Yangzijiang Shipbuilding - UOB Kay Hian 2020-03-02: 2019 Weaker Than Expected, But All Eyes On End-March For Resumption Of Shipbuilding Activity

YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6) | SGinvestors.io YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding - 2019 Weaker Than Expected, But All Eyes On End-March For Resumption Of Shipbuilding Activity

  • Despite executing well on delivering 59 vessels in 2019, Yangzijiang Shipbuilding reported NPAT of Rmb3.1b (+1% y-o-y) that missed our and consensus estimates due to higher labour and raw materials costs.
  • On the UOBKH post-results call between Yangzijiang Shipbuilding management and investors, Yangzijiang Shipbuilding stated that the key near-term focus is for 80% of its workforce to return by end-Mar 20 for its 2020 production and profit targets to remain intact.



2019 Results

  • Yangzijiang Shipbuilding (SGX:BS6) reported weaker-than-expected 2019 results with a 2% y-o-y increase in revenue to Rmb23.6b while NPAT rose 1% y-o-y to Rmb3.1b. Both revenue and NPAT missed our and consensus estimates by c.10%.
  • The key variance was in shipbuilding margins which were lower than expected due to higher labour and raw material costs. On a y-o-y basis, gross profit and net profit margins were flat y-o-y.

Executing well.

  • The company continues to execute well with 59 vessels delivered in 2019 and meeting their target for the year (2018: 46 vessels delivered). Yangzijiang Shipbuilding has 79 vessels in its current US$3.02b orderbook that will be delivered over 2020 and 2021.

COVID-19 impact.

  • Post results, we hosted a client call with the company’s management where it stated that thus far, the impact of travel restrictions in China has had a minimal impact on the company given that January and February are usually quieter months due to the Lunar New Year celebrations.
  • Yangzijiang Shipbuilding stated that while the central government has allowed workers to return, the hurdle at the moment is the provincial government which has kept travel restrictions in place. At present, 20-30% of workers are back at work and a key turning point will be in March where Yangzijiang Shipbuilding needs to see at least 80% of their workers back at the yard, and therefore hit their target to deliver 51 ships in 2020. In addition, the company stated that its clients are understanding and can accept delays of 1-2 months.


STOCK IMPACT


COVID-19 cases in North Asia may impact YZJ.

  • Management believes that the COVID-19 issue in China is largely under control, however in Korea and Japan, the number of cases has increased markedly which could affect its business in two ways:
    1. owners may not be able to come to China to take delivery of their vessels and thus final payment may be delayed, and
    2. suppliers and engine makers from Korea and Japan may have issues fulfilling and delivering Yangzijiang Shipbuilding’s orders.

Delivery risk in 2020.

  • Management did not believe that it would be penalised for any late ship deliveries as it has been in constant communication with their customers who are ok with delays of 1-2 months. Thus, if the provincial government lifts travel restrictions, then Yangzijiang Shipbuilding can get its workforce back to the yard to catch up - 2Q20 and 3Q20 (with 20 ships slated for delivery) would then only suffer 1-2 months of delay.
  • We point out that the ship-chartering market is presently weak and thus owners are not especially keen to take delivery

YZJ is currently targeting US$2b in new orders for 2020

  • YZJ is currently targeting US$2b in new orders for 2020 (vs our expectation of US$1.5b) and stated their confidence in this target given that the Jan-Feb 20 period has seen a significantly higher rate of enquiries compared to 1Q18 which had almost zero enquiries. The company commented that it had a few contracts in hand that it is close to announcing, and it has also received new enquiries from old clients who are looking to place orders.
  • Importantly, Yangzijiang Shipbuilding believes that its current orderbook as at 29 Feb 20 totaling US$3.02b will not experience cancellations as their clients are not speculators but instead have business strategies to open new lines/shipping routes or renew their vessels.

Debt investments.

  • On a q-o-q basis, its debt investments fell 3% to Rmb14.4b, in line with the company’s previous guidance that it would be reducing its exposure.
  • On the client call, the management commented that it looks very closely at two important benchmarks: low non-performing loan ratio and low loan-to-valuation. Thus, given the market conditions at present, it stated that it would be more cautious than previous years. However the company also noted that it would be selectively opportunistic as it believes that in such times of crisis, it would be able to access high quality deals that banks may have otherwise funded.

Provisions made for 2020.

  • Yangzijiang Shipbuilding commented that for 2020, it had made a total of Rmb580m in provisions for contracts that it could make losses on, and such provisions would be booked consistently throughout the year. If fully booked, these provisions would comprise c.19% of our full-year profit forecast of Rmb3.02b. These provisions relate to 26 out of 79 vessels and should the actual shipbuilding margin be better than expected, these provisions would be reversed out which would boost gross profit margins.

Dividend.

  • Yangzijiang Shipbuilding proposed a final dividend of $0.045/share (2018: $0.05/share) which implies a payout ratio of 36.6%. We forecast a payout ratio of 35% for 2020.


EARNINGS REVISION/RISK

  • Upgrading earnings. We have increased our earnings forecasts for 2020 and 2021 by 8% and 9% respectively as a result of the timing of revenue and profit recognition for their ship deliveries. The earnings increases have been tempered somewhat by lower estimated shipbuilding margins which we have lowered to 14% vs 16% previously.
  • Our target price is pegged to a P/B multiple of 0.8x which is in line with the company’s past-five-year average P/B multiple.
  • See Yangzijiang Share Price; Yangzijiang Target Price; Yangzijiang Analyst Reports; Yangzijiang Dividend History; Yangzijiang Announcements; Yangzijiang Latest News.
  • We highlight that its one-year forward P/B multiple of 0.54x is 13% below its -1SD level and near its all-time low of 0.51x, while its 2020 yield is attractive at 5.7%, in our view.


SHARE PRICE CATALYST

  • New order wins, especially for large vessels, tankers and LNG vessels which attract higher it margins





Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-03-02
SGX Stock Analyst Report BUY MAINTAIN BUY 1.40 DOWN 1.460



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