Yangzijiang Shipbuilding - Penetrating the large-sized containership market (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$1.39

Fair Value: S$2.10

Enters into LOI and Cooperation Framework Agreement. Yangzijiang Shipbuilding (YZJ) announced yesterday that it has entered into a letter of intent (LOI) with Peter Dohle Schiffahrts-KG (Peter Dohle) to build eight 10,000 TEU container vessels. YZJ's subsidiary, Jiangsu New Yangzji Shipbuilding (JNYS), has also entered into a Cooperation Framework Agreement with China Development Bank (CDB) and Peter Dohle. Under the agreement, JNYS and Peter Dohle will enhance the cooperation of shipping purchase projects. In addition, Peter Dohle has secured about US$1b in financing that will be mainly used to pay for the containerships over the next five years, subject to CDB's loan requirements.

Second 10,000 TEU container order in two weeks. This latest development comes closely on the heels of the longawaited Seaspan order to build similar 10,000 TEU containerships. YZJ's subsidiaries had entered into shipbuilding contracts worth US$0.7b with Seaspan in early Jun to build seven units of 10,000 TEU containerships with options for another 18 units. If all options are exercised, the total value of the 25 units is estimated to be around US$2.5b, translating to about US$100m per ship. Scheduled for delivery in 2014-2015, this newly-developed vessel type is significant to YZJ as the group is banking on the demand for such large vessels and foresees it being an important product for the group in the future. Being fuel-efficient, YZJ believes its proprietary designs meet the current demand for larger capacity vessels that are eco-friendly and have lower emissions.

But not all segments look positive. Despite encouraging news from the large container vessels' front, the outlook for the newbuild bulk carrier segment is relatively weak, and vessel values are pressurized partly due to the high volume of deliveries expected in 2011. According to the China Association of National Shipbuilding Industry, demand in the international shipbuilding market is now stronger for large-sized containerships, LNG carriers, and offshore work. Though YZJ has successfully received orders for its 10,000 TEU containerships and should benefit from increased demand from such products, the group may still be affected by weaker sentiment in the bulk carrier segment. As such, we lower our peg for YZJ from 15x to 13x FY11F core earnings and our fair value estimate drops to S$2.10 correspondingly (prev. S$2.42). Meanwhile, we like the company for its consistently good execution ability and substantial order book (US$5.38b as of 1Q11). Maintain BUY.