catalysts from the announcement of significant contract wins.YNH had a

•

contracts. We highlight five major projects which we believe YNH could win,

including Singapore Sports Hub, Downtown Line, Jurong rock cavern and Oman

Airport Terminal Building. Based on our estimates, if YNH meets our expectations,

its order book at end-2010 could breach the S$600m mark.Order book can scale new heights. YNH is bidding for more than S$1bn worth of

•

competition in the construction sector are likely to put pressure on project fees and

hence margins. We expect YNH’s gross margins to dip, mitigated by a strong

competitive position and a more favourable project mix.

Construction sector growth slowing.

construction sector, thanks to S$24bn and S$35bn worth of contracts awarded in 2007

and 2008. Growth in this sector has started to decelerate, growing only 13% yoy in

3Q09, down from 24% and 19% in the first two quarters. This downshift is expected to

continue in 2010, as fewer contracts would be dished out. As at end-Oct 09, only

S$17bn of contracts had been awarded, while expectations for the full year are S$18bn-

20bn. The projection for 2010 is S$15bn-17bn. Despite the lower growth rates, we

believe that contractors with strong market positioning can still do well, such as YNH,

which boasts a commendable track record and is a leader in its business segments.

More than S$1bn worth of contracts up for grabs.

management, we believe YNH is bidding for contracts worth more than S$1bn. We

believe it stands a chance of winning some of these projects in 2010. These include:Following a recent meeting with

Marina Costa Expressway.

win, YNH is awaiting the outcome of the last MCE contract, C482. Project C482 is

considerably complex and management estimates that YNH’s participation, if awarded,

could yield contract fees of S$60m-80m. Considering the fact that YNH is involved in

every other underground MCE project, we believe it stands a very good chance of

capturing this contract. YNH expects a contract award to be made known by 1Q10.With the recent announcement of its fourth MCE contract

Singapore Sports Hub.

the world has been delayed again and again. However, in Nov 09, newswires reported

that the winning bidder, Singapore Sports Hub Consortium (SSHC), has sent out

request-for-proposals for debt financing to some banks. Construction is expected to

begin in 1Q10 and will take about four years to complete. We believe YNH can win

work for this project for two reasons: 1) YNH has a long-standing working relationship

with Dragages Singapore, the leading member of SSHC; and 2) extensive involvement

in the MBS IR. We believe its track record would make a difference to its bid. The

contract for the Sports Hub could be worth S$150m-180m.Construction of this first and largest integrated sports facility in

Downtown Line, stage 2.

stage 2. The total contract value for the 12 stations is estimated at S$400m-500m.

Management expects to win 50% of these contracts, and in our view, this is a realistic

assumption. Having been involved in the construction of the Circle Line and more

recently MCE, YNH’s modular strutting systems have made their mark as the preferred

method for deep excavation support.A total of 12 stations will built by 2015 for Downtown Line

Jurong rock cavern.

underground oil storage capacity on Jurong Island. Jurong rock cavern will comprise an

oil storage complex to be built at subterranean depths, and upon completion, will have

3m cubic metres of potential storage capacity. YNH is bidding for a contract that is

worth around S$60m.This is an innovative initiative driven by JTC to increase

Oman airport terminal building.

steelwork for an airport terminal building in Oman, Middle East. This is a sizeable

project that is worth some S$200m. Counting the Delhi International Airport and

Bangkok’s Suvarnabhumi Airport as its previous projects, YNH has a strong case in its

bid, we believe.YNH is bidding for a contract to provide structural

Order book.

YNH’s order book is estimated at S$670m-720m for FY10. Based on our estimates of

S$435m of revenue for recognition in FY10, its order book at the end of 2010 could

breach the S$600m mark. YNH is set to enjoy another busy year, with order book

possibly breaking its record of S$540m at end-3Q09.

Margins improving, but may dip.

were 24-30%, from participation in higher-value-added projects and improved operating

efficiencies. YNH was involved in bigger and more complex projects like the MBS IR

and MCE which commanded premium fees. However, going into 2010, a slowing

growth rate in the construction sector is likely to put pressure on project fees and hence

margins.Gross margins for the first three quarters of FY09

Competition heating up.

competing for high-profile jobs like the MBS IR and Resorts World Sentosa integrated

resort. According to industry sources, several of these contractors depressed fees in2007-09 also saw an influx of foreigner contractors

[ 4 ]

bids to win jobs and some eventually succeeded in their bids, at the expense of the

local players. We believe that prominent projects in 2010 like the SSH, JRC and DTL

will continue to attract bids from these foreign players. However, we believe that YNH

will survive the competition better than its peers. Unlike most local contractors, this

specialist contractor is a leader in its field, with an unrivalled capacity and track record

to show. We believe its margins will only dip marginally, mitigated by its strong

competitive position.

Steel prices stabilising.

periods of stable steel prices, fluctuations in gross margins should be limited, but during

volatile times, margins can swing. YNH typically locks in raw-material supplies with

steel mills once a contract has been secured. The lead time between project tender and

award is typically three months. During periods of steel-price volatility, YNH’s

computation of its tender prices for contracts can differ materially from spot prices on

the dates the contracts are awarded. Thus, when steel prices are dropping, YNH’s

gross margins can improve as the actual cost of material is lower than the initial

expectations during the project tender. This was the case in 9M09 when the bulk of

revenue recognised was related to contracts awarded in FY08. Steel prices were

volatile in 2008, but have been stabilising since 2H09. As always, YNH walks a

tightrope balancing costs with competitive bids in the face of intensifying competition.Steel makes up about 30% of YNH’s cost of sales. During

Favourable project mix.

revenue in FY07-08 while specialist civil engineering made up 23-30%. The former

generally commands lower gross margins of 18-20% while the latter could generate

gross margins of up to 30%. A major portion of YNH’s revenue which would be

recognised in FY10 relates to specialist civil engineering projects in the pipeline.

Management expects more such projects to dominate the company’s topline as

sizeable MRT projects like the DTL come on stream in FY10. Given this mitigation, we

expect gross margins to dip only slightly by 1-1.5% in FY10.

Maintain Outperform.

profit is expected to reach new heights. We believe FY10 will be equally exciting, if not

better. We have upgraded our FY10-11 EPS estimates by 7-8% to factor in higher

contract-win expectations. Accordingly, our target price has been upgraded from

S$0.44 to S$0.47, still based on 10x CY11 P/E, at the lower end of its mid-cycle

multiples. We expect stock catalysts from the announcement of significant contract

wins.YNH enjoyed a record order book this year and its FY09 netStructural steelwork accounted for more than 70% of itsTaking into account the projects highlighted above, potential addition to2008-09 were good years for the SingaporeMargins may dip. Going into 2010, a slowing industry growth rate and intensifying