YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)
Yangzijiang Shipbuilding - Order Wins Trending Up
- Yangzijiang Shipbuilding's 2Q19 lifted by reversal of provision; 1H19 net profit slightly ahead, making up 53% of our FY19 estimate.
- Expect order win momentum to pick up strongly in 2H; maintain US$1.5-2bn order win target.
- Beneficiary of stronger USD; successful venture intoLNG carrier market a crucial catalyst.
- Reiterate BUY; Target Price unchanged at S$1.82.
Reiterate BUY; Target Price S$1.82.
- Yangzijiang Shipbuilding (SGX:BS6)’s valuation appears more compelling after recent pullback alongside broad market weakness. It is now trading at an undemanding 0.9x P/BV, at a c.10% discount to global peers despite its more attractive 11% ROE, 3.6% yield and solid balance sheet with 95 Scts net cash per share.
- The expected stellar earnings in coming quarters, buoyed by strengthened USD, and robust order flow should catalyse the stock price.
One of the world’s best-managed and profitable shipyards.
- Core shipbuilding revenue ahead is backed by its healthy order backlog of US$3.1bn (~1.5x revenue coverage) as at end-Jun 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. The company’s strategy to move up into the LNG/LPG vessel segment strengthens its longer-term prospects.
Where we differ:
- We believe the critical 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, pegged to 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 - 2Q19 lifted by reversal of provision
2Q19 headline profit stronger than expected.
- Yangzijiang Shipbuilding’s headline PATMI grew 14% q-o-q to Rmb936m in 2Q19, ahead of market expectations of ~Rmb800m. This brings 1H19 PATMI to Rmb1,760m, making up ~53% of our full-year estimate, slightly above.
- We maintain our forecasts for now though there seems to be upside risks to our earnings in view of the strengthening USD and potential reversals of provisions.
Aided by reversal of provision for expected losses.
- The outperformance in 2Q19 came largely from the reversals of provision for expected losses amounting to Rmb254m and forex gains of Rmb91m. In addition, the group also posted subsidy income of Rmb140m. These were partially offset by impairment losses on debt investment of ~Rmb93m, normalised investment return to ~11% (from 13-14% the past two quarters) and moderated shipbuilding margins.
- Adjusting for the effect of reversals/provisions for expected losses, core shipbuilding margin moderated to 10.1% (adjusted for net reversal of Rmb254m) vs 15.2% in 1Q19 (adjusted for net reversal of Rmb16.8m), and 12.5% in 4Q18 (adjusted for net provision of Rmb100m). We believe this was due to the lack of delivery of high-value vessels during the quarter, which typically recognise higher dollar margins upon delivery.
- As of end June-2019, provision for onerous contract had reduced to Rmb829m, from Rmb1,082m a quarter ago, of which ~70% could be written back in 2H19 and the remainder in 1H20. The warranty provisions increased marginally to Rmb346m, from Rmb331m a quarter ago.
Secured two new orders worth c.US$93m in 2Q19, comprising two 83.5k dwt.
- This brought order wins to US$209m in 1H19, making up only 10-14% of its full-year order win target.
- Overall newbuilding enquiries have been slow YTD as shipowners continue to adopt a wait-and-see approach amidst economic uncertainties and ahead of IMO 2020 implementation.
Order win momentum is picking up strongly.
- Management maintains their order win target of US$1.5-2.0bn. A strong uptick in enquiries has been received and quite a handful of them have progressed to advanced stages of negotiation and could be concluded in 2H19. These include high-value mega vessels such as 13.9k / 23k TEU containerships and 210k dwt / 326k dwt bulk carriers which newbuild prices range from US$50-150m each. Management has also observed recent trend towards dual-fuel vessels, which cost 15-20% higher than conventional vessels.
- We believe the eventual implementation of IMO2020 next year shall kick-start the vessel replacement cycle especially the small-to mid-sized vessels next year.
Orderbook stood at US$3.1bn
- Orderbook stood at US$3.1bn, declining from US$3.5bn a quarter ago given the higher orderbook drawdown of ~US$500m vs contract win of US$93m during the quarter. Revenue coverage dwindled to c. 1.5 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 net cash, equivalent to 95 Scts per share or 62% of its NTA.
Venture into LNG terminal another strategic move into LNG space
Acquisition of Odfjell terminal.
- On 16 July, Yangzijiang Shipbuilding announced the acquisition of a 55% stake in Odfjell Terminal (Jiangyin) (OTJ) from Norwegian tanker shipping company Odfjell for US$46.2m (~S$62.9m), funded by internal resources. The remaining 45% stake is held by Jiangsu Garson Gas. The acquisition is in line with Yangzijiang Shipbuilding’s strategy to move into the clean energy space.
- Capacity for LNG terminal is scarce and demand remains fast growing as China’s natural gas consumption is expanding at a double-digit rate. Furthermore, LNG is expected to experience faster growth than piped gas. This will also pave the way for Yangzijiang Shipbuilding to establish a network with LNG operators for newbuilding orders for LNG carriers. We understand that Yangzijiang Shipbuilding is in the midst of applying for a licence to operate LNG terminals.
JV yard with Japanese partner Mitsui has commenced operations.
- The JV yard, named Yamic, is currently construction six units of 82k dwt bulk carriers for the Japanese market. Partner Mitsui has transferred nine Japanese yard managers to the JV yard. The main goal of Yamic is to build LNG carriers, to tap the booming LNG demand.
- Based on the current development, any meaningful orders will only materialise in 1H20, at the earliest.
Pei Hwa HO
DBS Group Research
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https://www.dbsvickers.com/
2019-08-06
SGX Stock
Analyst Report
1.820
SAME
1.820
