Yangzijiang Research Report

by HSBC Global Research (27 June)

MODERATING container ship outlook, but secured revenue growth: Global container ship delivery until 2010 should exceed the average 10 per cent y-o-y global container trade growth.

Ship owners could withhold order placement on any softening of time charter and container ship freight rates, unless demand growth accelerates over the next two years. Yangzijiang's full backlog and new capacity should, however, secure impressive revenue growth (70-85 per cent over 2008-09 estimated).

Operating margins under pressure due to limited pricing power: We expect operating margins to flatten or decline in 2008 and 2009. Limited pricing power from ships will be delivered in 2008 and 2009, more bulk carrier deliveries, better operating leverage from increased volumes at the new shipyard, and efficiency gains are unlikely to offset rising steel costs (up 20-25 per cent y-o-y), in our opinion.

Panamax container ship (80 per cent of revenues and 50 per cent of order book) prices increased at a slower pace than bulk carriers (20 per cent of revenue). We expect 2008 operating margin to be essentially flat y-o-y and down 50 basis points in 2009.

Our proprietary market assessed cost of capital (MACC) valuation implies the stock is trading at a discount to sector average. Our TP is based on long-term adjusted cash returns on invested capital of 11.5 per cent, MACC of 16.6 per cent, PE of 7.8 times, and enterprise value/Ebitda of 4.9 times our 2009 EPS forecast.

Given the moderating container ship market, we think Yangzijiang should trade at a discount to its peers.

-Research Report by HSBC Global Research (27 June)