YANGZIJIANG SHIPBLDG HLDGS LTD
SGX:BS6
Yangzijiang Shipbuilding - Raising The Bar
- Yangzijiang’s 2Q18 figures beat expectations on strong shipbuilding earnings.
- Core shipbuilding margins expanded 4.2ppts q-o-q to 21.5% aided by deliveries of 10 higher-margin, large vessels.
- Order wins could exceed target; raise FY18/19 profits to Rmb2.8bn.
- Reiterate BUY; undervalued at trading near net cash levels; Target Price S$1.82.
Reiterate BUY; Target Price unchanged at S$1.82.
- Yangzijiang is a steal, trading near net cash (including HTM investments) of 91 Scts, undervalued at 0.7x P/BV, a c.20% discount to global peers, notwithstanding its more attractive 10% ROE and 5% yield.
- The astounding 2Q profit soaring 67% q-o-q serves as a confidence booster on Yangzijiang’s shipbuilding profitability. It is a prime beneficiary of stronger USD and among the best proxies for shipping and shipbuilding recovery.
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One of the world’s best-managed and profitable shipyards.
- Core shipbuilding revenue is backed by its healthy order backlog of US$4bn (~2x revenue coverage) as at end-June 2018. Better returns from the investment segment provides a cushion to its recurring income stream.
- Yangzijiang Shipbuilding 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 12x FY18F PE on shipbuilding earnings, 1.5x P/BV for bulk carriers and 1.1x P/BV for investments.
- Our Target Price translates into 1.3x 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 - 2Q18 beat expectations
2Q18 results exceed expectations.
- Yangzijiang’s reported headline PATMI of Rmb995m (+38% y-o-y; +67%q-o-q) in 2Q18. This brings 1H18 net profit to Rmb1.6bn (+15% y-o-y; +3% h-o-h), making up ~67% of ours and consensus’ full-year expectations. This is way above expectations of Rmb600m a quarter, driven by stronger-than-expected shipbuilding earnings.
Shipbuilding margin expanded to 21.5% from 17.3% in 1Q18.
- Core shipbuilding gross margin expanded 1.8ppts y-o- y and 4.2ppts q-o-q to 21.5% in the quarter, boosted by the all-time high quarterly deliveries of 20 vessels, consisting of the higher margins contracts - 2 units of 400,000 DWT bulkers, 5 units of 10,000 TEU containerships and 3 units of 11,800 TEU containerships, which we believe command margins of ~25% on average.
- Core shipbuilding revenue was also higher in the quarter, surging 78% q-o-q on the back of higher shipbuilding activity and disposal of the cancelled 10,000 TEU containerships (~Rmb550m). We expect margins to moderate to 15-17% going forward.
Write off prepayment to a supplier in financial difficulties.
- The stellar performance was partially offset by a write-off for trade receivables amounting to Rmb229m, which we understand was relating to prepayment to one of their long- term copper cable suppliers which is undergoing financial restructuring.
- Yangzijiang has also made provisions for HTM investments totalling Rmb133m out of prudence as pledged shares by two borrowers were suspended and triggered margin calls. This is a pre-emptive measure as borrowers are required to top up the collaterals. The provision was offset by forex gain of Rmb101m, and Rmb20m gain from acquisition of subsidiary (Huayuan Logistic Group).
Investment segment saw net interest income rising 27% q-o- q to Rmb369m, achieving higher investment return of 13%, vs 10% a quarter ago.
- This was largely attributable to step-up of coupon for an USD140m investment (from 6% to 10%), which has been redeemed in 3Q18. 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.
- Secured 13 new orders worth c.US$710m in 2Q18. Yangzijiang has secured 13 new orders worth c.US$710m in 2Q, comprising:
- One unit of 180,000 DWT bulk carriers
- Three units of 82,000 DWT bulk carriers
- Two units of 208,000 DWT bulk carriers
- Two units of 2,400 TEU containerships
- Five units of 12,690 TEU containerships
- YTD wins amounted to ~US$980m and appears to be on track to meet our full-year expectation of US$2bn this year.
Order wins might surprise on the upside.
- We sense that management appears more upbeat on shipbuilding outlook. While competition remains keen, shipping companies are more eager to take deliveries now than before in anticipation of demand growth.
- Recall that in 1Q18, there were four vessels terminated, including two units of 1,900 TEU containerships and two units of 36,500 DWT bulk carriers, which contract value totalled ~US$88m, based on our estimates. All of the four terminated contracts have not started construction.
- Management do not foresee further cancellations in the near future.
Orderbook stood at US$4.0bn, down from US$4.5bn a quarter ago given the strong revenue recognition in 2Q.
- This implies revenue coverage of c. 2-years. Yangzijiang is ranked no.1 in China and no.4 in the world based on outstanding order book.
Yard running at full steam; Tai Chang yard could be re-activated.
- Management shared that their main facilities, New Yangzi and Xinfu yards, are operating at 110% utilisation. It plans to reactivate the smaller offshore Tai Chang yard, that had been shut down given the decision to stay away from offshore projects. The yard has the capacity to deliver 10-12 units of mid-sized bulk carriers p.a. when fully ramped up in two years. We believe the Tai Chang yard will eventually be focusing on building clean energy vessels.
Solid balance sheet.
- Including HTM investments, Yangzijiang is in net cash, equivalent to 91 Scts per share or 66% of its NTA. This bodes well for M&A activities.
Earnings revisions.
- We are raising our FY18/19 profit forecast from ~Rmb2.4bn to Rmb2.8bn, taking into account the outperformance in 2Q, higher-than-expected profit margins, and accelerated revenue recognition.
- Our target price is largely unchanged at S$1.82 as the higher shipbuilding valuation is offset by lower valuation multiple for investment (1.1x PBvs 1.3x PB previously) to reflect higher risk premium on the back of credit tightening in China.
Pei Hwa HO
DBS Group Research Research
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https://www.dbsvickers.com/
2018-08-10
SGX Stock
Analyst Report
1.820
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1.820
