Yangzijiang Shipbuilding - UOB Kay Hian 2020-11-06: 3Q20 Net Profit Slightly Missed; Looking Forward To More Orders


Yangzijiang Shipbuilding - 3Q20 Net Profit Slightly Missed; Looking Forward To More Orders

  • Yangzijiang Shipbuilding’s 3Q20 net profit fell slightly short of expectations but the highlight was higher-than-expected shipbuilding profit margins. Post results, the company reported a US$198m order which brings total year-to-date orders in excess of US$1b, meeting our target.
  • Yangzijiang Shipbuilding believes it can achieve its own order-win target of US$2b this year, which we believe the market would view very favourably.
  • Maintain BUY. Target price: S$1.17.

Yangzijiang Shipbuilding's 3Q20 net profit slightly missed our expectations

  • Yangzijiang Shipbuilding (SGX:BS6) reported that its 3Q20 revenue fell 34% y-o-y to Rmb3.58b while net profit declined 17% y-o-y to Rmb585m. Revenue and net profit for 9M20 made up 60% and 70% of our full-year forecasts respectively, with stronger-than-expected gross profit margins boosting net profit. The highlight of the result was Yangzijiang Shipbuilding’s very high 3Q20 gross profit margin for the shipbuilding segment, which increased by 13.7ppt to 27.2%.
  • Management cautioned that these margins are not likely to be sustainable in the near term. For 2021, we forecast shipbuilding gross profit margin to return to a normalised level of c.12%.
  • Other factors that impacted the 3Q20 results were:
    1. forex losses due to a weaker Rmb/US$ exchange rate; and
    2. higher provisioning for its debt investments.
  • 3Q20 revenue for shipbuilding dropped by a larger-than-expected quantum as Yangzijiang Shipbuilding built less vessels for the quarter, and thus revenue recognition fell on a y-o-y basis. However, given that Yangzijiang Shipbuilding was constructing large vessels, and such vessels attract higher profit margins relative to smaller vessels, this resulted in Yangzijiang Shipbuilding achieving a higher-than-expected shipbuilding margin. In addition, the reversal of some shipbuilding provisions made in earlier quarters helped bolster this segment’s profit margins.

Orderbook wins this year have been solid, in our view

  • Yesterday (5 Nov 20), after its 3Q20 results briefing, Yangzijiang Shipbuilding announced a new order win comprising five 3,500TEU containerships worth US$198m with delivery from 4Q22 onwards. The new orders came from a Japanese shipowner and also include options for another five identical vessels at the same price. As a result, year-to-date order wins now total just over US$1b, meeting our target for the year, while options in hand total US$1.4b.
  • Interestingly, management commented during the earnings call that it is reasonably confident of hitting its own US$2b order-win target for 2020, which implies that a large proportion of the options will be converted, in our view.
  • We also highlight commentary from management that global new ship-building orders have declined by about 50% in 9M20 in the face of a depressed market, which makes the company’s order wins this year all the more compelling.

Debt investments update

  • During the quarter, Yangzijiang Shipbuilding increased the size of its debt investments by Rmb186m q-o-q, thus resulting in a total book that is now worth over Rmb16.2b. Current portion is Rmb13.6b (84% of total) and non-current is Rmb2.6b.
  • During the analyst briefing, management stated its belief that there was “no significant increase in risk” in its portfolio as almost all of its investments are collateralised and it has not seen any deterioration of its coverage ratios. The company continued to guide for lower returns of c.10% p.a. vs historical levels of 13-15% p.a. as funds flowing into this sector and chasing returns have continued to be strong.

Potential tax write-back at the end of 2020

  • Management highlighted that it is provisioning for a 25% tax rate for its new shipyard; however should its yard qualify as a “New High Tech Enterprise”, it would then pay a lower tax rate of 15%. This would equate to a tax write-back or around Rmb100m which we have not factored into our current forecasts.

We have lowered 2020 earnings by 9%

  • We have lowered Yangzijiang Shipbuilding's 2020 earnings forecast by 9% to take into account:
    1. the forex losses in 3Q20 as well as the higher provisioning for Yangzijiang Shipbuilding’s debt investments; and
    2. lower revenue from its trading business for 2H20.
  • Our earnings forecasts for 2021 and 2022 remain unchanged for now.
  • Maintain BUY on Yangzijiang Shipbuilding with target price of S$1.17. Our target price is based on 0.68x 2020F P/B, which is a 10% discount to its 5-year average P/B.
  • We view Yangzijiang Shipbuilding’s 2021F P/B multiple of 0.52x as undemanding as it is 1SD below its 5-year average of 0.73x, while on a PE basis, the company is trading 15% below its 10-year average of 8x.

No risk to dividends, in our view.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-11-06
SGX Stock Analyst Report BUY MAINTAIN BUY 1.170 SAME 1.170