Yangzijiang Shipbuilding - CIMB Research 2017-03-14: At a discount to peers

YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - At a discount to peers

Despite a stronger balance sheet and better profits, YZJ is trading at 0.9x CY17 P/BV, a significant discount to Cosco Corp at 2.5x P/BV and Sembcorp Marine at 1.5x P/BV.

Pan Ocean Korea has recently ordered five 63,000dwt bulk carriers (US$146m in total) from YZJ, firming our view that orders should improve by 42% yoy in 2017F.
Positive industry data indicators - higher BDI, stronger secondhand market and narrowing orderbook to fleet to 11% - spur hopes of better order momentum.
As order outlook improves, we think its shipbuilding business should be traded at 1x CY17 P/BV while HTM business be valued at 0.85x P/BV, in line with c.8.5% ROE.

According to Clarksons, Pan Ocean Korea has recently placed an order of five units of 63,000dwt bulk carriers from YZJ at US$29.2m per vessel, bringing total contracts to US$146m.
Management has seen order enquires picking up amidst an improvement in the dry bulk index and higher coal demand.
We are forecasting YZJ winning c.US$1.2bn in new orders in 2017F, up 42% from 2016’s US$823m.

FY16’s core shipbuilding gross margin came in at 25% (FY15: 19%), mainly helped by higher revenue from more vessels delivered yoy (39 in FY16 and 36 in FY15), as well as benefiting from a stronger US$/Rmb in 2H16.
In 2017, assuming Rmb remains steady, core shipbuilding gross margin is likely to trend downwards to c.20% due to higher steel costs. The lower margin trend is well flagged, but this is still more profitable vs. Singapore yards (GM of 8%) and gross loss in Cosco Corp.

The Baltic Dry Index recovered from its trough of 290 in Feb 16 to 1,000 YTD thanks to higher iron ore imports into China. This has resulted in a higher secondhand market as we note that prices for Panamax and Handymax vessels have increased by 17-28% yoy. This could help to improve newbuild (NB) momentum as prices for NB have been flat.
The % of orderbook to global dry bulk fleet has also narrowed to 11% as at end-16 vs. 17% in 2015 and 23% in 2014, suggesting that the oversupply situation is easing.

We raise our EPS by 9-28% for FY17-18F as we adjust shipbuilding revenue recognition with more vessels to be delivered in 2017.
We also increase our core shipbuilding margins to 19-20% (from 17-18%) previously and incorporate higher HTM interest income. The current order book of US$4.3bn with 85 vessels on hand should keep the yard busy till 2019.

YZJ has a cash balance of Rmb7bn and net debt of Rmb138m as of 4Q16. We believe this could sustain its DPS of S$0.04, translating into a c.3.5% yield.
With the potential of an improving order outlook, we believe YZJ’s core shipbuilding division should be valued at 1x P/BV.
We value its HTM asset at 0.85x, in line with the c.8.5% ROE achieved from the interest income derived. Our SOP-based target price is lifted to S$1.21 accordingly.
Higher order wins and margins are the key catalysts.

Lim Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-03-14

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.21 Up 0.910