Yangzijiang Shipbuilding - DBS Research 2017-11-13: Robust Contract Flow

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YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Robust Contract Flow

• 3Q17 boosted by disposal gains.
• Strong contract wins of US$754m, bringing YTD wins to US$1.6bn, double of last year’s.
• Raised FY17/18F net profit by 19/27%.
• Reiterate BUY; TP S$1.82.

Reiterate BUY; TP raised to S$1.82, on earnings revisions and rolling over valuation base to FY18. 

• As the largest and most cost-efficient private shipbuilder in China, Yangzijiang Shipbuilding (Yangzijiang) is well-positioned to ride the anticipated shipping and shipbuilding recovery. It has a solid balance sheet, sitting on net cash of 68 Scts per share (includes Held-to-Maturity investments), representing ~50% of NTA. 
• We now expect Yangzijiang to pay a final dividend of 4.5 Scts (instead of 4 Scts previously) in view of the strong projected FY17 earnings. 
• Our SOP-based TP of S$1.82 translates to 1.3x P/B, which is approx. 0.4SD below historical mean (1.9x) since listing in 2007.
• Valuation is undemanding at 1.2x P/B, against 9% ROE and 3% yield.

Proxy to shipping recovery. 

• The tide is turning for the shipping market with more favourable supply/demand dynamics, driving newbuild demand ahead. The global orderbook-to-fleet ratio has dropped to a low of < 10%, implying low single digit supply growth in the next two years. 
• On the scrapping side, the new Ballast Water Management Convention rule that takes effect in Sept-2017, could accelerate the demolition of old vessels. 
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Lower margins mitigated by preferential tax rate and write-backs. 

• Core shipbuilding revenue was backed by its healthy order backlog of US$4.3bn as at end Sept-2017, which translates to revenue coverage of > 2x. 
• While shipbuilding margins are expected to moderate from the average of 25% in 2016 to 16- 19% in 2018-2019, the drop could be mitigated by a lower tax rate, recognition of old yard relocation fees (Rmb158m) and write-back/disposal gains from terminated vessels.

Where we differ: 

• We have been more bullish on sector recovery and believe Yangzijiang deserves to re-rate catalysed by order wins. YTD order wins totaled US$1.6bn, outpacing earlier guidance of US$1.5bn.

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$ 1.82, after applying 14x FY18F price earnings (PE) on shipbuilding earnings, 1.5x price-to-book value (P/B) for bulk carriers and 1.3x 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.

WHAT’S NEW - Decent 3Q17; robust contract wins 

3Q17 boosted by disposal gains. 

• Yangzijiang’s headline PATMI tripled y-o-y to Rmb866m in 3Q17, in the absence of asset impairment losses. On a sequential basis, PATMI rose 20% q-o-q, boosted by gains from disposal of two terminated vessels and demolition business totaling Rmb156m. The impact of forex loss was offset by fair value gains on financial assets. 
• This brings 9M17 net profit to Rmb2,254m, making up 92% of our full year estimate. 

Shipbuilding margins moderated to 15% but expected to improve in 4Q with deliveries of higher value contracts. 

• Core shipbuilding gross margin was down c.5ppts q-o-q to 15% in 3Q17 due largely to USD depreciation, and higher steel cost. 
• In addition, the group commenced recognition for several big projects with lower projected margins. Besides, the nine deliveries in 3Q were largely small sized vessels and hence was a smaller boost to profit margins. 
• Management adopts prudent profit recognition during construction progress and generally the bulk of the profit is recognised upon delivery. 

Solid balance sheet. 

• Including HTM investments, Yangzijiang is in net cash, equivalent to 68 Scts per share or 50% of its NTA. This bodes well for M&A activities. 

Secured 26 new orders worth c.US$754m over the past three months. 

• Yangzijiang has secured 26 new orders worth US$754m in total since 1H17 results announcement in early Aug, comprising: 
  • 13 units of 82,000DWT bulk carriers 
  • Five units of 208,000DWT bulk carriers 
  • Two units of 45,000DWT bulk carriers 
  • One unit of 180,000DWT bulk carrier 
  • Three units of 2,200TEU containerships 
  • Two units of 1,668TEU containership. 
• The new wins lift YTD wins to US$1.59bn, and exceeded our order win assumption of US$1.5bn this year. There could be several more orders finalised by end of the year, though they will likely be announced together with the full year results in Feb-2018. 
• Orderbook inched up to US$4.3bn as of end Sept-2017, from US$4.0bn a quarter ago, 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. 

Earnings revision. 

• We have raised our FY17/18F profits by 19% factoring the disposal gains in 3Q, recognition of old yard relocation income and lower interest expenses. 

Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2017-11-13

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.82 Up 1.700