Chinese shipbuilder en route to Singapore

Yangzijiang targets up to $622 million in Singapore's third largest IPO ever.
Yangzijiang Shipbuilding, which is currently on the road to drum up interest for its Singapore initial public offering, has set the price range at S$0.70 to S$0.95 for a total deal size of up to S$943.4 million ($622 million).

Even at the bottom end of the range, this will be the second largest Singapore IPO in the past five years after Thai BeverageÆs $866 million offering in May last year, and the third largest ever if one includes SingTelÆs $1.5 billion listing in 1993. Some bankers argue that this deal is no longer a suitable benchmark, however, given it happened more than 13 years ago.

The indicative range values the Chinese shipbuilder at 11.3 to 15.3 times its estimated 2008 earnings, which equals a sizeable premium to its South Korean rivals, which are currently trading at an average of 8 to 9 times, but at a discount to its Chinese comps that trade at an average P/E ratio of 18 to 20 times.

Because of their lower overheads and labour costs, the Chinese shipbuilders are generally seen to deserve a premium, but the question investors will be asking themselves is - how much of a premium? Guangzhou Shipyard International, which is listed in both Hong Kong and Shanghai trades at a 2008 earnings multiple of about 26 times in Hong Kong after it doubled its profit last year amid strong demand for new ships.

Yangzijiang notes that it also benefits from the preferential interest rates provided by government-backed banks with the aim of promoting the domestic shipbuilding industry. China is the third largest shipbuilding country in the world in terms of compensated gross weight, according to Clarkson research.

ôWe believe this growth is in part due to the global trend of outsourcing manufacturing to companies in (China), as well as the increasing demand by Chinese carriers for domestically built vessels,ö the company says. The latter is largely due to the supportive government policy.

Jiangsu-based Yangzijiang is also benefitting from this demand and as of the end of last year, the company had a visible order backlog of approximately $2.8 billion for vessels that are due to be delivered between 2007 and 2010. Since then, it has received new orders with an aggregate value of $229 million for four container ships and four mini bulk carriers, which it expects to deliver in 2009 and 2010.

In 2006, the companyÆs net profit rose 60% to Rmb454.3 million ($58.2 million) on the back of a 52% rise in revenues to Rmb2.32 billion ($298 million).

ôShipyards and other infrastructure developments in China are the flavour of the month and this is a supply/demand story that is benefitting from the fact that there arenÆt enough ships around,ö says one observer

However, some analysts believe the shipping cycle is past its peak and that there may actually be some oversupply once all the ships currently under construction are put in the water over then next two to three years, which could lead to a slowdown in the order flow in the future.

A key part of the companyÆs growth strategy is to build ships at increasingly larger sizes, including containerships with load carrying capacities of 6,000 twenty-foot equivalent units (TEU) and above, Panamax and Aframax chemical tankers and bulk carriers of 100,000 deadweights tonnes (DWT) and above.

ôWe believe there is greater demand for these larger vessels and that they will provide us with better profit margins than smaller vessels,ö the company says.

The company currently has orders for 12 containerships of 4,250 TEU in size and ten bulk carriers of 92,500 DWT each.

To achieve this target, Yangzijiang, which is already the leading privately-owned containership builder in China, is currently constructing a new shipyard through a majority-owned subsidiary that is expected to be completed in October 2007. Once finished, the company will move all its shipbuilding operations for containerships above 2,500 TEU and bulk vessels above 55,000 DWT to the new yard, leaving the building of smaller ships at the existing yard.

The company will also expand into the manufacturing of offshore vessels and oil tankers as it believes there will be increased demand for these due to the increased investment by major players in the offshore oil and gas industry. Offshore vessels are used for transportation and delivery of drilling supplies, fuel, food and water to offshore drilling rigs and fixed or floating platforms. They can also provide processing of oil and gas.

Part of the proceeds from the offering will be used towards the Rmb1.5 billion ((192 million) construction cost of the new terminal. Some of it will also go towards the acquisition of an additional 25% in the subsidiary that holds the new yard to a total of about 75% and for the repayment of a loan.

The company is aiming to sell 993 million shares, or 30% of its issued share capital, through the IPO that is arranged by UBS as the sole bookrunner. DBS is a joint lead manager and also the lead manager for the domestic portion of the sale.

Two thirds of the shares are new, while the remaining third will be sold by executive chairman Ren Yuanlin, who is also the founder of the group. There is a 15% greenshoe, which could boost the total proceeds to $715 million.

The final price is expected to be determined just after the Easter holidays around April 11.
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