Yangzijiang Research Report

by DBS GROUP (29 April)

YANGZIJIANG'S Q1 2008 results were within our expectation. Q1 2008 net profit doubled to 371.3 million yuan, with revenue surging 86 per cent y-o-y to 1,694.1 million yuan.

Gross margin held up at 21.0 per cent (up 0.7 percentage point y-o-y and 1.1 percentage points higher q-o-q) as the bulk of its steel cost was locked in last year. The 72 million yuan unrealised fair value gains on forward currency contracts also boosted earnings.

Operationally, the firm managed to squeeze in four additional vessel deliveries in 2009 on the back of improved efficiency and resultant higher productivity at its new yard.In addition, these vessels were priced at over 30 per cent premium because of the shorter lead-time.

Hence, we have raised FY2008 and FY2009 revenue estimates by 10.6 per cent and 8.7 per cent, respectively. In anticipation of fatter margins for these vessels, net profit estimates were raised by 13.9 per cent and 13.0 per cent, respectively.

We remain concerned over Yangzijiang's execution of its US$6.8 billion record-high order backlog, which stretches over four years. With 30 per cent of its order book exposed to forex fluctuations and the risk of high steel prices affecting its earnings from H2 2009 onwards, the risk to forecasts is high beyond 2009.

The increase in our earnings estimates are offset by a lower target PE multiple of 14x estimated FY2009 PE (instead of 16x), in line with the industry de-rating to account for higher risk premium.

-Research Report by DBS GROUP (29 April)