Yangzijiang Shipbuilding - DBS Research 2017-03-02: Proxy to shipping recovery

Yangzijiang Shipbuilding - DBS Vickers 2017-03-02: Proxy to shipping recovery YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Proxy to shipping recovery

  • 4Q16 earnings lifted by favourable material cost and currency.
  • Secured c.US$170m new orders in 4Q16.
  • Declared dividend of 4 Scts, translating to 4% yield.
  • Reiterate BUY; TP S$1.12.



Reiterate BUY; TP raised to S$1.12. 

  • As the largest and most costefficient private shipbuilder in China, Yangzijiang Shipbuilding (Yangzijiang) is well-positioned to benefit from the State-Owned Enterprise (SOE) reform in China and ride the anticipated shipping recovery. 
  • It has a solid balance sheet, sitting on net cash of 65 Scts per share (includes Held-to-Maturity investments), representing 53% of NTA. Valuation is undemanding at 0.8x P/B, against 7-8% ROE and 4% yield. 
  • Our SOP-based TP is lifted to S$1.12 (implied 0.9x P/B), after rolling over our valuation to FY17 with higher target PE of 10x (8x previously) for shipbuilding segment in view of a recovery in the newbuild market. Reiterate BUY.


The tide is turning, led by dry bulk. 

  • The global orderbook-to-fleet ratio has dropped to a low of 11%, of which c.60% is scheduled for delivery in 2017, implying that supply will be much lower from 2018 onwards.
  • On the scrapping side, the new Ballast Water Management Convention rule that will take effect in Sept-2017, could accelerate the demolition of old vessels. This is expected to drive the recovery in the shipping market, led by dry bulk segment, and thus give a boost to newbuild demand. We expect new orders to almost double to US$1.5bn this year, from 2016’s US$823m.


Lower margins in 2017; mitigated by preferential tax rate and writebacks.

  • Core shipbuilding revenue is backed by its healthy order backlog of US$4.3bn as at end Dec-2016, which translates to revenue coverage of > 2x. 
  • While shipbuilding margins are expected to moderate from the average of 25% in 2016 to 16% in 2017-2018, it could be mitigated by a lower tax rate for New Yangzi Shipyard (impact estimated at Rmb150m), recognition of old yard relocation fees (Rmb158m) and absence of significant impairments (net one-offs of c.Rmb600m in 2016).


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$1.12, after applying 10x FY17F price earnings (PE) on shipbuilding earnings, 1.0x price-to-book value (P/B) for bulk carriers and 1x P/B for investments.


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/ 2017-03-02
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.12 Up 0.950



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