Yangzijiang Shipbuilding - DBS Research 2016-08-08: Decent yield play

YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Decent yield play

2Q16 results below on slower orderbook drawdown; shipbuilding gross margin commendable at c.21%.
Secured orders worth US$80m for four 1,800k TEU containerships; minimal financial impact from termination of three vessels.
Trimmed FY16-17 core earnings by 14-27% after pushing back vessel deliveries.

Maintain BUY for its distinctive competitive edge, decent yield and undemanding valuation; TP lowered to S$1.00.

While the operating environment for shipbuilding remains challenging, Yangzijiang Shipbuilding (Yangzijiang) is well-positioned to emerge stronger from this downturn. Its net cash of 56 Scts /share (incl Held-to-Maturity investments), representing 43% of NTA, bodes well for M&A opportunities.
Valuation is undemanding at 0.7x P/B.
Our SOP-based TP of S$1.00 translates to 0.9x P/B, against 7-8% ROE and 4% yield. Reiterate BUY.

As the largest and most cost-efficient private shipbuilder in China, Yangzijiang is among the few Chinese yards that have crossed into the high-end vessel space to compete against Korean rivals, and is well positioned to benefit from the post-consolidation upturn of the shipbuilding market, 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 and cash management.
Its healthy order backlog of US$4.7bn as of end Jun-2016 with high revenue coverage of over 2x vis-à- vis global peers does not just provide earnings visibility but is also a testament to Yangzijiang’s market leadership.

Net earnings in 2Q16 slid 7% q-o-q to Rm418m, below our expectation of Rmb500m due to slower orderbook drawdown. This brings 1H16 earnings to Rmb863m, making up c.40% of our FY16 core profit estimate.
We trimmed FY16-17 core earnings by 14- 27% after pushing back vessel delivery dates. There is potential upside to earnings from a partial writeback of provisions of Rmb369m in the event of the successful delivery of its only jack-up rig order and grant of preferential tax rate of 15% on high-tech status for New Yangzi and Xinfu yards next year, vs the usual 25%.

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$1.00, after applying 8x FY16F price earnings (PE) on shipbuilding earnings, 0.6x 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.

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% decline in earnings. Every 1% rise in steel costs, which accounts for about 20% of COGS, could result in a 1.1% drop in bottomline.

Janice CHUA DBS Vickers | http://www.dbsvickers.com/ 2016-08-08

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.00 Down 1.250