Yangzijiang Shipbuilding - DBS Research 2018-05-28: Unwarranted Sell-off

Yangzijiang Shipbuilding - DBS Vickers 2018-05-28: Unwarranted Sell-off YANGZIJIANG SHIPBLDG HLDGS LTD SGX: BS6

Yangzijiang Shipbuilding - Unwarranted Sell-off

  • 20% price decline in a month is unwarranted; stock is trading at an unjustifiable 35% discount (P/BV) to global peers despite attractive yield and higher ROE.
  • USD is strengthening and steel cost moderated 10% from end 2017 level – positive for Yangizjiang.
  • Stands to benefit from industry consolidation; moving into clean energy vessel space in a bigger way.
  • Price weakness is a BUY opportunity; Target Price unchanged at S$1.82.



Unjustifiable price weakness; Reiterate BUY; Target Price unchanged at S$1.82.

  • We believe Yangzijiang’s weak share price, falling 35% in 3-month, is unwarranted. 
  • The sell-down was due to overblown concerns on forex and steel cost pressure as well as slow sector recovery. It is now trading at rock bottom valuation of 0.7x P/BV, which is at a 35% discount to global peers’ average P/BV of 1.1x, notwithstanding its attractive 5% yield and higher ROE of 8-9% vs peers’ 4-5%.
  • It also has a solid balance sheet, sitting on net cash of 76 Scts/share (including financial assets), representing ~52% of NTA as opposed to shipyard peers that are mostly heavily indebted.


One of the world’s best-managed and profitable shipyards.

  • Core shipbuilding revenue is backed by its healthy order backlog of US$4.5bn (~2x revenue coverage) as at end-Mar 2018. Better returns from the investment segment provides a cushion to its recurring income stream.
  • As the largest and most cost-efficient private shipbuilder in China, Yangzijiang is well positioned to ride the shipping and shipbuilding recovery. Its strategy to move up into the LNG/LPG vessel segment with a Japanese partner strengthens the longer-term prospects of the company.


Where we differ:

  • We have been more bullish on the sector’s 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. 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. We arrive at a target price of S$1.82, after applying 14x FY18F PE on shipbuilding earnings, 1.5x P/BV for bulk carriers and 1.3x P/BV for investments.
  • Our Target Price translates into 1.25x P/BV, which is approximately 0.4SD below historical mean (2.0x) since listing.


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 accounts for about 20% of COGS, could result in 0.8% drop in earnings.


WHAT’S NEW - Share price weakness; Forex and steel cost pressure?


Provisions out of prudence in 4Q17.

  • To recap, Yangzijiang made Rmb1.2bn worth of provisions in 4Q17 in view of the weaker USD and rising steel cost then. We note that ~70 vessels (out of total of 123 vessels) on its orderbook were provided for while the remaining 40+ vessels (largely the large containerships and small bulkers) were expected to be profitable when stress-tested at those levels.

Expect write-backs as USD strengthens.

  • We understand the provisions were derived on assumptions of exchange rate at 6.15 Rmb/USD and steel cost at Rmb4,800 per ton. This appears rather conservative to us. Our economist expects Rmb/USD to average around 6.5 in 2018-2019. 
  • The USD has since strengthened to ~6.4/USD level and steel cost has moderated to Rmb4,400 level from the recent high of Rmb4,800 in Dec-2017. Management guided at end Apr that at the Rmb/USD rate of Rmb6.35, there could be a Rmb600m writeback upon delivery of the vessels. This should translate to approximately 8% shipbuilding margin.

Budgeted cost is usually more conservative.

  • In addition, Yangzijiang tends to be conservative in cost budgeting and typically delivers better than expected actual margins arising from cost savings and efficiency gains.

Some buffer to margins.

  • Shipbuilding margins are expected to moderate from the average of > 20% to ~15% in 2018- 2019, mitigated by a lower tax rate, recognition of old yard relocation fees (Rmb158m), write-back of the cost overrun provisions and write-back/disposal gains from terminated vessels.
  • The mega containerships under construction in particular the 11.8k TEU units for PIL, are churning lucrative margins of ~25%. Margin recognition has been prudent during construction phase and a big chunk of profit is expected to be recognised towards the later stage of construction. Hence, we expect margins to be boosted upon delivery of nine units (out of total orders of 12 units) over the next one year.
  • In addition, investment segment which contributes ~Rmb1bn interest income a year, is seeing a higher return 12% vs 8% last year, providing cushion to recurring income stream.

Measures to enhance return.

  • Management is proactively looking for avenues to enhance returns. Management sees opportunities to take over incomplete vessels from bankrupt yards, which would yield better profit margins than newbuild contracts. 
  • Management may also look to raise its investment business, tapping on mixed ownership restructuring and trend towards environmental related business.


Market share gains


Newbuild demand remains fairly healthy.

  • In 2017, world contracting totaled 24m CGT and 77m DWT, representing 83% and 137% y-o-y increase respectively. 
  • In 4M18, while pace has slowed down from 4Q17, world contracting totaled 7.7m CGT and 21m DWT, representing 42% and 68% y-o-y increase respectively.

Newbuild prices showing signs of improvement.

  • Newbuild prices starting to trend up since 4Q17. The price increases vary depending on vessel type. Bulk carriers and containerships have seen up to 11% newbuild price increase.

Target US$1.8bn new orders for 2018.

  • Management has set a conservative new order win target of US$1.8bn for 2018, which is slightly lower than 2017’s US$2.1bn actual wins, considering the group’s revenue coverage has already exceeded 2x and there is lack of visibility on forex and steel prices at this juncture. 
  • In general, Yangzijiang targets to secure ~US$2bn worth of new orders per annum to replenish its orderbook. The current 2-year revenue coverage is ideal as too high an orderbook stretching beyond 2 years may have higher project risks given forex and cost fluctuations.

Gaining market share.

  • Yangzijiang has gained market share over the years. Its orderbook as a percentage of the global orderbook surged from ~1% in 2008 to ~4% currently.

Potential collaboration with Japanese partner.

  • Its strategy to move up into the LNG/LPG vessel segment strengthens the longer-term prospects of company. Management has shared their vision to collaborate with a Japanese partner to expand into the clean energy vessel space in a bigger way.


Unjustifiably low valuation

  • Yangzijiang stock price has fallen 35% / 20% over 3 months and 1 month respectively, owing to overblown concerns on unfavourable forex and steel cost as well as shipbuilding sector recovery, which is unwarranted, in our view.
  • Yangzijiang is now trading at rock bottom valuation of 0.7x P/BV, which is 35% discount to global peers’ average P/BV of 1.1x, notwithstanding its attractive 5% yield and higher ROE of 8-9% vs peers’ 4-5%.
  • It also has a solid balance sheet, sitting on net cash of 76 Scts per share (including financial assets), representing ~52% of NTA as opposed to shipyard peers that are mostly heavily indebted.








Pei Hwa HO DBS Vickers | https://www.dbsvickers.com/ 2018-05-28
SGX Stock Analyst Report BUY Maintain BUY 1.820 Same 1.820



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