RHB Securities 2015-08-05: Yangzijiang Shipbuilding - Bowing To Hard Truths. Maintain BUY.


Bowing To Hard Truths 

  • 2Q15 PATMI was in line, at CNY1bn. 
  • Maintain BUY with a lower SGD1.68 TP (from SGD1.92, 31% upside). 
  • Yangzijiang won USD510m of new orders in July-August and expects its options exercise and new wins to bring total order wins to USD2bn by 3Q15 (YTD: USD0.88bn). 
  • Strategically, it is exiting the property development space and targets order book replenishment over margins in the near term. 
  • It is also neither pursuing M&As nor a dual listing. 

 Strong revenue growth with expectedly weaker margins. 

  • Yangzijiang Shipbuilding (Yangzijiang) booked 62% QoQ shipbuilding revenue growth as more high-value containerships were under construction in 2Q15, but margin fell to 14.8% (1Q15: 21.8%) as some first-in-series projects commenced at low budgeted margins (c.10%). 
  • As these provisions would be released into profits in 4Q15 when the vessels are delivered, we expect a 2H15 margins rebound for a respectable c.16% full-year average. 

 Orderbook replenishment over margins. 

  • While bowing to the hard truths of the weak new-build market, management has not given up its strict insistence on maintaining prices but would not, however, sacrifice profitability. 
  • The orderbook is now at USD4.65bn (equal to end-FY14), and, upon securing the c.USD1.1bn of orders expected in 3Q15, its yard utilisation rate would remain at 90-100% through FY17 – which would boost its aforementioned budgeted margins. 
  • We understand it is targeting higher margin orders in 4Q15 after securing this base-load USD2.0bn quantum of new orders. 

 Insights and opinions from the top. 

  • We appreciate chairman Mr Ren Yuanlin’s candour and macroeconomic insights, and introduce a new section in this report (see below) Chairman Renditions, with details on our key briefing takeaways. 
  • The company has sold its 100% interest in Hengyuan Real Estate Development Co Ltd and would only continue to develop residential projects in its old shipyard land. 
  • It is also no longer targeting M&As (to protect profitability) or actively pursuing a dual-listing as the market had previously speculated. 
  • Our SOP-based TP drops to SGD1.68 after we lower the shipbuilding multiple to 7x from 10x to reflect the more challenging environment, with our earnings forecasts cut by 2%/6% for FY15/FY16. 
  • The 4.2% yield is sustainable, while the 6x FY15F-17F P/Es and 1x FY15F P/BV are undemanding. 
  • Key risks continue to be shipbuilding margins and order-win momentum.

Chairman Renditions 

On shipbuilding orders. 

“In 1H15, effective contracts in China fell 80% YoY. Yangzijiang was not spared, with few orders before May. Many Chinese yards focused on dry bulk carriers and thus did not perform. The containership space was more vibrant, but orders were lost to Korean and Japanese players who competed hard on prices. In June, we adjusted our marketing/sales strategy and prioritised the orderbook over profit margins and immediately won orders. But Yangzijiang is not a (South) Korean yard, nor a Japanese yard, nor a Chinese state-owned yard. We will not take loss-making orders to keep the yard busy.” On property development. “Entering this market was a strategic error. Exiting it is our correction. Property prices have rebounded recently, but the long-run prospects are negative. Yangzijiang will take this opportunity to exit the business. Funds will be redirected to the shipbuilding business, but potential income growth from property will be sacrificed.” 

On Yangzijiang’s ship chartering business. 

“This is a supplement, not a main business. Management will not actively expand this segment, and actually looks to dispose assets opportunistically. The concept is that of a “profit reservoir” – buy half completed vessels from distressed yards at scrap-metal prices, complete the vessels and put them in the chartering business for some recurring income before they are eventually sold. In 2Q15, the company sold two such dry bulk carriers to customers.” 

On steel prices. 

“Steel is now cheaper than cabbages. This cannot go on.” 

On offshore fabrication. 

“Progress on the jack-up rig is normal, and on track for year-end scheduled delivery. The customer is from the Middle East, so there are no worries on it taking delivery. Yangzijiang has not given up on the offshore business, but under the current oil price environment and with our own current capabilities, we will not expand this business. We are happy we decided to take only one order when the market was hot – now competitors like Shanghai Waigaoqiao (Free Trade Zone Development Co Ltd) (600648 CH, NR) and COSCO (COS SP, NR) are suffering. We will use clean-energy vessels (liquefied natural gas/liquefied petroleum gas carriers) to replace offshore growth.” 

On a dual-listing. 

“Investment banks have approached us on this topic. The original premise is positive – higher valuations and higher liquidity from dual-listing in Hong Kong or China. However, before we decide to dual-list, we have some considerations: i) a clear use for the cash, which we may not have now, ii) original listing in Singapore was that of a small, old Yangzi yard. We are now a much larger organisation and we may face compliance and regulatory complications, and iii) expected market reception. We will only list at a good price, not for the sake of listing. Just because we have considered dual-listing, does not mean we will take immediate action. For now, we are not moving ahead.” 

On held-to-maturity (HTM) assets. 

“We are no longer lending to property companies, new customers, or small-/medium-enterprises. The lending book will fall, and so will our borrowings. We have been asked to give a special dividend after liquidating the HTM assets. However, we want to maintain our strong financial position. Banks will only lend to people with money. We want to keep those banking lines open.” 

On M&As. 

“They are much less attractive today compared to when we considered them in 1H15. Right now, even if you gave us a yard for free, we will not accept it. There will be reasons why they have gone bankrupt. We aim to maintain our profitability.”

To this Yangzijiang CEO Mr Ren Letian added:

“Right now, our yard produces vessels of similar quality to Japanese or (South) Korean builds, but our efficiency levels are still lower. We are targeting productivity growth and improvements not in capacity, but in efficiency.”

Lee Yue Jer CFA | http://www.rhbgroub.com/ RHB Securities 2015-08-07
BUY Maintain BUY 1.68 Down 1.92