Yangzijiang Shipbuilding - RHB Invest 2016-03-07: Saving For A Rainy Day

Yangzijiang Shipbuilding - RHB Invest 2016-03-07: Saving For A Rainy Day YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI 

Yangzijiang Shipbuilding - Saving For A Rainy Day 

  • We had a brief discussion with the management of Yangzijiang (YZJ) on its shipbuilding business and best practices. Our impression of its accounting conservatism remains unchanged. 
  • Most interestingly, we learnt that c.40% of potential orders did not get to the final signature due to YZJ’s unwavering stance on payment terms, which we view as a strong positive indication of risk management. 
  • Its dividend is highly-sustainable. We believe the market has under-priced its shipbuilding resilience and over-discounted its HTM asset book. 
  • Maintain BUY with SGD1.30 TP (41% upside, from SGD1.61). 

Provisions take conservative accounting one step further. 

  • YZJ wrote down the value of its jack-up rig under construction to USD110m, 35% below its sale price. This is, we believe, the low end of the USD110m-140m valuation range applicable to newbuild jack-ups today. Should the customer pay the amount in full or at a small discount, YZJ will be able to write back most of the impairment. 
  • Similarly, provisions on its held-to-maturity (HTM) assets will be kept in place until the loans are fully repaid. 
  • We trim our earnings forecasts by 19%/12% for FY16/17F, in line with the conservative accounting policies adopted by YZJ. 

Selecting quality customers over quantity. 

  • Last year, YZJ announced 37 new contract wins worth USD2.25bn. We asked management on the number of contracts that did not make it to the final sign-off due to customers’ unwillingness/inability to meet YZJ’s payment terms. It turns out there were at least 25 such cases, which means that by holding firm on its policy for sound payment terms, the company effectively turns away c.40% of potential orders. We view this as solid risk management which should also reassure its existing high-quality customers of the company’s sound business operations and ability to deliver on their orders. 
  • Despite turning away some customers, YZJ’s orderbook has not suffered and its orderbook now stands at a six-year high of USD5.4bn while YZJ targets USD2.0-2.5bn of orders annually. 

Sustainable dividends given strong balance sheet. 

  • YZJ has been conservative in accounting for items such as cash inflows from customer deposits, HTM asset values and shipbuilding margins even post-delivery. The impact of their more conservative accounting policies will eventually be reflected in the company’s future earnings, underpinning our confidence that it can easily support the 4.5-cent dividend. 
  • This is further backed-up by the group’s net gearing, which is a mere 6%. 

Fundamentals are solid. 

  • Assuming YZJ wins no new orders these two years, it will still remain EPS and cashflow positive. 
  • YZJ’s cash balance could keep the company afloat for a decade, as its cash overheads are extremely slim. 
  • The value of its HTM assets and properties, less net debt, is c.SGD0.67 per share. 
  • At current share price, the market has priced its shipbuilding division at 2.5x FY16F P/E. 
  • Our SOP-based TP implies 8.9x and 1x FY16F P/E and P/BV.

Lee Yue Jer CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-03-07
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.30 Down 1.61