Yangzijiang Shipbuilding - CGS-CIMB Research 2020-11-05: Expect More Orders Ahead


Yangzijiang Shipbuilding - Expect More Orders Ahead

  • Yangzijiang Shipbuilding's 3Q20 net profit of Rmb585m (-17% y-o-y, -24% q-o-q) was below our forecast of Rmb700m-750m due to lower revenue and forex loss (Rmb367m).
  • YTD order wins stand at S$1.03bn. We expect Yangzijiang Shipbuilding to meet its FY20 order win target of US$2bn. Current order book is at c.US$2.6bn.
  • Reiterate ADD. Yangzijiang's share price is cheap at 0.5x P/BV and 5x P/E ex-cash. Our SOP-based Target Price implies c.0.8x CY20F P/BV (-0.5 s.d. of mean).

Lower shipbuilding revenue and strong one-off margin

  • Yangzijiang Shipbuilding (SGX:BS6)’s 9M20 net profit of Rmb1.8bn formed 62%/66% of our/Bloomberg consensus FY20F. Core shipbuilding revenue fell 15% q-o-q and 21% y-o-y to Rmb2.5bn with 9 vessels delivered in 3Q20 vs. 16 in 2Q20.
  • Year-to-date, Yangzijiang Shipbuilding has delivered 37 vessels, still on track to meet its targeted 51 vessels for FY20.
  • Trading revenue was also lower than our expectations (-69% q-o-q, -79% y-o-y) at Rmb312m. Gross margin for core shipbuilding was significantly higher at 27% (1H20: c.15%) as it recognised more revenues from large vessels with higher profit margins which are nearing completion. We believe a sustainable level for margins is 15%.

“Other losses” hit by forex translation losses

  • Yangzijiang Shipbuilding recorded significant ‘other losses’ of Rmb290m, comprising unrealised Rmb367m of forex translation losses on weaker US$/Rmb q-o-q (6.81 vs. 7.08 q-o-q) on its US$ bank deposits and US$ denominated shipbuilding construction contract assets. This was offset by higher subsidy income of Rmb55m and fair value gain on derivative financial instruments of Rm17m.

Investment income from HTM assets

  • Income from assets held to maturity (HTM) was 9% lower q-o-q at Rmb502m but still contributed 40% of the group’s gross profit. HTM balance remained stable q-o-q at Rmb16.2bn and 3Q20 annualised return of investment was c.10%, in line with its typical 8- 10% trend.

More containership orders ahead

  • According to Yangzijiang Shipbuilding, due to COVID-19 headwinds, containers along China-Europe/US routes are experiencing supply shortage which sent charter rates to multi-year highs. Yangzijiang Shipbuilding expects more orders in 4Q20 to come from container liners, and management believes it is on track to achieve its US$2bn target for 2020.
  • Today, Yangzijiang Shipbuilding announced contracts worth US$198m for five 3,500 TEU containerships from a Japanese ship owner with options of another five units at similar cost (potentially another US$198m, if exercised). These vessels are scheduled for delivery from Nov 2022.
  • We estimate Yangzijiang Shipbuilding to have c.U$1.4bn-5bn of unexercised options and an order book of US$2.6bn, sustaining the yard operations visibility for 1.5 years.

Reiterate ADD and Target Price of S$1.37

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-05
SGX Stock Analyst Report ADD MAINTAIN ADD 1.370 SAME 1.370