New orders for four 10,000 TEU containerships from Seaspan. Yangzijiang announced that  Seaspan  has  converted  options  for  four  10,000  TEU  containerships  into  firm newbuilding  contracts  valued  at  USD0.36bn.  These  orders  are  on  top  of  the  seven  units firmed  up  in  June  2011.  Yangzijiang  will  deliver  the  11  containerships  to  Seaspan  from 2014 to 2015. The implied price of USD900m per ship is 10% lower than the first unit price for the first seven containerships. The containerships will be built at Xinfu shipyard.

Pace of new orders below order book burn rate. We estimate that the latest orders from Seaspan  lifted Yangzijiang's  unbilled  order  book  to  USD4.1bn.  In  2012,  Yangzijiang  only secured USD0.5bn new orders for eight ships and one jackup rig vs. an annual order book burn rate of USD2.5bn. We have assumed an annual order win of USD2.5bn over FY13-14F  and  there  is  downside  risk  to  our forecast  if  the  14  outstanding  options  awarded  to Seaspan are not exercised.

Margins  for  new  orders  are significantly  lower  than  existing  margins. While we hold the view that Yangzijiang is one of the most efficient shipyard in China, pricing power is in the  hand  of  ship  buyers  today  and  the  industry-wide  downturn  is  forcing  yards  to  take  in orders at single digit margins. Historically, Yangzijiang managed to achieve GP margins of 22-28%  due  to  pre-crisis  shipbuilding  orders  at  inflated  prices.  Most  of  the  high-priced orders  will  be  completed  this  year  and  we  think  margins  will  see  a  steeper  decline  from 2H2013 onwards. Learning curve to build offshore product will also lead to lower margins.

No  change  to  FY13-14F  EPS  estimates. We forecast net profit to fall 20% in FY13F. In our model, we assumed USD2.57bn shipbuilding revenue and 17% GP margin in FY13F. The stock is now trading at 7x FY13F P/E and 9.8x FY14F P/E.

Source: OSK