Yangzijiang Shipbuilding - DBS Research 2020-05-04: Navigating Through Rough Seas


Yangzijiang Shipbuilding - Navigating Through Rough Seas

  • Yangzijiang Shipbuilding's 1Q20 PATMI in line; fell 37% q-o-q to Rmb404m due to yard closure in Feb as a result of COVID-19.
  • Shipyard operations are back in full force since end- Mar; ship delivery is on track.
  • Weakening economic outlook could slow ordering momentum; confident on staying ahead of peers.
  • Reiterate BUY; Target Price adjusted down to S$1.40.

Yangzijiang's 1Q20 results in line

  • Yangzijiang Shipbuilding (SGX:BS6)’s net profit dropped 37% q-o-q to Rmb404m, largely in line with our expectation, as shipyard activity level declined ~30% during the quarter because of China’s lockdown to contain the COVID-19 spread. As a result, its shipbuilding segment contributed only 33% (vs the usual 55- 70%) to group gross profit while Investment contributed 67% during the quarter.
  • Shipbuilding profits should normalise as operations had ramped up to near pre-COVID level by end-Mar.
  • In 1Q20, the impairment loss on financial assets (Rmb128m) and pre-emptive provision for bad debts (Rmb111m) relating to trading customers in the energy space were mitigated by forex gains (Rmb105m) and higher interest income (Rmb89m).
  • Adjusting for the effect of reversals/provisions for expected losses, core shipbuilding margin declined to 7.5% (adjusted for net reversal of Rmb21m) vs 9.8% in 4Q19 (adjusted for net reversal of Rmb85m), and 15.2% in 1Q19 (adjusted for net provision of Rmb17m).
  • As of end-Mar 2020, provisions for onerous contracts and warranties stood at Rmb567m and Rmb375m respectively.

Shipyard operations see little disruption in supply chain.

  • Steel consumption is mostly sourced in China; equipment from Korea and Japan; and some materials from Europe whose deliveries are so far still manageable.

Order win momentum slowed down by COVID-19 and economic concerns.

  • Yangzijiang Shipbuilding won ~US$360m new orders, forming 18-24% of its annual target of US$1.5-2.0bn.
  • Overall newbuild ordering remains slow this year given the COVID-19 pandemic. Negotiations with customers have mostly been put on hold as customers adopt a wait-and-see strategy on new orders though remain committed to take delivery. Yangzijiang Shipbuilding delivered 16 vessels in 4M20, on track to meet its target of 48 vessels. We believe the momentum will pick up once the COVID-19 situation stabilises.
  • Management remains hopeful of securing clean energy vessels and customer Tiger (founded by former CEO of Seaspan, which is also a long-standing customer of Yangzijiang) exercising the options for 14k TEU containerships.

Orderbook stood at US$2.9bn, similar to a quarter ago.

  • This implies revenue coverage of c. 1.5 years, lower than the ideal range of 2-2.5 years. Yangzijiang Shipbuilding updated that there was a cancellation of oil tanker order, of which has been resold to a new buyer. Taking into account the forfeiture of 20% down payment of US$12m, it will likely be net positive to the group.

Mitsui JV is progressing well.

  • YAMIC - the JV yard with Japanese partner Mitsui - has delivered four units of bulk carriers with profits. This is an important vehicle, scaling up Yangzijiang Shipbuilding’s capability in building LNG carriers and securing potential new orders from Mitsui’s parent.

Stronger USD and lower steel costs are mitigating factors.

  • Yangzijiang Shipbuilding benefits from a stronger USD as its revenue is denominated mainly in USD, and only half is naturally hedged. USD has been fairly strong, hovering around the 7Rmb/USD level. Every 1% USD appreciation could lead to a 1.5% increase in earnings.
  • Meanwhile, steel cost has been softening since mid-2019, from Rmb4000/t to Rmb3,800/t by end-2019 and Rmb3,600/t currently. Every 1% drop in steel cost, which accounts for about 20% of COGS, could result in a 0.8% increase in earnings, with a 6-month lag.

Investment income to bolster dividend payment; expect a 4-Sct DPS or 4% yield.

  • Management reiterated that their investment segment is relatively safe, lending mostly to government or government-related projects and large corporate with collaterals (typically 2-3x coverage). Hence, default risks have been low and the principal amounts can be recouped through the disposal of collaterals in the event of default.
  • Investment returns from financial assets amounted to ~Rmb1.8bn or c.58% of PATMI 2019 and a similar return can be expected in 2020F. Even if we assume zero profits from the shipbuilding business, the Investment income alone is more than enough to support the 4-Sct dividend payout which will amount to Rmb780m or 43% of the Investment segment’s profit.
  • See Yangzijiang Share Price; Yangzijiang Target Price; Yangzijiang Analyst Reports; Yangzijiang Dividend History; Yangzijiang Announcements; Yangzijiang Latest News.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2020-05-04
SGX Stock Analyst Report BUY MAINTAIN BUY 1.4 DOWN 1.500