YANGZIJIANG SHIPBLDG HLDGS LTD
BS6.SI
Yangzijiang Shipbuilding - Good Entry Point
- A decent 1Q18; healthy core shipbuilding margin of 17% supported by high-price contracts and reversals of impairment.
- Higher investment return mitigates potential decline in shipbuilding margins.
- Secured US$268m worth of new contracts YTD; cancellation of four vessels.
- Reiterate BUY; Target Price S$1.82.
Reiterate BUY; Target Price S$1.82.
- Value is emerging as the stock trades at undemanding valuation of 0.8x P/BV, against 9% ROE and 4% yield. Recent upswing in BDI should also lift sentiment.
- As the largest and most cost-efficient private shipbuilder in China, Yangzijiang Shipbuilding (Yangzijiang) is well positioned to ride the anticipated shipping and shipbuilding recovery. Its strategy to move up into the LNG/LPG vessel segment propels the longer-term prospects of company.
- It has a solid balance sheet, sitting on net cash of 76 Scts per share (including financial assets), representing ~52% of NTA.
Proxy to shipping recovery; one of the world’s best-managed and profitable shipyards.
- Core shipbuilding revenue was backed by its healthy order backlog of US$4.5bn as at end-March 2018, which translates into revenue coverage of more than 2x.
- While shipbuilding margins are expected to moderate from the average of 25-27% in 2016-2017 to 14-16% in 2018-2019, the drop could be mitigated by a lower tax rate, recognition of old yard relocation fees (Rmb158m) and write-back/disposal gains from terminated vessels.
- In addition, investment return provides cushion to recurring income stream.
Where we differ:
- We have been more bullish on sector recovery and believe Yangzijiang deserves to re-rate, catalysed by order wins and newbuild price increases eventually.
- The shipping supply growth could outstrip demand growth in 2018-2019 particularly for dry bulks and tankers. The global orderbook-to-fleet ratio has dropped to ~10% from the peak of ~55% recorded ten years ago, implying low single-digit supply growth in the next two years.
- Profitability improvement of shipping companies should drive demand for newbuild vessels and higher newbuild prices.
Valuation:
- 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$1.82, after applying 14x FY18F price earnings (PE) on shipbuilding earnings, 1.5x price-to-book value (P/BV) for bulk carriers and 1.3x P/BV for investments.
- Our Target Price translates into 1.2x P/BV, which is approximately 0.4SD below historical mean (1.9x) since listing in 2007.
Key Risks to Our View:
- 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 account for about 20% of COGS, could result in a 0.8% drop in earnings.
WHAT’S NEW - A decent 1Q18
Decent 1Q18 results.
- Yangzijiang’s reported headline PATMI of Rmb595m (-11% y-o-y) in 1Q18 makes up ~25% of our full-year expectation. The y-o-y profit decline was mainly due to lower shipbuilding margins, as expected.
- Shipbuilding margin moderated to 17% in 1Q18. Core shipbuilding gross margin contracted 5.4ppts y-o-y to 17.3% in the quarter on the back of weakening USD and rising steel cost.
Forex loss mitigated by disposal gains and reversals of impairment.
- Forex loss of Rmb141m was offset by reversal of expected losses on construction contracts (Rmb53m); gains from disposal of PPE (Rmb40m).
- Investment segment saw net interest income surging 45% y-o-y to Rmb290m. The credit tightening in China has driven up the investment return from 8% to nearly 10% and could potentially rise to 12%. Investment segment remains a vital pillar for Yangzijiang, particularly during shipbuilding downturn. It generated > Rmb1bn interest income a year, offering stable recurring income and bolstering dividend payout.
Solid balance sheet.
- Including financial assets, Yangzijiang is in net cash, equivalent to 76 Scts per share or 52% of its NTA. This bodes well for M&A activities.
Secured nine new orders worth c.US$268m YTD.
- Yangzijiang has secured nine new orders worth US$268m in total YTD, comprising:
- One unit of 180,000-DWT bulk carrier
- Seven units of 82,000-DWT bulk carriers
- One unit of 83,500-DWT combination carrier
- While this represents only 13% of our full-year expectation of US$2bn, order wins tend to be patchy. In addition, Yangzijiang has 2-year order backlog, providing them the flexibility to monitor forex and material cost movement and newbuild price trend before committing to new orders.
Some contract terminations.
- In 1Q18, there were four vessels terminated, including two units of 1,900-TEU containerships and two units of 36,500-DWT bulk carriers. All of the four terminated contracts had not started construction.
- Orderbook stood at US$4.5bn, slightly down from US$4.7bn a quarter ago, implying revenue coverage of more than two years. Yangzijiang is ranked No.1 in China and No.3 in the world based on outstanding orderbook.
Strategy to move into clean energy segment.
- Management remains committed to move up the value chain into clean energy vessels, such as LNG, LPG carriers, via R&D and M&A. This brightens the long-term prospects of Yangzijiang, in our view.
BDI’s rally of 45% in 3-weeks should lift sentiment.
- The Baltic Dry Index (BDI) has started the second quarter on a stronger footing, rising 45% to 1,370 points level in 3-weeks. Yangzijiang’s share price has empirically exhibited strong correlation with BDI, which is a trade indicator that measures shipping costs for commodities, tracking global trade and indicating the future direction of economic growth.
- Final dividend of 4.5 Scts declared for FY17 will go ex on 18 May. This represents an attractive c.4% yield.
Pei Hwa HO
DBS Vickers
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http://www.dbsvickers.com/
2018-04-30
SGX Stock
Analyst Report
1.820
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1.820
