Yangzijiang Shipbuilding - DBS Research 2016-11-10: Value emerging

Yangzijiang Shipbuilding - DBS Vickers 2016-11-10: Value emerging YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Value emerging

  • 3Q16 core profits in line, but bottomline dragged by impairments.
  • Secured orders worth US$65m for three units of 1.9k TEU small containership; minimal financial impact from termination of six vessels.
  • Trimmed FY16-17F earnings by 2-8% adjusting for exceptionals and lower order wins.
  • Maintain BUY for its wide economic moat, undemanding valuation and decent yield; TP adjusted to S$0.95.


Steep discount to book unwaranted. 

  • While the operating environment for shipbuilding remains challenging, Yangzijiang Shipbuilding (Yangzijiang) is well-positioned to emerge stronger from this downturn with its wide economic moat. Its net cash of 54 Scts per share (includes Held-to-Maturity investments), representing 43% of NTA, bodes well for M&A opportunities.
  • Valuation is undemanding at 0.6x P/B, which represents a 33% discount to the Global Financial Crisis trough of 0.9x P/B. Our SOP-based TP of S$0.95 translates to 0.8x P/B, against 7.5% ROE and 4-5% yield. Reiterate BUY.


Riding out industry cycles with solid management and healthy order backlog. 

  • As the largest and most cost-efficient private shipbuilder in China, Yangzijiang is among the few Chinese yards that have crossed into the high-end vessel space to compete against Korean rivals, and is well positioned to benefit from the post-consolidation upturn of the shipbuilding market, alongside a shipping recovery. 
  • It has emerged stronger in the past few cycles with Executive Chairman, Mr Ren Yuanlin at the helm. Mr Ren, ranked 82 in Lloyd's List's Top 100 most influential people in shipping, is highly respected for his great foresight, strategic sense, and cost and cash management. 
  • Its healthy order backlog of US$4.4bn as at end Sept-2016 with high revenue coverage of c. 2x vis-à-vis global peers does not just provide earnings visibility but is also a testament to Yangzijiang’s market leadership.


Revenue recognition slows down. 

  • Net earnings in 3Q16 slid 32% q-o-q to Rm281m, below our expectation of Rmb500m due to Rmb531m impairment loss on its shipping fleet and higher provisions of Rmb219m (vs Rmb53m in 2Q16) for HTM assets. This brings 9M16 earnings to Rmb1,145m, making up c.62% of our FY16 estimate. 
  • We trimmed FY16-17F earnings by 2-8% after imputing the impairments and lowering FY16 order wins to US$650m, partially mitigated by the preferential tax rate for New Yangzi yard. 
  • There is potential upside to earnings from a partial writeback of provisions of Rmb369m in the event of the successful delivery of its only jack-up rig order and grant of preferential tax rate of 15% on high-tech status for Xinfu yards, vs the usual 25%.


Valuation

  • We value Yangzijiang based on sum-of-parts (SOP) methodology to better reflect the valuations of the various segments. 
  • We arrive at a target price of S$0.95, after applying 8x FY16F price earnings (PE) on shipbuilding earnings, 1.0x price-to-book value (P/B) for bulk carriers, 1x P/B for investments, and a 25% discount to the net present value (NPV) for its property project.


Key Risks to Our View

  • USD depreciation and hike in steel cost. Revenue is denominated mainly in USD, and only half is naturally hedged.
  • If the net exposure is unhedged, every 1% USD depreciation could lead to a 2% decline in earnings. Every 1% rise in steel costs, which accounts for about 20% of COGS, could result in a 1.1% drop in earnings.




Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-11-10
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.95 Down 1.000




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