Yangzijiang Shipbuilding

OCBC on 21 June 2012

1st default comes from Greece
As the debt crisis escalates in Greece, it is perhaps no surprise that the first ship order cancellation that Yangzijiang Shipbuilding (YZJ) just experienced in its history is from a Greek customer. According to Fairplay , YZJ might sell two 33,800 DWT bulkers that were ordered by FreeSeas after it defaulted on instalments totaling about US$7.4m. The first vessel has been completed and we understand that the second is near 70-80% completion.

No worries about financial impact…
The vessels were ordered at US$24.5m each at Sep 2010 from YZJ, and according to VesselValues, a newbuild Handysize bulker can sell at US$22.2m in today’s market. This is also consistent with a 10-15% drop in newbuild bulker prices according to Worldyards. Assuming that YZJ confiscated the 20% downpayment by Freeseas, this would still mean a profit of about US$2.6m for the yard, and we would not worry about the financial impact from this order cancellation.

… but does this portend of things to come?
The bigger worry, however, is whether this default is a sign of more to come. Recall that Chinese Premier Wen Jiabao had announced in Oct 2010 that state-run banks were encouraged to pledge US$5b of loans to Greek vessel owners, but according to XRTC Business Consultants (adviser to China Development Bank Corp), only US$1b of loans have been distributed since then. Fortunately for YZJ, the group’s order book exposure to Greece seems small.

Environment remains very challenging
YZJ’s share price has dropped by about 11% since we downgraded the stock on 27 Apr 2012, compared to the STI’s 4.5% fall. Meanwhile, according to Clarksons in May, almost 90% of China’s shipyards received no orders this year. We lower our peg to 6.5x (prev. 7.5x) with the increasingly dimmer outlook for the shipbuilding industry, and based on blended FY12/13F core earnings, our fair value estimate slips from S$1.23 to S$1.08. Maintain HOLD.