Yangzijiang Shipbuilding - CIMB Research 2017-08-31: Using Other People’s Money To Make Money

Yangzijiang Shipbuilding - CIMB Research 2017-08-31: Using Other People’s Money To Make Money YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Using Other People’s Money To Make Money

  • Yangzijiang Shipbuilding YZJ is placing out 137m new ordinary shares of the company to institutional investors at S$1.53 per share, raising approximately S$209m.
  • The placement price implies 1.18x FY17 P/BV. This is a surprise as the company had a strong balance sheet with net cash of Rmb304m as of 1H17.
  • We believe proceeds will be used to acquire the other 20% stake in Xinfu shipyard, LNG technology M&As and participate in private capital investment in China.
  • We are positive on the placement as dilution is minimal at 3.6% with the benefit of increasing institutional shareholders’ following.
  • Maintain Add and target price (S$1.66), still based on SOP but pegging 1x P/BV to HTM assets and 1.4x P/BV to shipbuilding.

S$1.53 per share, S$209m raised, minimal dilution

  • The placement shares will be placed out at a price of S$1.53, a discount of c.4.07% to the volume weighted average price of S$1.5949 for trades done with respect to the shares on 29 August 2017 (being the market day immediately preceding the date the placement agreement was signed).
  • Dilutive effect is minimal at 3.6% with share capital increased from 3,831,838,000 shares to 3,968,838,000 shares.

Why the placement?

  • Placement is a cheaper source of funding than borrowings, which is subject to withholding tax and which could cost the company 5-10% p.a. for the cross border remittance.
  • According to the company, 50% of the placement will be used for M&A and investments.
  • Its first ‘low hanging fruit’ target is the remaining 20% of Xinfu shipyard. Yangzijiang first acquired 20% of the yard in Nov 10 and increased its stake to 80% over the years, with a cumulative investment cost of close to US$90m. The yard is profitable with a net profit of c.Rmb600m as of 1H17 or c.33% of YZJ’s group profit.
  • Its second target is overseas firms with LNG technology know-how to improve YZJ’s position in the arena. Currently, the construction of LNG/regasification vessels is largely dominated by the Korean yards, especially for sizeable ones of up to 180,000 cu. m. The two LNG vessels that YZJ delivered thus far were 27,500 cu. m.
  • Finally, the placement proceeds will be used for private capital investment in the area of defense vessels or equipment. This could widen YZJ’s product offering while helping it climb the ranks so it can compete with the Chinese SOE yards in the defence space. To date, YZJ has not won any defence shipbuilding contracts as they were all awarded to SOEs.
  • Finally, we believe the placement will also lift its profile as its institutional shareholding following is widened given its index position in the FSSTI.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-08-31
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.660 Same 1.660