Yangzijiang announced that it is acquiring 100% interest in JiangsuTongzhou Marine Equipment Co Ltd ("JTME"), which owns shipbuilding facility(including slipway) with production area of 286 sqm, located nearYangzijiang's new yard. Prior to the acquisition, this facility wascontracted to Yangzijiang for a 5-year period, commencing from June 2008for a rental of S$31m per annum.

The consideration of S$114m is payable by 228m of Yangzijiang'sshare priced at S$0.50 each. This is expected to be fully paid by treasuryshares as the Group has already bought back a total of 221.7m shares ytd.The bottomline impact from JTME is expected to be <3%.

The acquisition appears expensive to us. Based on extrapolation of JTME's9M08 earnings of S$8.5m, the purchase price translates to 10x 08PE. Thisimplied valuation is much higher than Yangzijiang's own valuation of 4x08PE and industry average of 5x 08PE for Singapore and China yards.

We acknowledge that Yangzijiang has demonstrated good earningsexecution and impressive risk management since its listing in early 2007.However, the expensive acquisition disappointed us. We are of the view thata better valuation could have been obtained for JTME as shipbuilding is inthe midst of a downcycle. We expect the Group to better utilize its cash toreward shareholders. Hence, we reduce our PE multiple for Yangzijiang to 3xFY09 earnings. Our TP is thus revised down to S$0.34, which is backed bynet cash per share of S$0.30. Downgrade to Fully Valued.