Yangzijiang Shipbuilding - DBS Research 2021-03-01: Supercycle Order Momentum

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YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding - Supercycle Order Momentum

• Yangzijiang's FY20 solid shipbuilding earnings partially offset by forex loss.
• Whopping contract wins of US$1.3bn year-to-date; raise 2021 order win expectation to US$3.0-3.5bn from US$2bn previously.
• Maintain 2019 final dividend of 4.5 cents for 2020 despite earnings decline, translating into 4% yield.
• Undervalued recovery proxy trading below net cash; reiterate BUY on Yangzijiang; target price lifted to S$1.50.

Yangzijiang's FY20 earnings broadly in line; would have been a stellar year if not for the huge forex loss.

• Yangzijiang Shipbuilding (SGX:BS6)’s net profit declined by 19% y-o-y to RMB2.52bn in FY20, broadly in line with consensus expectations of ~Rmb2.6bn.
• It would have been a stellar year with stronger-than-expected shipbuilding margins, if not for significant forex loss of over RMB800m in 2H20, arising from translation loss of USD bank deposits and USD-denominated shipbuilding construction contract assets as USD softened.

Steady shipbuilding gross margin at 23.9%.

• Headline shipbuilding margin came in at 23.9% (-3.4ppts q-o-q; +11.5ppts y-o-y) in 4Q20. Adjusting for the effect of reversals/provisions for expected losses, core shipbuilding margin would have been even stronger at 27.5%, expanding +3.9ppts q-o-q. Management attributes margin expansion in 2H20 to delivery of large-sized containerships that yield higher profit margins.
• As of end Dec 2020, provision for onerous contracts and warranties stood at RMB491m (+Rmb77m q-o-q) and RMB382m (-Rmb16m q-o-q) respectively.

Yangzijiang secured a whopping US$1.3bn of new orders year-to-date; the most since the 2007 supercycle.

• Yangzijiang secured new orders for 29 vessels worth US$1.3bn in Jan 2021. See Yangzijiang's announcements. This is a very significant positive indicator of a buoyant newbuilding market, as it is probably the largest contract wins secured in a month since the 2007 supercycle. This is an acceleration from the US$510-560m orders a month that we saw in Nov/Dec 2020 and the typical US$500-800m orders a quarter during a mini upcycle.

Potentially another US$0.9-1.3bn of new orders for Yangzijiang in Feb 2021.

• During its results briefing, Yangzijiang's management shared that the bullish order trend persists. Approximately US$880m worth of new orders are already in the bag and the company could achieve orders similar to Jan for Feb as well.

Orderbook lifted to US$3.09bn as of end Dec 2020, from US$2.4bn a quarter ago.

• This implies revenue coverage of ~ 1.5 years. Given the astounding contract wins year-to-date, and potential wins in Feb, Yangzijiang's orderbook could be raised to ~US$4.5-5.0bn by the end of Mar 2021, implying ~ 2-2.5 years of revenue coverage.

Returned to optimum capacity utilisation from the start of the year; adding more capacity with reactivation of Changbo yard.

• Yangzijiang took a preventive measure to rightsize operations in 2H20, and reduce capacity by ~25% in view of the slow contract flow in 1H20. These have resumed and management will also reactivate the Changbo yard, that has been shut down since 2015, by mid-2021.

Making progress in LNG carrier space.

• While the bulk carrier and tanker markets remain sluggish, containerships and LNG carriers are seeing strong enquiries. Yangzijiang is developing mid-sized LNG carriers (40k/80k cbm) to move up the value chain.

Recent increase in steel cost and USD depreciation reflected in newbuilding price.

• While management does not expect a sharp increase in newbuild prices that yield margin expansion, the buoyant container shipping rates allow them to pass through higher steel costs (Rmb5000- 5500/t) and reflect weaker USD (Rmb6.40-6.50) in newbuild pricing.

Reversing earnings downtrend - revenue growth with healthy margins.

• We have raised our order win assumption of Yangzijiang for 2021 from US$2.5bn to US$3.5bn and lifted our 2022 earnings forecasts by 10%. We now expect ~14% earnings CAGR for Yangzijiang in the next two years, stemming from revenue growth and absence of huge forex losses. Our economists expect stabilised USD/CNY at around 6.50 in 2021-2022.
• We also find comfort that 70-80% of orders secured over the past year are for containerships, which is Yangzijiang’s core competency and traditionally fetches better margins, especially the larger vessels, relative to bulkers.

Investment income to bolster dividend payment; expect a 4.5-cents dividend or ~4% yield.

• Yangzijiang's investment return from financial assets contributed ~Rmb1.9bn to bottom line in 2019- 2020. We projected a lower ~Rmb1.6bn contribution in our forecast period, in line with management’s guidance to reduce exposure and expectations of a lower return.
• Nevertheless, the Investment income alone is more than enough to support a 4.5-cents dividend payout which will amount to RMB800m or ~50% of the Investment segment’s profits.

Yangzijiang is trading below net cash.

• While shipping and shipbuilding markets are affected by the economic slowdown, we expect a gradual recovery post COVID-19. Yangzijiang is trading at only 0.6x P/BV, below its cash level of ~S$1.11.
• See Yangzijiang Share Price; Yangzijiang Target Price; Yangzijiang Analyst Reports; Yangzijiang Dividend History; Yangzijiang Announcements; Yangzijiang Latest News.
• Supercycle order momentum, steady earnings delivery, and progress in LNG venture are key catalysts that should drive Yangzijiang's share price closer to our target price.
• Meanwhile, investors can expect a decent 4% dividend yield by holding on to Yangzijiang.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2021-03-01

SGX Stock Analyst Report BUY MAINTAIN BUY 1.50 UP 1.400