Yangzijiang Shipbuilding: Cut to Neutral; switch to Offshore & Marine names (DMG)

(Neutral, S$0.965, TP S$1.00)

Focus on micro financing and investments could weigh down on stock. In light of the rising concerns over informal lending and micro financing in China, Yangzijiang (YZJ) has issued a statement reassuring investors that the company is not affected and does not foresee negative impact on its results from its micro financing investments. While management continues to seek higher returns from investments in financial assets, market is getting cautious following a series of negative perception on informal lending in China. We think the concerns could continue to weigh down on its share price. We downgrade the stock to Neutral with a revised TP of S$1.00 (from S$1.62 previously). We change our valuation methodology from P/E to SOTP as it is a better reflection of the investment positions held by YZJ. We recommend a switch to Singapore Offshore & Marine names given stronger outlook for new orders.

More clarifications but did little to take away the concerns. In the latest announcement, YZJ highlighted that: (1) The RMB247.5m investments in micro-financing companies (Jiangsu Runyuan and Wuxi Runyuan) accounted for less than 3% of its total NTA (as at 30 Jun 2011) and less than 2% of its market cap. (2) Micro financing loan tenures are short term (less than one year) and the loans are offered to rural enterprises, individuals and small/medium technology firms in Jiangsu province. (3) YZJ has made provisions for the investments against unforeseeable losses. The two micro financing companies are profitable at this stage. (4) Investments in held to maturity financial assets are secured against collateral with debt cover of at least 2x.

We expect earnings to peak in FY11F. YZJ is on target to deliver 65 vessels this year and management is confident of delivering at least 30% net profit growth for 9M11 (results out on 9 Nov 2011). We believe FY11F will be a record year for earnings but expect earnings to fall 9% and 7% in FY12-13F respectively.

Valuation: Cut TP to S$1.00. We value YZJ based on sum-of-the-parts (SOTP): (1) net cash, financial assets, and amount due to customers at 2Q11 balance sheet value; and (2) 8x core shipbuilding net income in FY12F.