Disposed 31.5% stake in Wuxi Runyuan for RMB103.95m. Yangzijiang (YZJ) announced that its wholly owned subsidiary, Jiangsu Yangzijiang Shipbuilding, has entered into an agreement to dispose the entire 31.5% stake in Wuxi Runyuan Technology Microfinance Co (WRTMCO) for RMB103.95m (S$20.7m). The sale price is a 10% premium to its share of the total paid up capital of Wuxi Runyuan. The sale is consistent with management''s guidance in its 1Q12 results briefing, which is to divest Wuxi Runyuan and allocate the resources into its 100% owned microfinance firm, Jiangsu Runyuan Rural Microfinance. We are neutral on the sale as the capital will stay invested in the microfinancing space.

Customers struggling; first default for YZJ? Last week, the press reported that YZJ has terminated a shipbuilding contract signed with Freeseas for two 33,000 DWT bulk carriers as Freeseas failed to make the final payment in Feb and April 2012. The orders were placed in Aug 2010. The ships are scheduled to be delivered in 2Q12 and 3Q12. We understand that one of the vessels has been completed and another is close to completion. Management will be looking to sell the vessels to free up yard space and cover the costs. We note that the price for a 35,000 DWT bulk carrier has fallen 15% from ~US$26.5m in 2010 to US$22.5m today. While the order value may be small relative to the YZJ''s overall order book, we believe the news will be taken negatively by the market.

Valuation: Maintain Neutral with a TP of S$1.04. The stock is trading at 5.6x FY12F P/E and 6.8x FY13F P/E. While valuations appear inexpensive, we see limited near-term upside as we believe sector headwinds will continue to weigh down on the share price. Our sum-of-the-parts (SOTP) TP for YZJ is based on 7x shipbuilding earnings in FY12F and adjust for net cash, amount due to customers and financial assets.

Source: OSK