Yangzijiang Shipbuilding - DBS Research 2018-10-12: Marching Into LNG Space With Mitsui

YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding - Marching Into LNG Space With Mitsui

Yangzijiang has entered into a joint venture agreement with MES-SC and Mitsui to establish a new shipbuilding company (“the New Joint Venture”) in China.
The registered share capital of the New Joint Venture will be up to USD99.9m, and total capital expected to be employed could amount to USD299m.

This is a highly anticipated positive development for Yangzijiang as management shared intention to collaborate with a Japanese shipyard to tap the fast-growing gas carrier market.
The JV is a win-win partnership. Mitsui’s branding and expertise will enable Yangzijiang to make forays into the large LNG carrier market while shifting production base to China enhances Mitsui’s cost competitiveness.
The production base for the JV will be at Yangzijiang’s existing Taicang yard in Jiangsu, China. The facility was previously acquired for offshore rigbuilding projects, but the plan was subsequently abolished after it completed its only jackup rig project. The initial capital will be used to upgrade the facility and for working capital purposes.

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The JV yard is expected to commence operations in April 2019, pending relevant licenses and approvals from authorities. In the meantime, the JV could jointly develop and market for large LNG carrier contracts (170-180k cbm) which are typically worth USD180-200m. Assuming two new contracts are secured, it could lift Yangzijiang’s new wins from typical USD2bn to USD2.4bn or ~20% increase next year.
As Yangzijiang will hold a 51% stake in the New Joint Venture, the consolidation method would be adopted. We reckon earnings contribution will be relatively small in the initial years given the learning curve, production ramp up, longer delivery lead time of > 3-years for large LNG carriers and prudent margin recognition for the initial projects.
On a ballpark calculation, assuming two 170-180k cbm LNG carrier newbuild contracts a year, we might see 3-5% bottomline boost in 2020. The contribution should be much bigger thereafter upon successful on time on budget delivery and scaling up its LNG carrier building capability.

Yangzijiang’s share prices have done very well the past 3-months, rising ~50% from its low of 85 Scts in mid-July. Given current market jitters, we could see profit-taking pressure on the stock in the near term.
Nevertheless, we remain optimistic on Yangzijiang’s earnings delivery (beneficiary of stronger USD) and prospects especially after this JV would pave the way into the LNG carrier market.
Reiterate buy, Target Price $1.82. Current valuation remains undemanding at 0.8-0.9x book against 10% ROE and 4% dividend yield.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2018-10-12

SGX Stock Analyst Report BUY MAINTAIN BUY 1.820 SAME 1.820