DBS Vickers: Yangzijiang - 29 Mar 2008

Raised stake in new yard

Story: Yangzijiang (YZJ) announced that it has entered into a conditional S&P agreement to acquire the remaining 24.81% stake in its new yard, raising its stake to 100%. Of the total consideration of RMB2626.9m (c. S$517.7m), 42% would be funded through the IPO proceeds obtained in April 2007 and the remaining 58% via the issuance of new shares to minority shareholders. These new shares were priced at c. S$0.85 and will be locked for 3 years.

Point: In our view, the acquisition cost is fairly priced at a discount of 33.84% to its DCF-based valuation by independent valuer, Sallmanns. YZJ’s new yard is valued at RMB16bn (by Sallmanns), which works out to 16x on our FY09 earnings for the new yard. The discounted purchase price pegs the acquisition at 10x FY09earnings, close to YZJ’s current valuation at 10x (FY09) and at a marginal discount to China shipyards which are currently trading at 11.8x on FY09 earnings. As such, the acquisition is only marginally accretive to YZJ.

Nevertheless, we are optimistic that the acquisition would be earnings accretive in the long run if the group is able to extract efficiency gains to boost the growth potential of the new yard. In addition, the timely acquisition also allows YZJ to take full advantage of the tax holiday enjoyed by the new yard from 2008- 2009.

Relevance: We have raised our FY08 and FY09 net earnings estimates by about 13%-16% to account for the additional 24.81% stake in the new yard. However, after imputing the 10.68% increase in share capital, the impact on our diluted FY09 EPS is marginal. As such, we are keeping our TP at S$1.45, still pegged to 16x FY09 diluted EPS. Although share price has been beaten down by more than 20% since our downgrade in Feb08, we believe the potential negative newsflow on steel price increase in 2Q08 is likely to cap share price performance in the near term. Given that YZJ’s earnings are the most exposed to steel and currency risks among the SGX-listed yards, we maintain our HOLD call on the counter.