Yangzijiang Shipbuilding

AMFRASER SECURITIES on 5 July 2012

CONCLUDING a process that began in 2011, YZJ has entered into an agreement with the local government to relocate its old yard, currently situated on prime waterfront land, for a compensation of 720 million yuan (S$143.5 million).

In the trough of a shipbuilding slump, with yards closing amidst a sea of red ink, YZJ is in the unique position of being able to reduce its capacity with the equivalent of a golden parachute. We see the following benefits: reduced operational costs, positive impact on 2012-13F income and balance sheet and focus operations on larger vessels as the old yard built the smaller vessels.

Associated costs include compensating workers for relocation and/or retrenchment, but we expect the bulk of the 720 million yuan to flow through to the company. In addition, we do not see YZJ actually relocating to a new yard.

Our view is that the capacity at the new Xinfu yard is sufficient to absorb current and future orders, thus this is a definite cost reduction.

The announcement also hinted at possible co-development of the land. We think that the market may not take this well - the reaction to YZJ's entry into financing has so far been negative, and while individual pockets of property development do well in China, the impression is generally that of over-exuberance.

However, bottom line is that this is an unambiguously strong company. Our PATMI forecast for 2012F is 4.2 billion yuan, against consensus estimates of 3.7 billion yuan. Our positive outlook is based on a few key points: containership revenue recognition is far faster than bulk carriers, and YZJ is building more containerships this year; at least half the containerships are high-margin orders, and management has confirmed that their construction will be spread over 2012-14F - underpinning the margins - and the internal rewards system for cost-cutting is a strong and effective incentive to maintain and improve YZJ's efficiency. Should Q2/Q3 results outperform, we see possible consensus upgrades.

Based on a slightly positive profit outlook, we expect YZJ to at least maintain its 5.5 cents dividend paid last year, but our money is on a slight increase to six cents, equivalent to a very attractive 5.8 per cent yield.

The entire shipbuilding industry is trading at depressed valuations, and in this climate we advocate buying into the strongest. The patient investor is being paid to wait with an inflation-beating dividend yield of 5.8 per cent. The rerating will come eventually, and the risk-reward ratio is extremely appealing now. We continue to value YZJ at 8x 2012F EPS for a FV of $1.680. Maintain "buy".