YANGZIJIANG SHIPBUILDING stock was heavily traded yesterday with 20.4 million shares changing hands on a rising swell of reports highlighting the very likelihood that the shipbuilder has signed a letter of intent with Seaspan Corp. to build 22 units of 10,000 TEU containerships worth over US$2bn (including options).
The stock closed down 4 cents to $1.71.
Citing shipbuilding website Asiasis.com, Deutsche Bank yesterday (Mar 17) said that the website indicated that an executive from YZJ has confirmed the deal and the signing of the official contract should take place in late April or early May 2011.
According to the website article, the newbuilding prices could either be US$95m or US$98m per vessel.
Deutsche analyst Kevin Chong wrote: “YZJ has no comments on this potential contract and highlighted to us that they will only announce contracts that are confirmed.”
He added: “YZJ remains one of the most attractive shipbuilding stocks in China in our view and is one with a good long-term execution track record. Maintain Buy.”
His target price is $2.30.
In its report on 15 March, Credit Suisse said that Seaspan mentioned that it has “signed a letter of intent with a leading Chinese shipyard for a significant order of 10,000 TEU vessels”.
“We believe Yangzijiang is a strong contender since it is one of the few Chinese yards with the vessel design and yard capacity with its increased stake in Xinfu yard recently. We believe a letter of intent rather than a firm contract has beensigned to allow the customer time to arrange financing,” wrote analysts Gerald Wong and Bhuvnesh Singh.
The analysts noted that reports had emerged in trade publication Lloyds List and Tradewinds that Yangzijiang has signed a letter of intent with Seaspan for 22 containerships worth up to US$2.2 bn.
Why letter of intent, not firm contract?
Credit Suisse, which has a target price of $2.40, ventured: “The customer would have to pay up to 20% down payment upon contract signing, and a letter of intent is usually signed first while the financing is being arranged.”
Credit Suisse did not believe financing would be an issue, as it was announced that the LOI would be part of a US$5 bn investment by a new JV formed by Seaspan, Carlyle, Tiger Group Investments Ltd., and an affiliate of Dennis R. Washington. The JV will invest up to US$900 mn equity capital in containership assets, primarily newbuild vessels in China.
CIMB analyst Lim Siew Khee, who has a $2.69 target price, noted that no formal announcement has been made by YZJ as contracts are not yet effective with deposits.
Conservatively, she expects 10 vessels to be ordered in 2011, amounting to US$950-980m or 70% of her US$1.5bn order target.
“We believe current share price has priced in the fear of sharp rise in steel prices, which could lead to a worst-case 20% cut in FY12 earnings. We see opportunity to buy, anticipating catalysts from order wins and higher revenue from productivity gains.
To DMG & Partners analyst Jason Saw, the order size of 22 vessels is higher than market expectation of 10 containerships, and the "share price is likely to react positively to the massive news."
YZJ had US$5.3b order book as of 31 Dec 2010 and assuming the first six vessels are confirmed, total order book could be boosted by US$588m or 11%.
The contract was alluded to in a recent Nomura report here: ROXY-PACIFIC, YANGZIJIANG: What analysts now say....
