Immaterial impact on YZJ offshore business.

Target price S$1.58


PPLH Acquisition Is Immaterial; Remains A Defensive Play Amid The Shipbuilding Downcycle

What’s New
• Sembcorp Marine (SMM SP/BUY/Target: S$5.80) has lost its legal tussle with PPL Holdings (PPLH) for a 15% equity stake in PPL Shipyard. SMM has stated it is obtaining legal advice with a view of appealing the decision.

• This legal battle erupted in May 10, after Baker agreed to sell PPLH to a consortium led by Yangzijiang Shipbuilding (YZJ SP) for US$155m. In response, SMM, which owns 85% of PPL Shipyard, made a counteroffer of S$59.4m. After SMM’s offer was rejected, it contested the sale in court, claiming first right of refusal over the remaining 15% stake. The timeline and shareholding structure of the acquisition is shown below.

Stock Impact

• Immaterial impact on YZJ’s offshore business. Even if YZJ is able to finalise the acquisition, the impact could be very limited to YZJ, given: a) we believe YZJ has been focusing more on the newly-started offshore yard in Taicang rather than PPLH affairs, b) it is still unclear that how long PPLH’s management including Benety Chang and Anthony Sabastian Aurol will stay in their current positions and how much they can contribute to improve YZJ’s offshore fabrication capability.

• Taicang yard is still in a very early stage. The offshore yard is in Taicang, Jiangsu and the yard is about 156 ha with 1,500m coastline and YZJ just received the licence of the land. Its partner Qatar Investment Corporation is looking to place an order of two jack-up rigs (US$150m- 200m each) and negotiation is ongoing. Even if YZJ clinches the orders, it is too early to say if the offshore fabrication is positive for YZJ given poor profitability of offshore products for two sophisticated offshore yards, COSCO Corporate and CIMC Raffles.

• Sluggish newbuild market continues. According to Clarksons, 5M12 newbuild orders were only 16.5m dwt (5M11: 40.6m dwt), of which China’s market share further declined to 38% while Korea’s rose to 44%. The newbuild prices also continued to soften by 10-15% compared with the same period in 2011, due to lack of demand and decline in ship plate and marine engine prices. Pricing has been cost-driven since 2010.

• Seaspan’s options of 18x 10,000 teu containerships are likely to be exercised. Seaspan is rumoured to have obtained loans from China Development Bank to finance options of 18x 10,000 teu containerships signed with YZJ in 2011. However, we believe the price per vessel should have been renegotiated and would be about 10% below that of previous orders, which was US$98m. In such a case, gross margins of the 18 containerships remain at mid-single-digit level.

Valuation/Recommendation
• Maintain BUY on YZJ and target price of S$1.58, based on 10x 2012F PE. As a shipyard with adequate cash, we put YZJ as our top pick with Chinese shipyards sector amid an industry downturn.