Yangzijiang Shipbuilding - At a discount to peers
- Despite a stronger balance sheet and better profits, YZJ is trading at 0.9x CY17 P/BV, a significant discount to Cosco Corp at 2.5x P/BV and Sembcorp Marine at 1.5x P/BV.
- Pan Ocean Korea has recently ordered five 63,000dwt bulk carriers (US$146m in total) from YZJ, firming our view that orders should improve by 42% yoy in 2017F.
- Positive industry data indicators - higher BDI, stronger secondhand market and narrowing orderbook to fleet to 11% - spur hopes of better order momentum.
- As order outlook improves, we think its shipbuilding business should be traded at 1x CY17 P/BV while HTM business be valued at 0.85x P/BV, in line with c.8.5% ROE.
Better orders in 2017
- According to Clarksons, Pan Ocean Korea has recently placed an order of five units of 63,000dwt bulk carriers from YZJ at US$29.2m per vessel, bringing total contracts to US$146m.
- Management has seen order enquires picking up amidst an improvement in the dry bulk index and higher coal demand.
- We are forecasting YZJ winning c.US$1.2bn in new orders in 2017F, up 42% from 2016’s US$823m.
Lower margins but still above those of peers
- FY16’s core shipbuilding gross margin came in at 25% (FY15: 19%), mainly helped by higher revenue from more vessels delivered yoy (39 in FY16 and 36 in FY15), as well as benefiting from a stronger US$/Rmb in 2H16.
- In 2017, assuming Rmb remains steady, core shipbuilding gross margin is likely to trend downwards to c.20% due to higher steel costs. The lower margin trend is well flagged, but this is still more profitable vs. Singapore yards (GM of 8%) and gross loss in Cosco Corp.
Better industry data points
- The Baltic Dry Index recovered from its trough of 290 in Feb 16 to 1,000 YTD thanks to higher iron ore imports into China. This has resulted in a higher secondhand market as we note that prices for Panamax and Handymax vessels have increased by 17-28% yoy. This could help to improve newbuild (NB) momentum as prices for NB have been flat.
- The % of orderbook to global dry bulk fleet has also narrowed to 11% as at end-16 vs. 17% in 2015 and 23% in 2014, suggesting that the oversupply situation is easing.
- We raise our EPS by 9-28% for FY17-18F as we adjust shipbuilding revenue recognition with more vessels to be delivered in 2017.
- We also increase our core shipbuilding margins to 19-20% (from 17-18%) previously and incorporate higher HTM interest income. The current order book of US$4.3bn with 85 vessels on hand should keep the yard busy till 2019.
Rmb7bn cash, almost zero gearing; S$0.04 DPS could sustain
- YZJ has a cash balance of Rmb7bn and net debt of Rmb138m as of 4Q16. We believe this could sustain its DPS of S$0.04, translating into a c.3.5% yield.
- With the potential of an improving order outlook, we believe YZJ’s core shipbuilding division should be valued at 1x P/BV.
- We value its HTM asset at 0.85x, in line with the c.8.5% ROE achieved from the interest income derived. Our SOP-based target price is lifted to S$1.21 accordingly.
- Higher order wins and margins are the key catalysts.