Yangzijiang Shipbuilding - DBS Research 2018-11-09: Steady Sailing

YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6) | SGinvestors.io YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding - Steady Sailing

  • Strong 3Q18 shipbuilding earnings, lifted by stronger USD and writeback of provisions.
  • Secured new orders worth US$200m in 3Q18; YTD wins totaled US$1.2bn, or 67% of target.
  • Raised FY18/19F earnings by ~8%.
  • Reiterate BUY; Target Price S$1.82.



Reiterate BUY; Target Price S$1.82.

  • Yangzijiang’s valuation remains undemanding at 0.9x P/BV, at c.10% discount to global peers, notwithstanding its more attractive 10% ROE, 3.4% yield and solid balance sheet with 93 Scts net cash.
  • Shipbuilding profitability shall continue to be boosted by favourable forex and stable steel costs.
  • Yangzijiang is a prime beneficiary of stronger USD and among the best proxies for exposure to a recovery in the shipping and shipbuilding sectors.


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

  • Core shipbuilding revenue ahead is backed by its healthy order backlog of US$4bn (~2x revenue coverage) as at end-Sep 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 sector consolidation and shipbuilding recovery. Its strategy to move up into the LNG/LPG vessel segment through partnership with Mitsui strengthens the longer-term prospects of the company.


Where We Differ:

  • While market has placed much focus on Yangzijiang’s order win momentum, we opine that this is less critical given that the yard is full for the next two years.
  • We believe the key re-rating catalysts are Yangzijiang’s successful strategic positioning to expand into LNG carrier and tanker markets and overall shipping and shipbuilding recovery leading to margin improvements.


Valuation:

  • We value Yangzijiang based on sum-of-parts (SOP) methodology. We arrive at a target price of S$1.82, after applying 10.5x FY18F PE on shipbuilding earnings, 1.5x P/BV for bulk carriers and 1.0x P/BV for investments.
  • Our Target Price translates into 1.3x P/BV, which is in line with 10-year mean.


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 - Strong shipbuilding earnings


A strong 3Q18.

  • Yangzijiang’s reported headline PATMI of Rmb779m in 3Q18. Stripping out impairments, writebacks and forex, bottomline grew ~4% y-o-y. This brings 9M18 core profit to Rmb2.37bn (+5% y-o-y), making up ~85% of our full year expectation.
  • The stellar performance was underpinned by stronger than expected shipbuilding earnings.

Shipbuilding margin hovers around 20%.

  • While core shipbuilding gross margin contracted 1.5ppts q-o-q, this was largely due to lower deliveries of high margin vessels compared to the exceptionally strong 2Q. Relative to 1Q18 and 3Q17, margins expanded 2.9ppts and 5ppts respectively, boosted by the stronger USD (~2ppts) and writeback of provisions for expected losses (~5ppts).

Impairment offset by disposal gains and writebacks.

  • Yangzijiang made additional Rmb333m impairments on financial assets as its investment portfolio increased by c.Rmb1.5bn during the quarter. This was offset by the gains on disposal of financial assets (Rmb161m) and writebacks on provisions made for expected losses (Rmb152m).

Secured six new orders worth c.US$200m in 3Q18.

  • Yangzijiang secured 6 new orders worth US$200m in 3Q, comprising:
  • Two units of 82,000DWT bulk carriers
  • One unit of 83.5k DWT combination carrier
  • Three units of 2,700 TEU containerships

YTD wins amounted to ~US$1.2bn.

  • Management is maintaining its internal target of US$1.8bn for this year. Management stressed that it will be more selective in order taking given the healthy revenue coverage of > 2x. Bulker orders are slowing down as shipowners adopt wait and see approach for better clarity on whether to install scrubbers under the new IMO rule that will be implemented in Jan 2020.
  • Management is confident of securing more containership orders and expanding into the tanker segment for product diversification.

Orderbook stood at US$4.0bn.

  • 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.

Solid balance sheet.

  • Including HTM investments, Yangzijiang is in net cash, equivalent to 93 Scts per share or 66% of its NTA.

Discussions underway to acquire remaining 20% stake in Xinfu yard.

  • To recap, Yangzijiang raised net proceeds of approx. S$209m through a share placement in Aug-2017. One of the uses of the proceeds was to purchase the remaining 20% stake in Xinfu shipyard which we estimate would contribute an incremental ~Rmb100-150m or 3-5% to the bottomline.
  • Management shared that they have made some progress in negotiations and hopefully the deal will materialise in the near future.


Earnings revision:

  • We have raised FY18/19F earnings by 7.4/8% as we factor in the stronger USD translating to higher margins of 19.3% (+2ppts) in FY18 and shift the ~Rmb250m recognition of yard relocation fee and gain on divestment of shipping vessels to FY19.





Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2018-11-09
SGX Stock Analyst Report BUY MAINTAIN BUY 1.820 SAME 1.820



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