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).
- 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.