Yangzijiang Shipbuilding (KimEng)

Yangzijiang Shipbuilding (YZJ SP) – Secured shipbuilding contracts with Seaspan Corp
Previous day closing price: $1.53
Recommendation – BUY (maintained)
Target price – $2.15 (maintained)

Yangzijiang (YZJ) announced yesterday that it has secured shipbuilding contracts worth US$0.7b with Seaspan Corporation to build seven units of 10,000 TEU containerships. We understand that the agreement comes with options for another 18 identical units to be built. If all 18 options are exercised, the total estimated value of the 25 units of 10,000 TEU containerships is expected to be US$2.5b. More significantly, this will bring YZJ’s confirmed order wins to US$1.2b, meeting 60% of our 2011 forecast.

According to management, the seven new vessels are scheduled for delivery in 2014 and 2015. This newly developed container vessel type is fuel-efficient in nature and its proprietary designs meet the current demand for larger capacity vessels to have lower emission and be eco-friendly. With this contract win, YZJ became the first Chinese yard to win an order for 10,000 TEU containerships as it challenges South Korea’s dominance in building more profitable types of ships. In our view, this also affirms YZJ’s technological capability as it moves up the learning curve to design and build larger and higher-end vessels.

While the total contract value, including the options, is slightly higher than the market’s expectation of US$2.2b (when it signed a letter of intent in March with Seaspan for 22 containerships), the pricing of US$0.1b per vessel is largely in line with our estimate. After a much anticipated wait, we believe the actual confirmation of such a large order from Seaspan will be hugely positive for YZJ’s share price. Maintain BUY and target price of $2.15.