Yangzijiang Shipbuilding - DBS Research 2020-11-05: Orders Flowing Through


Yangzijiang Shipbuilding - Orders Flowing Through

  • Yangzijiang Shipbuilding's 3Q20 strong shipbuilding earnings overshadowed by forex loss.
  • Remarkable year-to-date wins of over US$1bn; confident to achieve US$2bn target.
  • Moving up to develop mid-sized 40k/80k cbm LNG carriers.
  • Trading at 18% discount to net cash at 0.55x P/BV despite 8% ROE and 4% yield; reiterate BUY on Yangzijiang Shipbuilding.

Yangzijiang Shipbuilding's 3Q20 earnings affected by forex loss.

  • Yangzijiang Shipbuilding (SGX:BS6)’s net profit declined by 17% y-o-y to Rmb585m in 3Q20, falling short of our expectation of Rmb700m due to significant forex loss of Rmb367m, arising from translation loss of USD bank deposits and USD-denominated shipbuilding construction contract assets as USD softened. Otherwise, it would have been a stellar quarter with stronger-than-expected shipbuilding margins.
  • Headline shipbuilding margin came in at 27.2% (+4.9ppts q-o-q; +13.7ppts q-o-q) in 3Q20. Even as we adjust for the effect of reversals/provisions for expected losses, core shipbuilding margin remains commendable at 23.6%, expanding 3.8ppts q-o-q and 14.8ppts y-o-y. Management attributes this to delivery of several large-sized containerships that yield higher profit margins.
  • As of end Sep-2020, Yangzijiang Shipbuilding's provision for onerous contract and warranty provisions stood at Rmb491m (-Rmb76m q-o-q) and Rmb378m (+Rmb3m q-o-q) respectively.

Secured US$1bn new orders thus far this year.

  • Subsequent to its order announcement at end-Aug, Yangzijiang Shipbuilding has won an additional ~US$334m in new orders. This brings year-to-date wins to US$1bn, forming 51-68% of its annual target of US$1.5- 2.0bn. These order wins are remarkable given the slow newbuild ordering activities amidst the COVID-19 pandemic.
  • Yangzijiang Shipbuilding's management remains hopeful to conclude more contract wins before year-end.
  • Orderbook stood at US$2.4bn, down from US$2.6bn a quarter ago. This implies revenue coverage of c.1.5 years, lower than the ideal range of 2-2.5 years.

Stands a good chance to return to optimum capacity utilisation next year.

  • Yangzijiang Shipbuilding took a preventive measure to rightsize operations in 2H20, and reduce capacity by up to 25% in view of the slow contract flow in 1H20. If the company is able to achieve its order win target, and momentum continues to pick up, it may resume those capacity in 2021.
  • Making progress in LNG carrier space. While the bulk carrier and tanker market remains sluggish, containerships and LNG carriers are seeing strong enquiries. Yangzijiang Shipbuilding is developing mid-sized LNG carriers (40k/80k cbm) to move up the value chain.

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

  • Investment return 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-cent dividend payout which will amount to Rmb780m or 43% of the Investment segment’s profits.

Yangzijiang Shipbuilding is trading below net cash.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2020-11-05
SGX Stock Analyst Report BUY MAINTAIN BUY 1.400 SAME 1.400