Yangzijiang Shipbuilding - DBS Research 2020-03-02: Making Its Way Against The Tide


Yangzijiang Shipbuilding - Making Its Way Against The Tide

  • Yangzijiang Shipbuilding (SGX:BS6)'s FY19 PATMI in line with our 5%-below-consensus estimate.
  • Declared 4.5-Sct DPS, translating into 4.8% yield.
  • COVID-19 hitting 1Q earnings, but recovering towards 2Q and buffered by investment income; trimmed FY20 earnings by 14%.

Reiterate BUY; Target Price lowered to S$1.50.

  • Reiterate BUY; Target Price lowered to S$1.50, following earnings revision and a 10% discount to investment book given the economic slowdown in China.
  • Yangzijiang is unjustifiably trading below its net cash position of ~S$1.05 per share. Valuation is compelling at 0.6x P/BV against 9% ROE and 4-5% dividend yield. We believe its share price has priced in the 1Q weakness to a large extent and has yet to reflect the positives from its Chairman’s return.
  • The stock was trading at ~S$1.50 prior to the negative news relating to the Chairman’s assistance with an investigation involving former government official which has now been completed.
  • Stronger contract flow and progress in LNG venture are key catalysts that should drive the stock price closer to our Target Price.

FY19 results in line

  • Yangzijiang reported Rmb3.1bn net profit for 2019, largely in line with our 5%-below-consensus estimate, similar to the restated FY18 profit. The group restated its FY18 financials with net profit adjusted from Rmb3.6bn to Rmb3.1bn on changes in recognition of income from forfeiture and valuation of unlisted preference shares.
  • Adjusting for the effect of reversals/provisions for expected losses, core shipbuilding margin was stable at 9.2% (adjusted for net reversal of Rmb85m) vs 8.7% in 3Q19 (adjusted for net reversal of Rmb155m), and 12.5% in 4Q18 (adjusted for net provision of Rmb99m).
  • As of end-Dec 2019, provision for onerous contract and warranty provisions stood at Rmb588m and Rmb382m respectively.

Slow order wins in FY19; stronger order momentum a key catalyst.

  • Yangzijiang won ~US$830m worth of new orders, forming 42-55% of its annual target of US$1.5-2.0bn.
  • Overall newbuild ordering was slow this year especially in 1H as shipowners adopt a wait-and-see approach amidst economic uncertainties and ahead of IMO 2020 implementation.
  • YTD, Yangzijiang has secured an additional US$104m of new orders, comprising two units each of 40k DWT bulk carriers and 82k DWT bulk carriers. While order win momentum started to improve with more clarity on implementation of IMO 2020 towards end-2019, conclusion of new contracts has probably been deferred by COVID-19. We believe the momentum will pick up as the situation stabilises.
  • Orderbook declined to US$2.9bn from US$3.2bn a quarter ago. This implies revenue coverage of c. 1.5 years, lower than ideal range of 2.0-2.5 years.

Key takeaways from briefing

Chairman’s reassuring remarks.

  • Chairman, Mr Ren Yuanlin was present at the company’s results briefing for the first time in two years. He resumed his duty at end-Dec after taking leave of absence for 4.5 months to assist in an investigation involving former government official. He commended CEO Mr Ren Letian and the senior management team for demonstrating strong capability to ensure smooth operation of shipyards and also excelling in several aspects including successful commencement of collaboration with Japanese partner Mitsui Shipyard, during his absence. He is confident that Yangzijiang will emerge stronger despite the challenging operating environment, with strategies in place and a solid balance sheet.

Impact of COVID-19.

  • Shipyard activity level has dropped to 20-30% due to China’s lockdown to curb the spread of COVID-19. Workers from other cities should mostly resume work by March. Management is hopeful to increase yard activity level back to 70-80% over the next one month, contingent upon continued improvement of the outbreak situation.
  • Equipment supply is also delayed but remains manageable. No penalty is expected in the event of vessel delay. We have revised down our FY20 earnings forecasts by 14% to factor in the lower revenue and profitability in 1H20.

Buffered by investment income.

  • While 1Q revenue is badly affected, Yangzijiang’s shipyard will try to catch up over the next three quarters. Usual shipbuilding revenue run rate of ~Rmb3bn in 1Q could be halved, wiping out profits, in our view. However, we believe Yangzijiang will remain in the black supported by investment income of ~ Rmb400m a quarter.

New contracts a top priority.

  • Management emphasised on its priority to pursue new orders and maintain its US$2bn target, leverage on the company’s market leadership in large containerships and bulk carriers, as well as expansion into tankers and cleaner vessels (such as LNG carriers).

Dividend yield sustainable at ~4%.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2020-03-02
SGX Stock Analyst Report BUY MAINTAIN BUY 1.50 DOWN 1.68