Bottom-fishing

YZJ is cheap at 1.2x P/BV, its trough during GFC. After a strong 1Q12,

we believe FY12 is likely to beat consensus expectations on margin

strength. Securing jack-up rig orders could be its game changer.

We adjust FY12-14 EPS by -5% to

+7% on changes to shipbuilding

margins. Maintain Outperform, albeit

with a lower 7x CY13 P/E target, 20%

below its 5-year mean (from 8x or

10% below its 5-year mean) to reflect

increased risk aversion. Implied P/BV

is 1.5x, 20% below its 4-year -1SD of

1.9x – still cheap. .

Trough unwarranted

The stock had outperformed the

FSSTI by 20% year to Apr before

sliding in May following a resurgent

European debt crisis. We think it has

been oversold, to 1.2x P/BV (GFC

valuations in Oct 08). With no news

of order cancellations, we foresee a

rapid recovery in its share price if and

when euro-zone concerns dissipate.

Strong margins from Cosco’s

pre-crisis orders

YZJ beat our expectations in 1Q12

with shipbuilding gross margins of

27.2% against our 23.5% expectation

for FY12. We believe progressive

execution of its remaining 18 pre-GFC

high-margin container-vessel orders

from COSCO in FY12-13 could

support margins. We now expect

shipbuilding gross margins of 25%,

22% and 15% for FY12-14 (previously

23.5%, 21% and 19%).

Offshore re-rating

YZJ’s entry into rig building should

be imminent as it prepares itself by

developing the Taicang yard and

hiring personnel to beef up its

offshore division. Given its

shipbuilding track record, we believe

its learning curve could be less

painful than for other Chinese

shipbuilding aspirants such as Cosco

Corp and JES. Management is

confident of securing 1-2 jack-up rig

orders by end-2012.