4Q08 gross margin shrunk by 10ppt qoq to 13% due to provisions of Rmb200m. In view of the deteriorating conditions for shipping industry, Yangzijiang increased its provision for potential cost variation to 8% of contract prices, from 0.5% previously. The cost variation is to account forunexpected additional cost such as doubtful debt, price discount to shipowners and cost over-run for projects under construction. The provision may be reverted upon completion of the projects if the actual total cost incurred is less than budgeted cost.
Cancellations/delays underway. Despite the Chinese government’s efforts to stimulate the shiipbuilding sector, the challenges of cancellation / delay and default risk amidst depressed freight rates and credit crunch will cap share price performance. Yangzijiang now expects to stretch its orderbook delivery over a longer period of 4.0 years, vs 3.5 years previously, as requests for order rescheduling are flowing in.
Maintain Fully Valued; TP reduced to S$0.32. We trim our estimates by 5% and 10% for FY09 and FY10 respectively, as we now expect order cancellation / delay of 25% vs 15% previously, as well as raise the provision levels in FY09-FY10. Our TP is reduced to S$0.32 based on 3x revised FY09 earnings. Although we like YZJ’s proven execution track record, we see downside risk to current share price in anticipation of negative newsflow hitting the industry. Maintain fully valued.
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