Yangzijiang Shipbuilding - DBS Research 2020-08-07: Tide Is Turning; A Promising 2Q20


Yangzijiang Shipbuilding - Tide Is Turning; A Promising 2Q20

  • Yangzijiang Shipbuilding's 2Q20 net profit surged 92% q-o-q to Rmb774m.
  • Plans to temporary shut down 13-25% of capacity in view of the sluggish newbuild activities; trimmed FY21 forecasts by 13%.
  • US$200m worth of LOI could turn effective in Aug.

A bargain, trading at 17% discount to net cash of ~S$1.13 per share.

  • Yangzijiang Shipbuilding (SGX:BS6) delivered a promising set of results for 2Q20. The stock’s current unjustified low valuation of 0.6x P/BV despite superior financials of 8% ROE and sustainable DPS of at least 4 Scts (~4% dividend yield) presents a good opportunity to longer-term investors.
  • Yangzijiang Shipbuilding has demonstrated its resilience during industry downturns with decent profits and dividends.

One of the world’s best-managed and most profitable shipyards.

  • Core shipbuilding revenue is backed by its order backlog of US$2.6bn (~1.5x revenue coverage) as at Jun 2020 while its investment segment generates stable recurring income.
  • As the largest and most cost-efficient private shipbuilder in China, Yangzijiang Shipbuilding is well positioned to ride on the sector consolidation and shipbuilding recovery. The company’s strategy to move up the value chain into the LNG/LPG vessel segment strengthens its longer-term prospects.

Yangzijiang Shipbuilding's 2Q20 Results Review

  • 2Q20 results broadly in line. Yangzijiang Shipbuilding’s net profit surged 92% q-o-q to Rmb774m in 2Q20, as its yard operated at full steam following China’s easing lockdown in early Mar 2020. Shipbuilding business performed well. Adjusting for the effect of reversals/provisions for expected losses, core shipbuilding margin declined to 7.5% (adjusted for net reversal of Rmb76m) vs 7.5% in 1Q20 (adjusted for net reversal of Rmb21m), and 10.1% in 2Q19 (adjusted for net provision of Rmb254m).
  • Shipbuilding margin during the quarter was partly aided by the sale of 157k DWT oil tanker in 2Q20 that lifted margins by 2-3ppts, based on our estimate and strong USD.
  • As of end-Jun 2020, provision for onerous contract and warranty provisions stood at Rmb491m (-Rmb76m q-o-q) and Rmb378m (+Rmb3m q-o-q) respectively.

Commendable order wins despite COVID situation.

  • Yangzijiang Shipbuilding won ~US$517m new orders, forming 26-34% of its annual target of US$1.5-2.0bn. While this is lagging behind target, the order wins are remarkable given the slow newbuild ordering activities amidst the COVID-19 pandemic. We believe the ordering momentum will gather pace once the COVID-19 situation stabilises.
  • In particular, Tiger Group’s options worth up to US$1,170m, if exercised, would boost 2020 order wins. Tiger Group has placed orders for two 14k TEU containerships with Yangzijiang Shipbuilding in mid-Mar with options to build eight similar units worth up to US$920m to be exercised in 2020.
  • Subsequently, in Jun 2020, Tiger's gas arm also placed order for two LNG-tanked carriers worth over US$60m with options to build another eight worth up to US$250m. The conversion of these into firm contracts would boost Yangzijiang Shipbuilding's order win this year.
  • Orderbook stood at US$2.6bn, down from US$2.9bn a quarter ago. This implies revenue coverage of c. 1.5 years, lower than the ideal range of 2-2.5-years.

Trading below net cash.

  • Including debt investments, Yangzijiang Shipbuilding is in a net cash position, equivalent to S$1.13 per share or 70% of its S$1.60 NTA per share.

Investment income to bolster dividend payment; expect a 4- Sct DPS or 4.4% yield.

  • Investment returns from financial assets contributed ~Rmb1.8bn or c.58% of PATMI 2019 and a similar return could be expected in 2020F. The Investment income alone is more than enough to support a 4-Sct dividend payout which will amount to Rmb780m or 43% of the Investment segment’s profits.

Briefing takeaways and Outlook

Strong management and execution.

  • Yangzijiang Shipbuilding has once again demonstrated its resiliency and superior management in handling challenges during COVID-19 pandemic. Its yard has been back at full force since end-Mar 2020 and production is now 15 days ahead of schedule for 1H20. The group delivered 28 vessels on time during the period. The JV yard with Japanese partner Mitsui – YAMIC progressed well since becoming operational in Aug 2019 and delivered its six maiden vessels in 1H20.

Sluggish newbuild activities globally.

  • In 1H20, there were 314 new orders totalling 17.6m DWT which became effective globally, representing a ~50% y-o-y decline by DWT. Outstanding order book-to-fleet ratio had also decreased further to 7.8% by the end of Jun 2020 from 9.4% in early 2020.

Plan to rightsize capacity.

  • Given the slow ordering activities, and relatively low orderbook revenue coverage of 1.5 years, management plans to shut down one of its slipways and probably a dry dock as well, which will reduce capacity by up to 25%, in order to maintain it yard’s efficiency.

Opportunities to bargain hunt half-built units.

  • The 157m DWT oil tanker delivered in 2Q20 was a half-built unit Yangzijiang Shipbuilding took over at scrap value. The unit was completed and resold with a lucrative gross margin of 40%. Leveraging on the its strong balance sheet, Yangzijiang Shipbuilding is in talks to purchase another VLCCs and five containerships.
  • These units could have a lower cost of 10-20% as compared to newbuild units. If concluded, the dry dock (~12% of capacity) may continue to be in operation to build these containerships.

Tide should be turning.

  • The company’s orderbook-to-fleet ratio of 7.8% is at a historical low, indicating tight supply of new vessels ahead. Order win momentum is poised to pick up and more new orders could be concluded once the travel restrictions are relaxed.
  • Expect US$200m contracts to be effective in coming month. Yangzijiang Shipbuilding has US$200m worth of LOI that could become effective in August.

Newbuild prices should have bottomed.

  • Yangzijiang Shipbuilding reiterated that it would reject orders that are unprofitable. The sluggish newbuild ordering suppresses newbuild prices while firmer steel cost adds pressure to cost and margins. It might have to bear with orders with low single-digit margins in the near term to ensure yard optimisation but expects newbuild prices to trend up as the COVID-19 situation improves. Yangzijiang Shipbuilding is on a much stronger footing relative to peers given its 5-ppt cost advantage and solid balance sheet.

Earnings revisions.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2020-08-07
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