Yangzijiang Shipbuilding - CGS-CIMB Research 2020-10-16: Rising Tide

YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding - Rising Tide

Encouraging rise in ocean rates and positive outlook by liners could spur newbuild orders. Yangzijiang Shipbuilding’s c.U$700m orders YTD are on track to hit US$1.1bn.
With yard operations at 100%, we expect Yangzijiang Shipbuilding’s 3Q20F net profit to be steady q-o-q at Rmb700m-750m, relatively stronger than Singapore yards.
Yangzijiang's share price is cheap at 0.5x P/BV and 5x P/E ex-cash.

Re-iterate ADD on Yangzijiang Shipbuilding. Our SOP-based Target Price implies c.0.8x CY20F P/BV (-0.5 s.d. of mean).

The strong uptrend for Transpacific spot rates since Jun 2020 may suggest that demand is matching capacity deployment.
In Sep 20, riding on the traditional year-end peak season, SCFI (Shanghai Containerized Freight Index) Shanghai to West Coast America rose c.170% y-o-y to an all-time high since 2009 of US$3,831/FEU and Shanghai to East Coast America up c.87% y-o-y to a high of US$4,590/FEU since 2015. Shanghai to Europe also reached a modest high of US$1,085/FEU (+66% y-o-y). Panamax grain bulk carriers also staged a recovery to pre-Covid average of US$32.3/tonne in Sep 2020.

In the latest trading update for 3Q2020, Maersk raised its FY20F EBITDA to US$7.5bn- 8bn (previously US$6bn-7bn) citing slightly better than anticipated volumes in ocean in 3Q20 (-3% y-o-y vs. mid-single digit contraction). Preliminary revenue rose 10% q-o-q to US$9.9bn in 3Q20F on continued recovery in demand across businesses and initiatives to improve costs. This is its second guidance upgrade in 2020 which signals firm demand recovery to us.

YTD, Yangzijiang Shipbuilding (SGX:BS6) has secured c.US$700m of orders, in line with our US$1.1bn target for 2020, or up 33% y-o-y, defying the disruptions of COVID-19.
From the 2020 orders won, there are options for another 22 vessels, amounting to c US$1.29bn to be exercised in 2020-2021, in our view. Improving earnings among shipowners could accelerate these options.

The absence of a deep contraction as seen in 2Q20 (-10% y-o-y) in the world containership trade should see continued improvements into 2021. On the supply side, containerships capacity growth has been well balanced which we believe could be the reason for the spike in freight rates.
Clarkson estimates container volumes to grow 5.7% y-o-y in 2021 after a -4.1% decline in 2020. This corresponds to +3% of total capacity growth, largely driven by large-sized 12,000 TEU ships. Outlook for bulk carriers in 2021 is slightly more modest at c.4% y-o-y rebound in dry bulk trade volumes vs. fleet growth of 1.5%.

With yard operations unchanged q-o-q, we expect Yangzijiang Shipbuilding to deliver at least 15 vessels in 3Q20F and steady q-o-q net profit of Rmb700m-750m, relatively stronger than its Singapore peers.
Shipbuilding gross margin appears likely to normalise to c.16-18% in 3Q20F (2Q: 22%) on the absence of vessel resale gains which were present in 2Q20.

See Yangzijiang Share Price; Yangzijiang Target Price; Yangzijiang Analyst Reports; Yangzijiang Dividend History; Yangzijiang Announcements; Yangzijiang Latest News.
Yangzijiang Shipbuilding's strong net cash of Rmb4.4bn (S$0.22 per share) at end-Jun 20 should sustain above market yield of 4.3%. It is trading at new trough and undemanding valuations of 0.56x CY20F P/BV, vs. ROE of 9%.
On an ex-cash basis, Yangzijiang's share price trades at 5x CY21F.
In Sep-Oct, Yangzijiang Shipbuilding bought back 25m shares or c.S$24.2m. See latest share buyback transactions of SGX listed companies. Our SOP valuations peg its assets held to maturity at 1x FY20F P/BV and shipbuilding at 0.7x CY20F BV. Second wave is key risk.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-10-16

SGX Stock Analyst Report ADD MAINTAIN ADD 1.370 SAME 1.370