Yangzijiang Shipbuilding - DBS Research 2018-07-03: Beneficiary Of Strengthening USD

Yangzijiang Shipbuilding - DBS Vickers 2018-07-03: Beneficiary Of Strengthening Usd YANGZIJIANG SHIPBLDG HLDGS LTD SGX:BS6

Yangzijiang Shipbuilding - Beneficiary Of Strengthening Usd

  • Yangzijiang's share price has unjustifiably halved from its high in Nov-17 due to overblown concerns on forex and steel cost as well as US-China trade war.
  • Strengthening USD to above Rmb6.65 bolster profits in FY18-19.
  • Share buyback exercise reaffirms confidence.
  • Attractive entry point at 7x PE, 0.6x PB and 5% yield; generating 8-9% ROE; reiterate BUY with S$1.82 Target Price.



Poised for rebound; Reiterate BUY; Target Price unchanged at S$1.82.

  • Yangzijiang’s share price is set to stage a rebound, after falling 50% YTD, due to overblown concerns on forex and steel cost as well as trade war.
  • Recent strengthening of USD will benefit Yangzjiang with every Rmb0.10 leading to Rmb300m writeback. There is a window of opportunity to buy the quality shipyard at a rock bottom valuation of 0.6x P/BV, which is at a ~30% discount to global peers’ average P/BV of 0.9x, notwithstanding its attractive 5% yield and higher ROE of 8-9% vs peers’ 4-5%.
  • Yangzijiang 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.
  • It is the largest and most cost-efficient private shipbuilder in China, Yangzijiang is well positioned to ride sector consolidation 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 demand growth could outstrip supply 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 - Opportunity to bottom fish


Price continues to fall alongside broad market weakness.


Bottom-fishing opportunity.

  • While the hit on sentiment from trade war fears might linger, the sell-off on quality shipyard names like Yangzijiang, halved from its high of S$1.74 in Nov-2017, to a 16-month low seems overdone.
  • The stock is now trading at a rock bottom valuation of 0.6x P/BV, which is at a ~30% discount to global peers’ average P/BV of 0.9x, 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.

Stronger USD is positive for Yangzijiang.

  • To recap, Yangzjiang prudently made provisions for its existing orderbook in 4Q17, taking into account the lower USD at 6.15 Rmb and higher steel cost of Rmb4,800/t. With the strengthening USD to 6.65 Rmb, every Rmb0.10 increase is expected to result in Rmb300m writebacks upon delivery of vessels.

Steel cost unlikely to surge further.

  • Our steel analyst had expected steel prices to bottom out in 2Q, following a demand recovery and inventory drawdown ahead, but prices are unlikely to surge as steel demand growth is unlikely to exceed expectations, and there is ample inventory of steel and iron ore.

Expect decent 2Q18 results.

  • The stronger USD is in line with our expectations. Our economists had expected USD to hover around 6.5-6.6 Rmb in 2018-2019. As such, we believe Yangzijiang is on track to achieve our core shipbuilding gross margin assumption of 14-16% and profit forecast in FY18- 19.
  • For 2Q18, we expect Yangzijiang to deliver core shipbuilding margins of 17%, similar to 1Q18, bolstered by a stronger USD and deliveries of higher margin mega containerships. As such, net profit will likely be steady q-o-q at ~Rmb600m. This should reignite confidence into the stock, in our view.

Share buyback signals management’s confidence.

  • Yangzijiang activated its share buyback mandate on 30 May. As at end June, it has repurchased 13.2m shares or approx. 3.3% of outstanding shares at an average cost of S$0.93. The move signals management’s confidence in company and should bolster stock prices to certain extent.

Potential collaboration with Japanese partner is another catalyst.

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





HO Pei Hwa DBS Vickers | https://www.dbsvickers.com/ 2018-07-03
SGX Stock Analyst Report BUY Maintain BUY 1.820 Same 1.820



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