Simply oversold

�� Shares down despite robust results

Fears of rising steel prices and spillover from US recession have sent

Yangzijiang?s (YZJ) shares down 49% in the last three months, underperforming

the market. This is despite the company?s stronger-than-expected 2007 results,

delivering an industry-leading 23% gross margin and 91% y/y growth in net profit.

�� Rising steel costs manageable

We find that steel prices tend to lead YZJ?s margins by five quarters. Though the

current high steel price may well impact margins in H209, we believe the market

underestimates the effect of faster rising vessel prices. In our view, those orders

signed for early delivery in 2009 will help YZJ fend off margin pressure.

�� We expect minority stake purchase to be a positive catalyst

YZJ management has indicated its intention to complete the acquisition of a 24.8%

minority stakes in the new yard as early as in Q108, so as to take full advantage of

the latter?s tax exemption status. Based on our assumption, we estimate the

acquisition could be 11% EPS accretive.

�� Valuation: Cut PT to S$2.65 from S$2.80, maintain Buy rating

We lower our DCF-based price target from S$2.80 to S$2.65, (WACC of 12.9%, g

of 3.0%), following a 5% down-revision to our earnings forecasts for 2009 and

2010, mainly to reflect UBS?s latest forecast of the renminbi/US$ exchange rate.

Boasting a net cash/market cap ratio of 26% and trading at 11.4x/7.4x 2008E/09E

PER, YZJ is cheaper than regional peers. We reiterate our Buy rating on the stock.