BUY
Price S$1.41
Previous S$1.98
Target S$1.98
Potential US$1b contract for containerships
Signed L etter of Intent (LOI) for eight 10,000 TEU containerships. Following hot on the heels of the order for seven containerships from Seaspan, Yangzijiang (YZJ) has signed a Letter of Intent for another eight 10,000 TEU containerships valued at around US$1b. In addition to the LOI, YZJ has signed a cooperation framework agreement (CFA) with China Development Bank (CDB) and Peter Döhle to enhance the cooperation of shipping purchase projects and to realise cooperation amounting to US$1b in the future five years. No changes to our FY11-12F EPS and TP of S$1.98 based on 12x FY11 P/E. We are neutral on the shipbuilding order outlook but are positive on the stock given high order visibility, superior execution and ability to move up the value chain.
Another big boost to orderbook assuming LOI converted into firm order. Assuming the LOI is made effective, we estimate that YTD order wins will hit US$2.2b and gross order book will climb to around US$7b. We believe gross profit margins for the containerships, a new product by YZJ, should be around 8-9%. No changes to our earnings estimates as we have factored in US$2.5b new orders in FY11F for execution in FY12-13F.
Valuation: TP of S$1.98 based on 12x FY11 P/E. Our TP implies 40% upside from its last closing price. We expect +5% net profit CAGR over FY10-12F the growth in revenue (+18% revenue CAGR) will be offset by lower gross margins for new projects. Our earnings model assumed FY11-12F gross margins of 20% and 16% respectively.
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