Yangzijiang Shipbuilding - UOB Kay Hian 2021-03-01: 2020 Strong Shipbuilding Margins The Highlight, More Order Wins To Come

YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6) | SGinvestors.io YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding - 2020 Strong Shipbuilding Margins The Highlight, More Order Wins To Come

  • Yangzijiang Shipbuilding’s 2020 net profit of RMB2,516m (-21% y-o-y) beat our expectations, helped by its stronger-than-expected shipbuilding margins.
  • With US$1.3b in orders already in the bag year-to-date, we expect Yangzijiang Shipbuilding to win at least US$3b in orders for this year.
  • We upgrade our Yangzijiang Shipbuilding's 2021 and 2022 earnings forecast by 6% and 10% respectively on the acknowledgment of the strong order flow year-to-date. We maintain BUY and raise our target price to S$1.25.



YANGZIJIANG'S 2020 RESULTS


2020 profit beat our estimates.

  • Despite the 37% y-o-y decrease in revenue, Yangzijiang Shipbuilding (SGX:BS6) saw gross profit margins increase 10ppt y-o-y to 28% which resulted in NPAT declining by a lower 21% y-o-y and beating our estimates by ~7%. This was attributable to its construction of containerships which attract higher profit margins relative to bulk carriers.
  • In our view, these higher shipbuilding margins may potentially be a secular trend for Yangzijiang Shipbuilding as it increases its concentration on containerships. We note that 22 out of the 29-vessel order from Feb 21 were containerships, and within that order there were four 24,000 TEU vessels which are the largest containerships globally at present.

Highest payout ratio in four years.

  • Yangzijiang Shipbuilding declared a final dividend of S$0.045/share, flat from last year, and representing a 35% payout ratio which is the highest since 2017. This represents a 4.8% yield from Friday’s closing price.

Raising our order-win expectations.

  • After the results call, we upgrade our 2021 order win expectation of Yangzijiang Shipbuilding from US$2.5b to US$3b, which we view as conservative given the tailwinds that the company has seen in 1Q21 with this US$1.29b order.


STOCK IMPACT


Concentrating on containerships…

  • As a specialist builder of containerships (~60% of its current orderbook are containerships), Yangzijiang Shipbuilding generates higher profit margins on these types of vessels relative to bulk carriers and tankers, in our view.
  • On the results call, Yangzijiang Shipbuilding noted that it is currently seeing a significant number of inquiries for containerships and believes that it is in a prime position to win more of such orders given that many liners have used its product and thus trust its quality and ability to deliver on time.

… and leaving bulk carrier orders to others.

  • While Yangzijiang Shipbuilding received bulk carrier orders in 2020, it stated that it is less keen on getting such orders due to:
    1. the appreciation of the RMB vs the USD which negatively affects orders which are priced in USD; and
    2. rising USD-denominated steel prices given that bulk carriers utilise more steel than containerships.
  • Yangzijiang Shipbuilding also pointed to very high levels of competition within China for bulk carrier orders, with 1-2 Chinese state-owned enterprises getting the majority of the bulk carrier orders while a multitude of smaller and less profitable yards fight for the remainder, thus degrading gross profit margins.

Reopening its mothballed yard on the back of a better outlook.

  • Yangzijiang Shipbuilding disclosed that as at end-20, it had 25% of its shipyard capacity mothballed due to lack of orders. However with the company’s slipways and dry docks all fully utilised at present, and with a better shipbuilding outlook, Yangzijiang Shipbuilding will reopen its Jiangsu Yangzi Changbo shipyard by end-1H21.
  • Being a smaller yard, it will be able to construct around 6-7 ships per year, all of which will be smaller-sized feeder containerships. Note that Yangzijiang Shipbuilding is not planning to expand capacity as general shipbuilding margins do not justify such expansion, and yard capacity remains oversupplied in China.

Investing in a new type of financial instrument.

  • In a move that may not sit well with some investors, Yangzijiang Shipbuilding revealed that it had invested RMB2.5b in various venture capital funds in 2020 and generated a return in excess of RMB500m.

Small-scale LNG vessels - another potential market.

  • On the results call, management stated that small-scale LNG vessels could be a potentially large market for the company. Instead of the large sea-going long-range LNG carriers, it will look at smaller river-run Type B and Type C vessels that will serve China’s inland cities. However regulatory hurdles such as local and central government permissions need to be overcome for LNG to transit along the river.
  • Crucially, construction of such vessels can fill up Yangzijiang Shipbuilding’s smaller dry-docks while the larger dry-docks serve the larger vessels.


EARNINGS REVISION/RISK

  • We have upgraded our net profit forecasts of Yangzijiang Shipbuilding for 2021 and 2022 by 6% and 10% respectively to take into account our higher new order win expectations.

VALUATION/RECOMMENDATION



SHARE PRICE CATALYST

  • Continued strong momentum in order wins.
  • 1Q21 results showing the margin expansion potential of new containership orders.





Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-03-01
SGX Stock Analyst Report BUY MAINTAIN BUY 1.25 UP 1.170



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