Yangzijiang Shipbuilding - UOB Kay Hian 2020-08-07: 2Q20 Stronger-Than-Expected Profit Margins; More Order Wins To Come In 2H

YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding - 2Q20 Stronger-Than-Expected Profit Margins; More Order Wins To Come In 2H

Yangzijiang Shipbuilding reported a 17% y-o-y decline in 2Q20 net profit to Rmb774m, in line with expectations. The company surprised with stronger-than-expected gross-profit margins, helped by completing an unfinished vessel and subsequently reselling it for a hefty profit.
With US$517m in new orders in 1H, management guided for higher levels of new order wins in 2H20; we maintain our US$1b expectation vs the company’s US$2b target.
Maintain BUY. Target price: S$1.17.

Yangzijiang Shipbuilding (SGX:BS6) reported 2Q20 revenue of Rmb4.8b (-32% y-o-y) and net profit of Rmb774m (-17% y-o-y). Although revenue and net profit made up 42% and 43% of our full-year estimates respectively, this was expected given the gradual re-start of yard operations at the start of 2Q20.
The highlight of the results was the company’s strong gross profit margins that expanded nearly 10ppt y-o-y to 26.6%, helped by shipbuilding margins of 22.3% - the highest since 1Q17. Notably, the y-o-y revenue decline was attributable to the low profit-margin business of trading, which fell 68% y-o-y, and not shipbuilding (-3% y-o-y).

On a q-o-q basis, revenue rose 36% while net profit nearly doubled, up 92%. Importantly, the company had a very commendable operational performance in 2Q as it delivered 16 vessels (2Q19: 18 vessels) and was 15 days ahead of schedule for the quarter. As a result, the company is on track to deliver the targeted 45 vessels for 2020.

Management guided on 2-3% gross profit margins when bidding for new jobs vs 8- 10% margins previously as it needs to keep or even gain market share in these tough times when Korean and Chinese yards cannot even get orders. Including variation orders and other items, gross profit margins are not expected to be that bad given Yangzijiang Shipbuilding’s product mix and other business initiatives.

Yangzijiang Shipbuilding’s strong balance sheet allows it to take advantage of the industry downturn by buying, at scrap prices, uncompleted ships from troubled yards, then finishing off the construction and subsequently selling off the vessel with a hefty profit margin. This is what occurred in 2Q20 with the sale of a 157,000dwt Aframax oil tanker that Yangzijiang Shipbuilding had previously bought from Rongsheng Heavy Industries at scrap prices and subsequently sold to realise a gross profit margin of > 40%. Yangzijiang Shipbuilding is therefore presently looking at replicating this success with an unfinished VLCC and five containerships.

Yangzijiang Shipbuilding had a decent amount of new orders in 1H20 with 15 vessels worth US$517m, all of which came from its Chinese customers. In addition, Yangzijiang Shipbuilding revealed that it has a Letter of Intent from an existing client worth “over US$200m” that it is working to convert into a firm offer, and it also has several other projects that it believes may eventuate in orders in 4Q20.
Interestingly, the management stated that its European clients, after having pressed the pause button on their spending plans earlier in the year due to COVID-19, have started to enquire about large container vessels, and that Greek owners have also resumed enquiries about 82,000dwt tankers. The company did not change its $2b order-win target for 2020.

Debt investments rose 3.5% q-o-q to Rmb16b while its gross profit for this segment grew 10% y-o-y to Rmb554m. During the analyst briefing, the company guided for returns potentially declining in the future as the property sector in China, being a key borrower, has been unwilling to offer higher returns.

Yangzijiang Shipbuilding’s tax rate of nearly 29% for 1H20 will likely be lower in 2H20 in our view. On a UOBKH conference call with clients, management stated that its two largest yards will likely receive a 15% tax rate for 2020 if the company meets the appropriate criteria of being a “high tech enterprise”. As a result, we have maintained our 21% tax rate estimate for 2020 vs the company’s 1H20 tax rate of 29%.

Maintain BUY and slightly lower target price to S$1.17. Our target price is based on 0.68x P/B, which is a 10% discount to its 5-year average P/B multiple which has declined since our last published note.
We believe Yangzijiang's current share price up to at least S$1.10 should be protected by its 2020F yield of 4.7%, which we view as reasonably secure. As at end-1H20, the company’s net cash position of Rmb4.4b translates to S$0.29/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/ 2020-08-07

SGX Stock Analyst Report BUY MAINTAIN BUY 1.17 DOWN 1.220