Yangzijiang Shipbuilding - DBS Research 2017-03-02: Proxy to shipping recovery

YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Proxy to shipping recovery

As the largest and most costefficient private shipbuilder in China, Yangzijiang Shipbuilding (Yangzijiang) is well-positioned to benefit from the State-Owned Enterprise (SOE) reform in China and ride the anticipated shipping recovery.
It has a solid balance sheet, sitting on net cash of 65 Scts per share (includes Held-to-Maturity investments), representing 53% of NTA. Valuation is undemanding at 0.8x P/B, against 7-8% ROE and 4% yield.
Our SOP-based TP is lifted to S$1.12 (implied 0.9x P/B), after rolling over our valuation to FY17 with higher target PE of 10x (8x previously) for shipbuilding segment in view of a recovery in the newbuild market. Reiterate BUY.

The global orderbook-to-fleet ratio has dropped to a low of 11%, of which c.60% is scheduled for delivery in 2017, implying that supply will be much lower from 2018 onwards.
On the scrapping side, the new Ballast Water Management Convention rule that will take effect in Sept-2017, could accelerate the demolition of old vessels. This is expected to drive the recovery in the shipping market, led by dry bulk segment, and thus give a boost to newbuild demand. We expect new orders to almost double to US$1.5bn this year, from 2016’s US$823m.

Core shipbuilding revenue is backed by its healthy order backlog of US$4.3bn as at end Dec-2016, which translates to revenue coverage of > 2x.
While shipbuilding margins are expected to moderate from the average of 25% in 2016 to 16% in 2017-2018, it could be mitigated by a lower tax rate for New Yangzi Shipyard (impact estimated at Rmb150m), recognition of old yard relocation fees (Rmb158m) and absence of significant impairments (net one-offs of c.Rmb600m in 2016).

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$1.12, after applying 10x FY17F price earnings (PE) on shipbuilding earnings, 1.0x price-to-book value (P/B) for bulk carriers and 1x P/B for investments.

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

Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2017-03-02

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.12 Up 0.950