Yangzijiang Shipbuilding - CGS-CIMB Research 2020-02-28: Eyes On The Next Generation


Yangzijiang Shipbuilding - Eyes On The Next Generation

  • Chairman Ren Yuan Lin joined Yangzijiang Shipbuilding (SGX:BS6)'s analyst call and praised the existing management for helming its operations while he assumed an advisory role.
  • 1Q20F earnings will be affected by sub-optimal yard operations with only 20- 30% workforce; Yangzijiang Shipbuilding needs c. 80% by Mar to deliver 51 vessels in 2020.
  • Saving grace:
    1. firm demand for HTM assets, with c.10% return;
    2. delivery of jack-up rig (read: potential write-back).
  • Potential catalyst: stronger orders.

Lower order wins and DPS the key disappointments

  • In FY19, Yangzijiang Shipbuilding secured new orders (21 vessels) worth US$0.83bn vs. our expectation of US$1bn (FY18: US$1.5bn). This resulted in its order book shrinking 9% y-o-y to US$2.92bn, for 75 vessels.
  • YTD, Yangzijiang Shipbuilding has secured US$104m of new orders, including two units each of 40,000 dwt and 82,000 dwt bulk carriers, all under its JV with Mitsui.
  • Management still targets to win US$2bn of orders and sees strong demand for large containerships. We conservatively pen in US$1.2bn of new wins.
  • The flat DPS of S$0.045 for FY19 (FY18: S$0.05) was disappointing given its strong Rmb5.1bn net cash.

Delivered 59 vessels in 2019

  • Yangzijiang Shipbuilding's 4Q19 net profit of Rmb642m (-48% y-o-y, -9% q-o-q) was broadly in line with our expectations. FY19 net profit of Rmb3.1bn was in line with our forecast of Rmb3.174bn, but missed Bloomberg consensus' Rmb3.3bn.
  • Core shipbuilding revenue was flat q-o-q at Rmb3.3bn with 13 vessels (total delivery in 2019: 59 vessels).
  • Provision for onerous contracts in balance sheet was at Rmb588m to be utilised in FY20F, mainly for sizeable bulk carriers (208k dwt). There was a net Rmb511m provision utilisation in FY19F.

Need 80% of workforce to return by Mar 2020

  • Yangzijiang Shipbuilding's Jan operations were not affected as yard utilisation is typically low due to Chinese New Year celebrations. However, it has been operating at sub-optimal yard workforce of 20-30% in Feb due to restrictions imposed by the local government for returning sub-contractors.
  • Chairman Ren believes the Covid-19 situation may not be contained by Mar, taking cues from the reopening of China's schools and reconvening of Congress meetings for gradual recovery. Yangzijiang Shipbuilding needs at least 80% of its workforce to return by Mar to be able to hit its target delivery of 51 vessels in 2020.
  • There are no risks of liquidated damage for delays as shipowners and the shipbuilding supply chain across regions are disrupted (e.g. engines from Korea). We expect shipbuilding revenue to drop 60% q-o-q in 1Q20F, with gross margin at c.9%. Prolonged Covid-19 outbreak is a key risk.

HTM make up 42% of 4Q19 PBT; hopes to sell jack-up rig

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-02-28
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