YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)
Yangzijiang Shipbuilding - LNG Orders The Next Big Thing
- Solid 38% y-o-y growth in 1Q19 earnings.
- Shipbuilding gross margin remained healthy at ~15%.
- Secured US$116m worth of new orders; order momentum should recover towards 2H.
Reiterate BUY; Target Price S$1.82.
- YANGZIJIANG SHIPBULDING (SGX:BS6)’s valuation remains undemanding at 1x P/BV, at a c.10% discount to global peers, notwithstanding its more attractive 11% ROE, 3% yield and solid balance sheet with 99 Scts net cash per share.
- Yangzijiang Shipbuilding is among the prime 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$3.5bn (~2x revenue coverage) as at end-March 2019. Better returns from the investment segment provides upside to its recurring income stream.
- As the largest and most cost-efficient private shipbuilder in China, Yangzijiang Shipbuilding is well positioned to ride the sector consolidation and shipbuilding recovery. Its strategy to move up into the LNG/LPG vessel segment strengthens the longer-term prospects of the company.
Where We Differ:
- While the market has placed much focus on Yangzijiang Shipbuilding’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 Shipbuilding’s successful strategic positioning to expand into the LNG carrier and tanker markets and overall shipping and shipbuilding recovery leading to margin improvements.
Valuation:
- Our target price of S$1.82 is based on sum-of-parts, based on 9x FY19F PE shipbuilding earnings, 1x P/BV for bulk carriers and 1x P/BV for investments. This translates into 1.1x P/BV, which is in line with 0.5SD below its 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 a 0.8% drop in earnings.
WHAT’S NEW - Solid core earnings in 1Q19
Delivering another stellar quarter.
- Yangzijiang Shipbuilding’s headline PATMI grew 38% y-o-y to Rmb824m in 1Q19, ahead of market expectations of ~Rmb700m.
Boosted by investment return.
- The outperformance came from the higher interest income, which rose 93% y-o-y and 22% q-o-q to Rmb561m on the back of higher total debt investments amounting to ~Rmb17bn and investment return (14% vs 10-13% previously).
- Yangzijiang Shipbuilding also reported higher associate/JV income of Rmb73m, which was largely attributable to fair value gain of venture capital investments. This mitigated a forex loss of Rmb110m.
Core shipbuilding margin remained healthy
- Core shipbuilding margin remained healthy at ~15.2% in 1Q19 (adjusted for reversal of provision for expected losses of Rmb16.8m), a notch higher than ~12.5% in 4Q18 (adjusted for net provision for expected losses of ~Rmb100m). As of end-March 2019, provision for onerous contract and warranty provisions stood at Rmb1,082m and Rmb331m respectively.
- Yangzijiang Shipbuilding secured three new orders worth c.US$116m in 1Q19, comprising:
- One 157k DWT oil tanker
- One 29.8k DWT self-unloading vessel
- One 82k DWT bulk carrier
- Overall newbuilding enquiries have been slow YTD as shipowners continued to adopt a wait-and-see approach ahead of IMO 2020 implementation. Though, there have been some signs of recovery especially tanker segment of late.
- Yangzijiang Shipbuilding maintains its 2019 order win target of US$2bn for now, though market conditions appear challenging at this juncture. Order win momentum should improve sequentially especially towards 2H19 with more clarity on implementation of IMO 2020. This shall eventually kick-start the vessel replacement cycle especially the small-to mid-size vessels.
Orderbook stood at US$3.5bn
- Orderbook stood at US$3.5bn, declining from US$3.9bn a quarter ago given the higher orderbook drawdown of ~US$520m vs contract win of US$116m during the quarter. Nonetheless, revenue coverage remains healthy at c. 2-years. Yangzijiang Shipbuilding is ranked No.1 in China and No.5 in the world based on outstanding order book.
- Solid balance sheet. Including debt investments, Yangzijiang Shipbuilding is in a net cash position, equivalent to 99 Scts per share or 64% of its NTA.
Qatar’s massive LNG newbuild campaign presents opportunity
Qatar Petroleum launches tender for up to 100 LNG carriers.
- Subsequent to a press release confirming its intention to order up to 60 new LNG carriers early this year, Qatar Petroleum, the world’s largest LNG producer, has issued an invitation to tender on 22 April. The major LNG carrier construction campaign expected to initially deliver 60 LNG carriers in support of its planned production expansion, with a potential to exceed 100 new LNG carriers over the next decade. The vessels will serve Qatar Petroleum’s North Field Expansion (NFE) project, which will increase Qatar’s LNG production capacity from 77m tons per annum (mta) to 110 mta starting in 2024.
Expect spillover to Japanese and Chinese yards.
- While the bulk of the orders are expected to land in the hands of Korean yards, which collectively command ~75% market share based on existing orderbook, we believe there will be spillover to Japanese and Chinese yards.
- In China, there are a handful of shipyards with capability to build LNG carriers – Jiangnan SY, Hudong Zhonghua and SCS, which have ~3% market share of the global LNG orderbook.
- The development illustrates strong demand for gas carriers. While it remains preliminary whether Yangzijiang Shipbuilding might be involved in Qatar’s LNG carrier tender, it presents an opportunity for Yangzijiang Shipbuilding to build a track record, in our view. Large LNG carrier (170,000-180,000 cbm) is a high value-add product that commands a high price tag of US$180-200m. This is double of Yangzijiang Shipbuilding’s 10k TEU mega containership contracts which cost US$90-100m/unit.
- Qatar is not a new market for Yangzijiang Shipbuilding. Recall that Yangzijiang Shipbuilding has partnered with Qatar Investment Corporation back in 2012 for its first and only jackup rig order, though eventually the rig delivery was cancelled.
Pei Hwa HO
DBS Group Research
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https://www.dbsvickers.com/
2019-04-30
SGX Stock
Analyst Report
1.820
SAME
1.820
