins have held up with the construction of higher margin vessels (24% in 2Q09 and 20% in 1Q09). This compares with 1% shipbuilding margin for Cosco in 2Q09, which was affected by longer-thanexpected delivery delays and higher-priced raw materials. However the shipbuilding industry is now out of the boom period and normalised margins are expected to fall in the long run.

Looking at new areas amid weak orders. The last time that Yangzijiang received new orders was in 2Q08, and management expects minimal new orders given low demand and customers' difficulties in securing financing. Hence, the group is proactively looking into new areas such as the vessel scrapping market which is relatively buoyant now. We view this possible development positively, given the resulting business model.

Initiate with BUY. We initiate coverage on Yangzijiang with a BUY rating with fair value estimate of S$1.20 based on 11x blended FY09/10F earnings, in line with peers. Project execution has been good with relatively strong margins compared to peers. Its strong order book of US$6.1b which extends to 2012 also lends earnings visibility though we note that new order flow may be minimal going forward. We have not factored in possible contributions from the vessel scrapping business.

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