Yangzijiang Shipbuilding - DBS Research 2016-02-29: 4Q15 dragged by impairments

Yangzijiang Shipbuilding - DBS Research 2016-02-29: 4Q15 dragged by impairments YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI 

Yangzijiang Shipbuilding - 4Q15 dragged by impairments 

  • 4Q15 core profit was in line; dragged by massive Rmb824m provision/impairments 
  • Shipping and shipbuilding industries remain challenging 
  • One of the most cost efficient and well managed shipyards; decent yield of c.5% 
  • Reiterate BUY; TP lowered to S$1.25 

 Decent dividend yield. 

  • While the outlook for shipping and shipbuilding remain uninspiring, Yangzijiang is poised to emerge stronger in this downturn. 
  • Valuation is undemanding at 0.7x PB and 6x FY16F PE. Our SOTP-based TP is lowered to S$1.25, following earnings revisions. This translates to a fair 1x P/Bv and 9x PE, against 10-11% ROE and 4.5% yield. 
  • In addition, Yangzijiang sits on net cash of 44 Scts, representing 36% of NTA and 47% of market capitalisation. 

 4Q15 results were dragged by provisions/impairment. 

  • Excluding provisions, core profits were actually commendable, with shipbuilding business registering an impressive 20% gross margin. Looking ahead, given the persistently weak shipping market, risks of deferment and cancellations are heightened. We have trimmed our shipbuilding margins by 1-4ppts and cut FY16-17 recurring PATMI by 15-20%. Upside stems from the writeback of provisions in the event of the successful delivery of a jack up rig. 

 Riding out industry cycles with solid management and healthy order backlog. 

  • As the largest and most cost-efficient private shipbuilder in China, Yangzijiang is amongst the few Chinese yards that have waded into the high-end vessel space to compete against Korean rivals, and is well positioned to benefit from the post consolidation recovery of shipbuilding markets, alongside a shipping recovery. 
  • It has emerged stronger in the past few cycles with Executive Chairman, Mr Ren Yuanlin at the helm. Mr Ren, ranked 82 in Lloyd's List's Top 100 most influential people in shipping, is highly respected for his great foresight, strategic sense and cost/cash management. 
  • Healthy order backlog of US$5.4bn with high revenue coverage of over 2x vis-à-vis global peers do not just provide earnings visibility but is also a testament to Yangzijiang’s market leadership. 

Valuation: 

  • We value Yangzijiang based on sum-of-the-parts (SOTP) methodology to better reflect the valuations of the various segments. 
  • We arrive at a target price of S$1.25, after applying 8x FY16F price earnings (PE) on shipbuilding earnings, 0.5x price-to-book value (P/B) for bulk carriers, 1x P/B for investments, and a 25% discount to the net present value (NPV) of its property project. 

Key Risks to Our View: 


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 bottom line. 

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$1.46 per share based on an exchange rate of Rmb4.51/SGD, which is out-of-the money currently



Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-02-29
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.25 Down 1.55


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