DBS Vickers 2015-08-05: Yangzijiang Shipbuilding - 2Q15 Results. Against all odds.


Against all odds 

  • 2Q15 results slightly above; shipbuilding gross margin was low at 15% due to conservative recognition for new projects. 
  • Secured new orders worth US$510m in Jul-Aug. 
  • Prime beneficiary of industry consolidation.  
  • Reiterate BUY with 25% upside potential to our S$1.62 TP plus 4-5% dividend yield.  


Highlights 


2Q15 results slightly above. 

  • Yangzijiang reported 2Q15 PATMI of Rm1,031m (-7% y-o-y; +46% q-o-q), boosted by subsidy income and gain on disposal of financial assets in the quarter. 
  • This brings 1H15 PATMI to Rmb1,737m, making up 54% of our full year estimate (excl. old yard relocation fee). 
  • The y-o-y decline in 2Q15 PATMI was attributable largely to lower shipbuilding margins, and absence of Rmb349 tax refund, partially offset by gain on disposal of financial assets (Rmb158m) and subsidy income (Rmb124m). 

Lower shipbuilding margins. 

  • Core shipbuilding gross margin contracted 6ppts q-o-q to 14.8% due largely to prudent recognition of new projects that hit initial recognition in 2Q, especially for new vessel types like the 208dwt bulk carrier. 
  • We expect margins to improve in 2H and average around 17% for full year. 

Sound balance sheet. 

  • Including Held-to-Maturity (HTM) investments, Yangzjiang is in net cash, equivalent to 42 Scts per share or 34% of its NTA.
  • This bodes well for M&A activities. 


Outlook 


New orders. 

  • Yangzijiang has secured new orders worth US$510m in Jul-Aug, comprising four 9,700 TEU and four 3,800 TEU containerships; each comes with four options totaling US$510m. 
  • This brings YTD wins to US$883m, representing 44% of its US$2bn target. 
  • Nine existing orders, primarily dry bulks, were changed to containerships, resulting in an increase of US$25.4m to its orderbook. 
  • Potential order pipeline includes 10k/14k TEU containerships, LNG carriers, VLCC and tankers. 
  • Orderbook stood at US$4.14bn as of end-Jun 2015 (excluding orders won in Jul-Aug), translating into a healthy book-to-bill of 1.8x. 

Deployment of excess cash. 

  • Strategy to pare down its noncore investments (HTM and property investments) remains intact. 
  • HTM investments inched up Rmb900m q-o-q to Rmb10.8bn in 2Q15. 
  • Meanwhile, management plans to channel the excess cash into Limited partnership / General partner funds to tap the opportunities of SOE restructuring in China. 

Set to outperform peers. 

  • Yangzijiang is set to outperform peers with 5- to 10-ppt higher margins (through better newbuild prices, payment terms and efficiency as well as active cash management) and relatively stable profits with upside potential from the recognition of relocation fees from the government (Rmb720m) and remaining profits from disposal of previously cancelled vessels of c.Rmb400m in 2016. 


Valuation: 


  • We value Yangzijiang based on sum-of-the-parts (SOTP) methodology to better reflect the valuation for the various segments. 
  • We arrive at a target price of S$1.62, after applying 8x FY15F price earnings (PE) on shipbuilding earnings, 0.5x price-to-book value (P/BV) for bulk carriers, 1x P/BV for investments, and a 25% discount to the net present value (NPV) of its property project. 


Key Risks: 


Prolonged industry downturn. 

  • We believe the worst is over for the shipbuilding industry, but in the event of unforeseen circumstances that could lead to a prolonged downturn, Yangzijiang's earnings and share price will be affected. 

USD depreciation and hike in steel cost. 

  • Revenue is denominated mainly in USD, and only half is naturally hedged. 
  • Assuming the net exposure is unhedged, every 1% USD depreciation could lead to a 2% earnings decline. Every 1% rise in steel costs, which account for about 20% of COGS, could result in a 1.1% drop in bottomline. 

Overhang from outstanding warrants. 

  • There are 330m outstanding warrants (approx. 8.6% of outstanding shares if fully exercised) expiring on 29 Apr 2016. 
  • The exercise price is Rmb6.602 or S$1.42 per share based on an exchange rate of Rmb4.65/SGD.



Analyst: HO Pei Hwa

Source: http://www.dbsvickers.com/


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