Yangzijiang Shipbuilding 1Q20 - UOB Kay Hian 2020-05-04: Weaker-than-expected With Difficult Near-term Conditions, Valuations Appear Inexpensive

YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding 1Q20 - Weaker-than-expected With Difficult Near-term Conditions, Valuations Appear Inexpensive

Yangzijiang Shipbuilding's 1Q20 net profit of Rmb404m (-51% y-o-y) was hit by COVID-19 shutdowns at its shipyards resulting in weak gross profit margins for the shipbuilding segment of 8% vs our 2020 forecast of 14%.
Debt investment portfolio rose Rmb1.1b q-o-q. Outlook for new order wins will be muted amidst global economic growth headwinds in the next couple of quarters.

Weaker-than-expected quarter. For 1Q20, Yangzijiang Shipbuilding (SGX:BS6) reported a 44% y-o-y decline in revenue to Rmb3.5b while net profit fell 51% y-o-y to Rmb404m. This was mainly due to Chinese government-mandated shutdowns of the company’s shipyards which led to a poor performance from shipbuilding. As a result, this segment saw its gross profit margin decline to 8% for 1Q20. It was also negatively affected by fixed depreciation costs despite the lower level of shipbuilding activity.
Yangzijiang Shipbuilding delivered 12 ships in 1Q20 and a further seven in Apr 20. In addition, the company stated that nearly 100% of its workers are back at its shipyards and it does not foresee any delays to ship deliveries stemming from supply-chain issues.

Management appeared downbeat regarding prospects for new-order flow this year due to the global economic downturn, coupled with the difficulty in negotiating sales & purchase contracts with international customers over video calls or email.
Thus far in 2020, Yangzijiang Shipbuilding has US$360m in firm orders and a further US$920m in options. We have lowered our 2020 order expectations to US$1b from US$1.5b.

During the analyst call, there were many questions on Yangzijiang Shipbuilding’s debt-investment portfolio which saw a Rmb128m provision. This was due to a Rmb1.1b q-o-q increase in investments (comprising Rmb1.5b in new investments and Rmb400m in redemptions); thus Yangzijiang Shipbuilding undertook its standard provisioning which could be written back in the event of zero defaults.
Yangzijiang Shipbuilding disclosed that borrowers were largely local state-owned enterprises. During 1Q20, the company did not experience a surge in default rates despite the COVID-19 lockdown; however there were short-term delays in repayments in February as its borrowers were unable to access offices to process documentation.

During 1Q20, one of Yangzijiang Shipbuilding’s clients cancelled an order for a 150,000dwt oil tanker as it was unable to pay. As a result, its US$12m downpayment was forfeited by Yangzijiang Shipbuilding and it was able to sell the vessel to one of its customers and thus did not incur a loss.

Yangzijiang Shipbuilding does not have a publicly-disclosed target payout ratio and its final dividend (it does not pay an interim dividend) has ranged between S$0.040-0.055/share from 2011-19. This implies a payout ratio of between 25-43%.
For 2020, we forecast DPS of S$0.045/share, which is flat y-o-y and implies a payout ratio of 35% which we do not view as onerous.

In 1Q20, Yangzijiang Shipbuilding’s shipping and chartering segment (13% of gross profit) saw a 60% q-o-q decline in gross profit, and we expect it to slow down in the coming few months with the current quarter likely the trough.
Management disclosed that the lack of business had led them to lay up some of its vessels and it does not envision chartering activities to resume in the near term. Note that when the Baltic Dry Index troughed in 2016, Yangzijiang Shipbuilding’s shipping & chartering business incurred losses in the first three quarters of 2016.

We have lowered our earnings forecasts for 2020 and 2021 by 15% and 11% respectively to take into account a 2-3ppt downgrade in shipbuilding for both years, lower chartering volume for the company’s fleet in 2020 given global economic headwinds, and slightly higher impairment losses from the company’s debt investment portfolio.
For the shipbuilding segment, we currently forecast gross margins of 12% and 13% for 2020 and 2021 respectively, vs prior estimates of 14% and 15% respectively.

We had previously highlighted that travel restrictions could result in delays in delivery of Yangzijiang Shipbuilding’s vessels to its clients. However, the ytd delivery of 19 vessels to Korean, Greek and other international clients only necessitated a 14-day quarantine for inbound staff and crew in an otherwise untroubled delivery schedule thus far.

Our target price of S$1.22 (S$1.25 previously) is based on a target P/B multiple of 0.78x, which is a 10% discount to its 5-year average P/B multiple. While share price drivers appear to be thin on the ground at present, we believe that the business conditions faced by Yangzijiang Shipbuilding will trough in the next 4+ months.
We believe that Yangzijiang's share price up to at least S$1.10 should be protected by its 2020F yield of 4.6%, which we view as reasonably secure. As at end-1Q20, the company had net cash of Rmb4.7b, or S$946m, which equates to S$0.24/share.
See Yangzijiang Share Price; Yangzijiang Target Price; Yangzijiang Analyst Reports; Yangzijiang Dividend History; Yangzijiang Announcements; Yangzijiang Latest News.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-05-04

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