Yangzijiang Shipbuilding - Starting the year well
- 1Q17 earnings above expectations, aided by fair value adjustment to currency hedges.
- Early delivery of first two LNG vessels at better than expected margins.
- Signs of shipbuilding recovery.
- Maintain BUY; TP lifted to S$1.35.
Reiterate BUY; TP raised to S$ 1.35.
- As the largest and most cost efficient 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 67 Scts per share (includes Held-to-Maturity investments), representing 52% of NTA. Valuation is undemanding at 0.9x P/B, against 7-8% ROE and 4% yield.
- We lift our SOP-based TP to S$ 1.35 (implying 1.0x P/B), based on a higher target PE of 13x (10x previously) for the shipbuilding segment in view of a recovery in the newbuild market.
1Q17 above; boosted by fair value gain.
- Yangzijiang’s headline net profit rose 14% y-o-y and 10% q-o-q to Rmb668m in 1Q17. This was better than our expectation of c.Rmb500m, largely aided by a fair value gain of Rmb144m.
- Shipbuilding margin remains strong at 23%. Core shipbuilding gross margin was flat y-o-y and down 3ppt from the relatively high 26% in 4Q16 (aided by appreciation of USD).
Solid balance sheet.
- Including HTM investments, Yangzijiang is in net cash, equivalent to 67 Scts per share or 52% of its NTA. This bodes well for M&A activities.
- The final dividend of 4 Scts for FY16 is expected to go-ex on 18 May (book closure on 22 May) and payment will be made on 7 Jun.
First LNG vessels delivered ahead of time with decent profits.
- Yangzijiang delivered 14 vessels in the quarter, including its first two units of 27.5k cbm LNG carriers secured in early 2015. We understand that the LNG carriers were delivered four months ahead of schedule, demonstrating Yangzijiang’s superior execution.
- The gross margins for the units were also better than expected, in the high 20s supported by relatively high newbuild price, lower material costs, stronger USD and timely delivery.
Secured new orders worth c.US$318m in 1Q17.
- As announced in early April, Yangzijiang has secured new orders worth US$318m in 1Q17, comprising: - Five units of 82,000DWT bulk carriers - Five units of 62,000DWT woodchip carriers - Two units of 1,800 TEU containerships - One unit of 6,500DET ConRO vesel (hybrid of containership and RORO).
- The new wins make up 21% of our order win assumption of US$1.5bn this year.
Termination of 4 vessels in 1Q17
- Termination of 4 vessels in 1Q17, comprising 3 units 36.5k dwt bulk carriers and 1 unit 10k TEU containership.
- Construction work on one of the bulk carriers has yet to start while the containership is near completion. Yangzijiang has collected 20% downpayment on average for these units. We believe it stands a good chance to find buyers in view of the uptick in shipping market.
- Orderbook declined from US$4.3bn to US$4.03bn, still implying revenue coverage of more than 2-years.
- Yangzijiang is ranked No.1 in China and No.4 in the world based on outstanding order book.
Some positive signs of recovery.
- Enquiry levels have picked up in particular for dry bulk. Payment terms seem to have improved slightly as well. While overall customers are still looking at 30:70 payment terms, the 30% payment is made prior to launch of vessels relative to before upon completion.
Where we differ:
- We have the highest TP on street as we are more bullish sector recovery and believe Yangzijiang deserves re-rating catalysed by order wins.
- We value Yangzijiang based on sum-of-parts (SOP) methodology to better reflect the valuations of the various segments.
- We arrive at a target price of S$ 1.35, after applying 12x 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.