Yangzijiang Shipbuilding - OCBC Investment 2017-09-25: Significant Overseas M&A Coming Up?

Yangzijiang Shipbuilding - OCBC Investment 2017-09-25: Significant Overseas M&A Coming Up? YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding: - Significant Overseas M&A Coming Up?

  • Down 13% post placement announcement.
  • Await news of acquisitions.
  • Maintain HOLD.

Price eases after placement announcement 

  • After the share placement announcement on 31 Aug 2017, Yangzijiang Shipbuilding’s (YZJ) share price has dropped 13% from a high of S$1.625 on 30 Aug to S$1.41 as of yesterday’s close. 
  • Recall that 137m new shares (represents 3.6% of existing share capital) will be placed out at S$1.53/share to raise net proceeds of about S$209m. Up to half of this will be used to fund new investments and business expansion through acquisitions, JVs and/or strategic alliances, with the remainder meant for working capital and general corporate purposes, such as repayment of bank borrowings.

Financially robust 

  • As of 1H17, the net-cash group had RMB6.3b in cash and cash equivalents (excludes RMB335m restricted cash), RMB6.0b of current held-to- maturity financial assets, RMB1.1b of current available-for-sale financial assets and RMB724m of financial assets at fair value through profit or loss. 
  • Under non-current assets, there were RMB4.6b of held-to-maturity financial assets and RMB200m of available-for-sale financial assets. This is against current borrowings of RMB5.2b and non-current borrowings of RMB801m.

Awaiting news of overseas acquisitions 

  • With these significant resources, there have been questions on the need to raise funds, unless the group is preparing to undertake significant M&A ahead. 
  • Another possible explanation could be that the placement adds to cash at the listed platform level, as a significant portion of cash may be with the subsidiaries in China, while increased scrutiny over capital movements after certain high-profile incidents in China have led to more capital controls. Hence the placement would allow YZJ to undertake more significant overseas acquisitions. 
  • Whichever the case, time will tell with regards to the use of the proceeds. As for the stock, we believe that a fair amount of new orders expectation has been baked into the share price, as mentioned in our earlier report. 
  • We tweak our estimates to account for the placement and adjust our P/B for the shipbuilding segment from 1.3x to 1.2x, in line with the decline in industry average, leading to a fair value estimate of S$1.48. Maintain HOLD.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-09-25
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 1.480 Down 1.580