Yangzijiang Shipbuilding (DMG)

Yangzijiang Shipbuilding: Finally signed massive order from Seaspan (BUY, S$1.52, TP
S$1.98)

Massive orders from Seaspan confirmed; maintain BUY. Yangzijiang (YZJ) announced that they have entered into a shipbuilding contract with Seaspan to build seven 10,000TEU containership for US$0.7b (RMB4.5b) with options for 18 identical units. The seven units will be delivered in 2014 and 2015. The latest order win lifted its YTD order win to around US$1.2b (RMB7.85b) and gross order book to US$6.1b (RMB40b), implying 2.5x FY11F revenue. No changes to our EPS estimates. Stock is now trading at 9.3x FY11 P/E. We continue to like YZJ given its high order visibility and superior execution but believe our TP (based on 15x FY11 P/E) is too aggressive given weaker-than-expected order outlook from the bulk segment. Hence, we lower our TP from S$2.47 to S$1.98 based on lower target P/E of 12x. Maintain BUY.

Moving up the value chain to build bigger vessels. The order for the newly developed container vessel type is a major milestone for YZJ and is their biggest ship product to-date that will put them in direct rivalry with the Korean shipyards in building huge containerships. We believe the gross profit margin for the new batch of containership is much lower than its existing margins (>20%) and should hover around 8-9%. The order is not expected to have significant impact on our FY11-12F EPS estimates.

Valuation: Maintain BUY with a lower TP of S$1.98 based on 12x FY11 P/E. We lower our TP for YZJ given order outlook for the bulk carrier market has turned weaker due to falling charter rates and believe orders for new bulk carriers will be few and far in between. Still, we remain positive on the stock: (1) high order book will keep the yard busy for the next couple of years; (2) we expect margins for FY11 and FY12 to stay high due to execution of pre-crisis order book.