Yangzijiang: Excellent execution priced

Shipbuilding industry is not expected to turnaround soon. Unlike consumer and manufacturing industries, where recovery could be expected by 2H09, the new orders for newbuilds are not expected to flow in materially till 2011, in view of the huge order backlog and bleak shipping outlook. YTD, there were only two orders of handymax vessels placed. In fact, there could wellbe more cancellation of contracts, which has virtually gained momentum in April. We believe shipbuilders’ earnings are likely to peak this year. The cancellations and deferments as well as price cut for existing orders would be a drag on shipbuilders’ revenue stream and profitability in 2010. We have built in 25% cancellations / deferments of Yangzijiang’s current order book of US$6.7bn and assumed new order wins of US$50m a year in 2009-2010.

Trading at unjustifiable premium over Korean peers. Yangzijiang’s share price soared c.80% after it posted record 1Q results. It is now trading at a notable premium of >20% over the Korean shipbuilders. This appears overdone to us given Korean yards’ larger market capitalization and stronger execution. This should suggest limited upside to share price in the near term. In addition, the anticipated correction of BDI in coming weeks should impose additional downward pressure on Yangzijiang’s share price as well, in view of its high correlation with BDI (0.68).

Downgrade to FULLY VALUED. We advise investors to take profit. We are leaving our earning forecasts intact. However, our TP is raised to S$0.68, on a higher multiple of 6.5x 09PE vs 5x previously, which is in line with the average valuation for Korea and HK-listed peers. This translates to 2.0x P/Bv, in line with the historical average P/Bv for Korea shipbuilders.

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