YangZIJIang Shipbuilding by Merrill Lynch

Setting the stage for cyclical newbuilding rebound in 2H11
The record containership deliveries in 1H11 are likely to add pressure to falling freight rates, as per Shipping - Asia-Pacific, 01 February 2011. This is in line with our view for lackluster new orders in 1H11, resulting in a renewed order-to-fleet ratio downtrend. We expect this short-term phenomenon to set the stage for a cyclical newbuilding recovery in 2H11E, as ship owners gradually re-position for the 5ppt slower rise in capacity, vs demand, in 2013E. Buy Yangzijiang (YZJ), the direct stock on containership newbuilding upturn. We keep our S$2.49 PO for YZJ.
Expected game changer – Maiden (>8,000TEU) ship orders
We expect the medium-term catalyst to come in 2H11, when YZJ secures its maiden large-sized containerships (>8,000TEU) newbuild contracts. This gamechanging moment will likely come when the leading Korean yards exhaust delivery slots for 2013, and YZJ attracts ship owners with the delivery of competitively priced containerships for mid-2013, via its new yard that is expected
to be ready by end-2011.
The Street has room to close earnings forecast gap with us Our net profit estimates for FY11 and FY12 have narrowed by 3ppt to 12%, and 6ppt to 25% above consensus, respectively, since Yangzijiang Shipbuilding, 09 November 2010. We expect this upward earnings revision by the Street to stay in 1H11, due to the growing recognition of less severe margin compression on YZJ’s
order backlog, and the factoring in of revenue growth from new yard expansion.
Better able to mitigate impact of higher steel prices
We expect YZJ to absorb higher steel prices better than its peers. This is done via leveraging on its strong balance sheet to secure better price discounts, aboveindustry average margins, proven delivery track record that could bargain for certain cost escalation clauses, and productivity gains. Still, a vanilla 10ppt higher than- expected rise in steel prices could cut our FY12 earnings forecast by 10%.