By Low Pei Han
Wed, 24 Feb 2010, 08:37:02 SGT

Yangzijiang Shipbuilding (YZJ) recently reported a 44% rise in FY09 revenue to RMB10.6b and a 45% increase in net profit to RMB2.29b, with both metrics exceeding our full-year estimates by about 8%. 4Q09 revenue, core net profit and PATMI also improved on a sequential basis, which makes this set of results laudable given the challenging environment. YZJ has been delivering consistently better performance year after year with relatively few negative surprises compared to peers in the same industry, illustrating its good execution ability and management control. The group also continued to secure new shipbuilding contracts to build four 92,500 DWT bulkers, providing support to its order book of US$5.6b (127 vessels) as at 31 Dec 09. YZJ also does not expect any cancellation for its existing contracts. We have raised our fair value estimate to S$1.32 (prev S$1.28) after tweaking our estimates. Maintain BUY.

Good set of FY09 results. Yangzijiang Shipbuilding (YZJ) reported a 44% rise in FY09 revenue to RMB10.6b and a 45% increase in net profit to RMB2.29b, with both metrics exceeding our full-year estimates by about 8%. 4Q09 revenue, core net profit and PATMI also improved on a sequential basis. Gross profit margin, though slightly lower at 19.7% in 4Q09 compared to 20.2% in 3Q09, is close to its two-year average of 19.8%. The group delivered 40 vessels in FY09 compared to 27 vessels in FY08, and plans to increase the number to 48 ships this year.

Secured new shipbuilding contracts. The group continued to secure new shipbuilding contracts to build four 92,500 DWT bulkers (value undisclosed), providing support to its order book of US$5.6b for 127 vessels (73 are for bulk carriers and the rest containerships) as at 31 Dec 09. YZJ also does not expect any cancellation for its existing contracts. We understand that demand is mainly from small- and medium-sized shipping companies that operate in China’s coastal region instead of large shippers such as NOL and Cosco.

Dual listing for range of new initiatives. Gross margin for the shipbuilding business is likely to trend lower in the long run, but the group is trying to use volume to support incremental profits. More importantly, Yangzijiang is developing its ship breaking business and is also looking for a partner to go into the offshore marine business. The group is also upgrading its vessels to increase fuel efficiency, amongst other features, as management expects demand for greener vessels to increase in 2011 and beyond. The first two initiatives are especially capital intensive, and we understand that YZJ may dual-list in Hong Kong or Taiwan to raise funds for which is estimated around US$200m. Management comments, however, that current valuations seem a little low, so they are not rushing into it.

Maintain BUY. The group has declared a final dividend of 3.5 S cents per share compared to last year’s 2.8 S cents. This latest set of results is laudable amidst a challenging environment. YZJ has been delivering consistently better performance year after year with relatively few negative surprises compared to peers in the same industry, illustrating its good execution ability and management control. We have raised our fair value estimate to S$1.32 (prev S$1.28) after tweaking our estimates. Maintain BUY.