Yangzijiang - Margins holding up well

Yangzijiang reported a stronger than anticipated set of 1Q09 results. Net profits of Rmb483m were up 30% yoy and 47% of our full-year estimate thanks to stronger than expected margins. We are upgrading our FY09 net profit estimate by 39% to reflect the higher than anticipated results. Yangzijiang delivered 6 vessels in 1Q09 (8 so far this year) and is on schedule to deliver all 40 vessel scheduled for delivery in 2009. The new yard is running at 50% capacity and is on track to reach 90% by 2010.

Yangzijiang’s gross margins held up better than expected. The margins came in at 20% vs. our full year estimate of 13% thanks to the recognition of higher value vessels (company is making close to 40% margins on those) andthe lower than anticipated steel prices. To reflect this difference, we have upgraded our full-year 2009 gross margin estimate to 16%. We still expect the company to be impacted by the 8% provisions on potential cost variations, especially once it delivers these higher value vessels.

Yangzijiang has not seen a single of its 149 vessel order book (US$6.7 billion) cancelled. The company is working hard to avoid any cancellations by helping customers find funding, providing delivery delays or order modifications and even providing rebates. As a result our 35% order cancellation is too aggressive and we reduce it to 20%. At the same time we are increasing our working capital requirements to reflect the delays and rebates offered.

To reflect the better than anticipated margins and lower order cancellations, we increased our FY09 net profit estimate by 39% and our FY10 estimate by 106%. This leads us to upgrade our 6x PE target price from S$0.36/share to S$0.50/share. With 11% upside to our new TP, we are upgrading our rec from a SELL to an O-PF. We expect Yangzijiang to outperform the other shipbuilders although the news surrounding the sector will remain negative.

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