For those still hazy about YZJ warrants, summary is as follows (courtesy of DBSV)

Issuance of 330m warrants. Yangzijiang proposed to issue an aggregate of 330m warrants at an issue price of RMB0.3072 (S$0.0605). Each warrant carries the right to subscribe for one new ordinary share at the strike price of RMB7.617 (S$1.50) by 29 Apr 2016.

Placement to institutional investors. Citigroup is the placement manager and warrants will be offered to institutional investors and accredited investors. The warrants will not be listed on stock exchanges.Net proceeds from warrant issuance will be RMB92.17m or S$18.15m. Potential net proceeds from the full exercise of warrants will be RMB2.5bn or S$495m.

Net proceeds from warrant issuance will be RMB92.17m or S$18.15m. Potential net proceeds from the full exercise of warrants will be RMB2.5bn or S$495m.

Rationale. As explained in the announcement, the proceeds will be used to strengthen working capital and enhance capital base for future market expansion and development opportunities when shipbuilding industry recovers.

No urgent funding needs. Yangzijiang is one of the most well run yards in China with superb cost and cash management. As of end Sept 2012, Yangzijiang was in net cash position. It sat on cash (RMB3.4bn) and restricted cash (RMB5.3) of RMB8.7bn. While total borrowings amounted to RMB8.6bn, the company has invested RMB9.8bn in financial products (of which RMB7.7bn is short term investment).

Aren’t there better financing option? We believe this may be part of management's effort to enhance company's flexibility to raise money if the shipbuilding industry recovers in 2-3 years’ time. Working capital requirement is higher as Yangzijiang moves into offshore and large size containership with lower payment term of 20:80. However, we find funding via equity issue less favourable given the dilutive effect. Yangzijiang could well pare down its investment in financing products and explore cheaper financing in the debt market given its net cash position at this juncture.

Near term dilution risk is low. In the event of full conversion by 2016, maximum dilution will be 7.9%. Exercise price of S$1.50 is much higher than our 12-month TP of S$1.20, representing a 36.4% premium over the last traded price of S$1.10 on 15 Jan. Hence, the risk of dilution should be low in the near term.

Downgrade to HOLD. Yangzijiang’s share price has risen 15% in the past two weeks amidst positive sentiment on China economic recovery and reduced risk premium. Current valuation is fair at 1.2x FY13 P/Bv on the back of dwindling ROE from 26% in FY12E to 11% by FY14F. PE will rise to 10x in FY14 as earnings are expected to fall by 37% yoy.

Downgrade to HOLD in the light of declining earnings and yield amidst a prolonged sector downturn. Downside risk to our order win assumption post results prevails. TP is unchanged at S$1.20 as the warrants are out-of-the money.