CLSA issued 'Outperform' call on Yangzijiang last Fri.

WITH THE RISE in global valuations of shipbuilding stocks, CLSA has raised Yangzijiang’s target price to 75 cents last Fri, up 50% from its April call.

Even though the target is a tad lower than last Friday’s close price of 77 cents, Yangzijiang’s stock price notched up 2 cents to 79 cents on Mon after the broker issued its "Outperform" call.

It last closed at 77.5 cents.

CLSA’s 75-cent target for the leading shipbuilder is based on 9X FY09 PE, and is at premium to its closest peer, Cosco Corp (valued at 8X FY09 PE).

The broker justifies the valuation premium by citing Yangzijiang’s “efficiency and track record.

In its 2008 annual report, Yangzijiang had disclosed a range of breakthroughs in its production cycles for containerships and bulk carriers – ranging from 6.7% to 30.0%.

On closer look, one realizes that the edge that Yangzijiang’s yards have over Cosco’s may be traced to the former’s long shipbuilding track record, which exceeds half a century.

In contrast, Cosco’s maiden revenue contribution from newbuilding came about only 2 years ago in 2007.

Secondly, Yangzijiang is a specialist that focuses on building new containerships (58% 1Q09 revenue contribution) and dry bulk carriers (42%).

Cosco, on the other hand, has a finger in many pies, ranging from ship repair, conversion, newbuilding, offshore engineering to even ship agency.

Furthermore, Yangzijiang opened in Sep 2008 an education and training center that further enhances its yard productivity.  Already, as many as 8,000 workers have been trained last year.

CLSA call is the most aggressive among brokers.

One fruit of its productivity improvement efforts is the delivery of vessels that are significantly larger than before.

At its new yard, it delivered last year 4,250-TEU containerships and 92,500-dwt bulk carriers, which are more than double the size of previous vessels.

Other reasons that the broker is positive on Yangzijiang include vessel delivery on-schedule and a strong cash position.

According to the CLSA report, Yangzijiang has delivered 16 vessels to-date and is on track with its pre-determined schedule to deliver another 24 vessels by the end of the year.

The company’s strong order book (US$6.4 billion as at 18 May) will keep its revenue stream strong until 2012.

1Q09 revenues were Rmb 2.1 billion, up 23% yoy while net profit was Rmb 483.3 million, up 16%.

1Q09 operating cash flow was Rmb 530.6 million while cash reserves were Rmb 3.7 billion as at 31 Mar 2009.

Related story:  YANGZIJIANG: Why no cancellation of dry bulk orders?

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