Yangzijiang Shipbuilding 3Q19 - UOB Kay Hian 2019-11-15: Slight Miss Despite Very Strong Free Cash Flow Generation

YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding 3Q19 - Slight Miss Despite Very Strong Free Cash Flow Generation

For 3Q19, Yangzijiang Shipbuilding reported a 1% y-o-y increase in revenue to Rmb5.424b but net profit declined 10% y-o-y due to forex and derivatives losses, higher losses from associates and a higher tax rate. See Yangzijiang Announcements.
9M19 revenue and net profit make up 70% and 71% of our full-year estimates respectively.
As at end-Oct 19, Yangzijiang Shipbuilding had an outstanding orderbook of US$3.2b for 83 vessels, making it the fifth largest shipyard globally.

YANGZIJIANG SHIPBUILDING (SGX:BS6) reported 3Q19 earnings that slightly missed our estimates but met consensus numbers. On the top of the market’s mind is when Chairman Ren would return to the company, however, management were not able to shed much light on this issue which has been weighing on the company’s share price. Yangzijiang Latest News.

Management highlighted that the weakness in the Chinese economy may persist into 2020 and thus they have taken the decision not to invest as much capex as in the past. In any case, its shipyards are far better in quality than the majority of the yards in China.
Yangzijiang Shipbuilding also highlighted that labour costs are increasing in China due to the lack of skilled and semi-skilled labour, this could contribute to margin pressure for some orders that they currently have.

Yangzijiang Shipbuilding believes the impending IMO2020 rule has disrupted shipowners’ new-order plans and thus shipowners are taking their time to evaluate various options, eg whether to build new ships or to install scrubbers. In addition, Yangzijiang Shipbuilding believes the US-China trade tensions and a pessimistic economic outlook has further weigh on shipping demand and sentiment.
In the medium to long term however, Yangzijiang Shipbuilding appeared a lot more positive as it expects shipbuilding demand to rise due to increased demolition and faster pace of recycling as well as increased demand for high-efficiency green vessels that are able to use LNG as a dual fuel.

Specifically, Yangzijiang Shipbuilding lowered its total debt investment q-o-q from Rmb18b as at end-Jun 19 to Rmb14.8b as at end-Sep 19. However, the company did point out that its debt investments are at a similar level to that in 3Q18.
As at end-3Q19, Yangzijiang Shipbuilding had net cash of Rmb4.164b or S$808.5m, equating to S$0.21/share. See Yangzijiang Dividend History.
Free cash flow generation during the quarter was extremely strong at Rmb5.6b vs only Rmb58,000 in 3Q18. This was mainly attributed to nearly Rmb4b of debt investments that the company redeemed during the quarter.

We value Yangzijiang Shipbuilding using 0.9x P/B which we believe is a fair reflection of the company’s prospects in the current shipbuilding industry cycle. The company is currently trading at nearly 2SD below its 5-year P/B average of 0.82x which we believe is mostly a reflection of the ‘corporate governance issues’ surrounding the chairman’s current leave of absence. See Yangzijiang Share Price; Yangzijiang Target Price.
In our view, these corporate governance issues do not have anything to do with Yangzijiang Shipbuilding itself, however the market has clearly taken a ‘wait-and-see’ approach for now.

New-order flow stemming from the new IMO 2020 regulations on marine fuel standards.
Return of the chairman to the company’s board and day-to-day management and operations investigations into his external charitable foundation.

Adrian Loh UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-11-15

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