Yangzijiang Shipbuilding - DBS Research 2016-04-29: Swimming against the tide

YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Swimming against the tide

1Q16 results broadly in line; shipbuilding margins held up at 23%
Expect minimal financial impact from the termination of eight bulker orders, buffered by 10-30% payment collected
FY15 final dividend of 4.5 Scts going-ex on 4 May; translating to 4.5% yield

While the outlook for shipping and shipbuilding remains uninspiring, Yangzijiang is poised to emerge stronger from this downturn. Its valuation is undemanding at 0.8x PB and 7x FY16F PE.
Our SOP-based TP of S$1.25 translates to a fair 1x P/BV and 9x PE, against 10-11% ROE and 4.5% yield.
In addition, it sits on net cash of 55 Scts, representing 42% of NTA and 55% of market capitalisation.

Yangzijiang reported a 1Q16 PATMI of Rm448m (-37% y-o-y). The y-o-y decline in PATMI was attributable largely to the absence of income from forfeited deposits as well as share of shipping losses and mark-to-market losses of its listed shares under venture capital investment.
1Q16 PATMI made up 21% of our full-year core profit estimate, largely in line with expectations given 1Q is a seasonally weaker quarter.
Upside stems from the writeback of Rmb369m provisions in the event of the successful delivery of its only jack-up rig order and grant of preferential tax rate of 15% vs the usual 25% on high-tech status for New Yangzi and Xinfu yards.

As the largest and most cost-efficient private shipbuilder in China, Yangzijiang is among 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.
Its healthy order backlog of US$4.7bn as of end Mar-2016 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.

We value Yangzijiang based on sum-of-parts (SOP) 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.

USD depreciation and hike in steel cost. Revenue is denominated mainly in USD, and only half is naturally hedged. If 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.

Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-04-29

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