Bloomberg: Stay in positive territory, Price Target : S$ 0.46

JES, BUY S$0.36, Bloomberg: JES SP

Stay in positive territory

Price Target : S$ 0.46

By: Pei Hwa HO

· 3Q10 results in line

· Earnings turnaround on track with improved operating environment, higher order book and new yard

· Maintain BUY; TP S$0.46


Comment on Results

Recovery on track. JES reported net profit of RMB23m on the back of 21% rise in topline to RMB641m. Net profit was down 53% q-o-q but improved sequentially from recurring profit of RMB20m in 2Q10 (excluding US$4m or RMB27m one-off gain from contract cancellations last quarter). Gross margin recovered to c9% vs 7.3% in 2Q10. Continued delivery of better recurring earnings would boost investors’ confidence in JES’ execution and provide catalysts for the counter.

JES saw a strong order flow YTD with 24 vessels contracted or over US$600m of new orders. JES’ orderbook grew to a total of 35 vessels worth US$900m, to be delivered over the next 2 years.

Making inroad into offshore. With the commencement of the new yard, which is one of the most advanced yard facilities in China, JES is in talk with strategic partners to penetrate the offshore segment by constructing offshore vessels like FPSO. Such positive development, if successful, will raise JES profile among the Chinese shipbuilders.

Recommendation

Our TP of S$0.46 is based on 1.5x FY11 P/BV, which is the mean of its peak and trough valuations. We reckon JES to be a potential one-bagger in the shipbuilding sector, assuming net margins recover back to 2006 level of 8.2%. Maintain BUY. Near term price catalysts are strong order wins and earnings delivery. Possible key risks are poor.