Yangzijiang Shipbuilding - DBS Research 2015-11-04: Slowly but surely

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YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI 

Yangzijiang Shipbuilding - Slowly but surely 

• 3Q15 PATMI distorted by non-cash accounting losses. 
• Secured new orders worth US$730m; hefty orderbook of US$4.8bn translates into over 2x revenue coverage. 
• Dual-listing and M&A plans still on the cards. 
• Reiterate BUY with 23% upside potential to our S$1.55 TP plus 4-5% dividend yield. 

3Q15 dragged by non-cash items. 

• 3Q15 PATMI of Rmb681m (-16% y-o-y) brings 9M15 PATMI to Rmb2.4bn (-15% y-o-y), making up only 67% of our full-year forecast. This represents a c.Rmb200m shortfall or c.6% of our full-year estimate. 
• Key variance came from the: 
  1. unexpected losses on disposals of A-share investments (Rmb207m) and property subsidiary - Hengyuan (Rmb101m). Though, strictly speaking, these were merely accounting losses which reversed gains booked in 1H15 as they were liquidated at near cost; as well as 
  2. unrealised forex losses resulting from strengthening USD against Rmb for the hedges (Rmb158m) and USD-denominated borrowings (Rmb130m). 
  This was offset by the anticipated recognition of Rmb557m old yard relocation fees received from the government. 
• Shipbuilding gross margin expanded 3.7ppt q-o-q to 18.5%, boosted by a stronger USD. 

Key takeaway from briefings: 

1. Overall shipping and shipbuilding outlook remains challenging as the impact of China slowdown filters through; 
2. Deferment is likely especially for bulk carriers while cancellation risk is less of a concern given the high 20-40% collection prior to delivery; 
3. The tough environment underscores Yangzijiang’s competitive advantage - industry foresight, cost control and project management; 
4. Yangzijiang secured US$730m new orders comprising 10 containerships and two VLGCs. This brings YTD wins to US$1.6bn and management is confident of meeting the US$2bn target by year-end in view of current newbuild rush to avoid the new emission regulation effective from 1 Jan 2016; 
5. Sound strategies to move into the growing and less-competitive clean energy carrier market, steering clear of offshore projects, and sticking with its order principal – no losses, poor payment terms, and high technical hurdles; 
6. Redeployment of HTM investments into safer government-related projects to tap on the China SOE restructuring; and 
7. Dual-listing in HK and M&A remain in the cards if the opportunity arises. 

STI Index stock with decent yield; dual-listing a longer-term catalyst: 

• We have cut our FY15/16 PATMI by 7%/14% to account for the unexpected items in 3Q15 and normalised margin assumption by 2- 3ppt. 
• Our TP has been consequently lowered to S$1.55. 
• While Yangzijiang’s earnings outlook is uninspiring, we believe its share price is supported by its recent STI inclusion and decent 4-5% dividend yield. 
• Valuation is undemanding, trading at below book despite its 12-14% ROE. In addition, potential corporate actions could offer upside surprises. 
• Reiterate BUY.

Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2015-11-04

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.55 Down 1.62