YANGZIJIANG SHIPBUILDING - Addressing investors’ concerns (DMG)

BUY

Price S$1.235

Previous S$1.98

Target S$1.98

Guiding for >30% net profit growth in 1H11; maintain BUY. Following sharp decline in share price recently, Yangzijiang (YZJ) issued a statement this morning clarifying that: (1) it has no plans for convertible bonds in the pipeline; (2) existing European customers are long-term customers with strong financial standing and payment track record; (3) YZJ reported timely delivery of vessels in 1H11 and is confident of delivering at least 30% earnings growth in 1H11 (to be announced on 11 Aug 2011); (4) Management may use share buyback to protect the interest of minority shareholders. Assuming 30% net profit growth in 1H11, YZJ should report at least RMB848m net profit (+6% YoY) in 2Q11 and 1H11 earnings should account for at least 54% of our forecast. We maintain BUY rating with an unchanged TP of S$1.98 based on 12x FY11F P/E. Stock is now valued at 7.5x FY11F P/E and offers 3.6% net dividend yield.

Poor outlook for bulk but winning market share in containership segment. While the order outlook for bulk carriers has turned negative given persistent concern on oversupply and weak showing of the Baltic Dry Index, order flow has been supported by the containership segment. YZJ is making headways in the big containership market with a firm order for seven 10,000 TEU containerships from Seaspan (plus options for 18 units of identical vessels) and Letter of Intent (LOI) for eight 10,000 TEU containerships from Peter Döhle. We believe existing orderbook of ~US$7b is sufficient to keep the yard busy for the next three years.

No plans for convertible bond in the pipeline; may use share buyback for support. There has been news that YZJ is looking at potential issuance of convertible bond (CB) but management highlighted that YZJ has no plans for CB in the pipeline. Balance sheet remains strong: as of 31 Mar 2011, YZJ has RMB15b in cash and financial instruments and RMB10.9b debt and amount due to customers for construction contracts. Net amount of RMB4.1b is equivalent to 17% of its market cap. With its strong cash position, management is looking at the possibility of using its share buyback mandate to support its share price.