Yangzijiang Shipbuilding (KimEng)

Event

We are downgrading Yangzijiang Shipbuilding (YZJ) to a HOLD rating on worries that the outlook for shipping may deteriorate further amid global economic uncertainty. On top of that, investors continued to take issue with the group’s growing investment in its non-core financing business. Despite its undemanding valuation, we do not see any potential stock catalysts in the near-tem given the lingering headwinds and fierce competition among the regional shipyards.

Our View Operationally, YZJ is sitting on comfortable order book of US$5.5b, which will keep its yard busy till 2013. With the remaining two units of 10,000 TEU containerships being made effective, the contract for all seven vessels have been converted to firm orders after the collection of initial deposit. Recall that Seaspan still has an outstanding option for 18 units of similar vessels, which is likely to confirm within the next 12 months.

Granted, YZJ is recognised for its execution track record and leadership in cost control. But we are increasingly negative on the shipbuilding outlook in general with heightened risks of prolonged downcycle especially if global economy goes into a deep recession. Even while newbuild contract dry up, the group may also have to offer longer vessel delivery schedule to existing buyers to avoid order cancelation.

YZJ recently acquired a 31.5% equity stake in Wuxi Runyuan Technology Microfinance Co. Ltd for a total cost of RMB94.5m. The latter is a company licensed to provide microcredit to small and medium technology enterprises. Despite market scepticism, we think this is in fact, a deliberate move by the management to diversify more into its financing business given the less-than-favourable shipbuilding outlook.

Action & Recommendation

Following a sharp de-rating of Chinese shipbuilders, we are cutting our P/E multiple for the group’s shipyard business from 12x to 8x, pegged in line with its sector peers. Accordingly, our target price has been lowered to $1.15, still based on SOTP valuation. Downgrade to HOLD.