Yangzijiang Shipbuilding (KimEng)

Event:
We initiate coverage on Yangzijiang Shipbuilding (YZJ) with a BUY rating and target price of $2.15, pegged at 13x FY12F PER. From its humble beginnings, YZJ has morphed into one of the world’s 20 largest shipbuilders in a relatively short span of time. Its rise as a formidable contender rests on its aggressive acquisitions and strong production capabilities to meet the market’s ever-changing demands.

Our View:
Despite keen competition from domestic and international shipyards, YZJ achieved an impressive 200% YoY jump in new shipbuilding orders last year to US$1.38b. In contrast, total orders secured by China as a country were up by 189% YoY. To stay ahead of the curve, YZJ is taking steps to augment its shipbuilding capacity, as well as build energy-saving vessels to capture better margins.

Management plans to invest RMB4b over the next three years to convert the 60%-owned Xinfu yard into one that has an annual capacity of up to 3m DWT. The group has also paid RMB108m for a plot of land near its New Yangzi yard, which will increase the yard’s capacity by another 1m DWT next year. These investments will put YZJ on track to double its production capacity in five years.

YZJ has already signed a Letter of Intent with Seaspan Corp to build 22 units of 10,000 TEU containerships worth up to US$2.2b. But it has not made a formal announcement in view of the ongoing negotiations as details on financing have yet to be finalised, according to management.

Action & Recommendation:
We peg our target price at $2.15, based on 13x FY12F PER. This is in line with the regional shipyards and implies about 40% upside from the current price. Near-term catalysts include robust order wins and a successful foray into the offshore marine sector. Initiate with BUY.