YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)
Yangzijiang Shipbuilding 1Q21 - Shipbuilding Margins Should Improve; New Orders To Continue
- Yangzijiang Shipbuilding reported a better-than-expected net profit which jumped 89% y-o-y to RMB780m. With US$4b of orders year-to-date, we look forward to more in the next few months as the company is targeting US$5b in new orders vs our expectation of US$5.5b.
- With our eye on rising steel costs and forex movements, we note that as Yangzijiang Shipbuilding starts to build its new containership orders, higher margins should flow through from 2H21 onwards.
- Maintain BUY. Target price: S$1.76.
YANGZIJIANG'S 1Q21 RESULTS
NPAT and margins stronger than expected.
- Yangzijiang Shipbuilding (SGX:BS6) reported an 89% y-o-y increase in NPAT at RMB780m (26% of our full-year estimate) which was driven by a 10ppt increase in gross profit margins and an 18ppt increase in net margins.
- We were not perturbed by revenues that declined 25% y-o-y to RMB2.62b due to lower shipbuilding activities, as shipbuilding margins expanded to 14.7% vs 8.4% in 1Q20 which was affected by the pandemic.
- During the analyst briefing, Yangzijiang Shipbuilding's management reiterated its belief that its revenues will trough in 1Q21 and should increase from 2Q21 onwards.
New order win outlook.
- With slightly over US$4b in new orders garnered year-to-date in 2021, we note that Yangzijiang Shipbuilding is targeting US$5b in new orders which, in our view, should be easily achieved.
- Yangzijiang Shipbuilding noted that its smallest Changbo yard (to be reactivated by mid-21) will build the smaller 1,000-3,000TEU containerships while the Yangzi and Xinfu yards will focus on the mid-and large-sized vessels. Our 2021 and 2022 new order win expectations remain at US$5.5b and US$3.5b respectively.
STOCK IMPACT
Capacity expansion unlikely.
- During the analyst call, Yangzijiang Shipbuilding's management stated that it is not looking at acquiring any shipyards in China, despite the fact that its current orderbook for delivery into 2023 is approaching full capacity. Some of the activities at its yards are currently on 2-3 shifts (eg steel cutting) while others remain on single shifts due to equipment bottlenecks, such as the speed and availability of gantry cranes.
- With all of Yangzijiang Shipbuilding’s yards located in close proximity to each other on the Yangtze River, the company is able to command synergies unlike other yards that are spread out and thus are unable to operate efficiently.
Potential sale of some of its shipping fleet in the near term.
- At present, Yangzijiang Shipbuilding generates chartering income from 24 vessels classified as RMB2b in fixed assets on the company’s balance sheet ( ~US$10-12m per vessel). However management commented that a potential sale of its in-demand bulk carriers (e.g. 92,500dwt, 82,000dwt and 64,000dwt vessels) could eventuate soon at 50% above book value.
Looking forward to higher shipbuilding margins.
- Yangzijiang Shipbuilding guided for higher shipbuilding margins starting in 2H21 as it commences building its large slate of containerships. In addition, management noted that owners – galvanised by the environmental, social and corporate governance (ESG) investment theme and increased concerns over climate change – are looking to convert some of their newbuild ships to dual fuel. This is positive for Yangzijiang Shipbuilding as it can then charge a higher profit margin for such variation orders.
Cost items that we will be monitoring in the near to medium term are steel costs and the CNY/US$ exchange rate.
- Currently, Yangzijiang Shipbuilding has assumed RMB5,000-5,800/tonne in its contracts vs spot prices of RMB5,300, but believes that prices will trend down over the next 12 months. On currency, it tries to hedge 40% of its incoming US$ receipts, and has bought more forward contracts since Dec 20 as more orders have come in.
Debt investments – still performing admirably.
- Yangzijiang Shipbuilding’s debt investments fell 12% q-o-q to RMB14.9b as at end-1Q21, while implied yield of 12.97% (vs company’s guidance of ~10- 12% p.a.) remains at a healthy level, in our view. Coverage ratios for its debt exposure remain strong with collateral using shares and/or vessels both improving y-o-y in particular.
EARNINGS REVISION/ RISK
- None.
VALUATION/RECOMMENDATION
- We maintain our BUY rating on Yangzijiang Shipbuilding with a target price of S$1.76 which is an aggregate of our P/E and P/B valuation methodologies.
- Our P/E valuation of S$1.89 is based on a target 10x multiple (+1 standard deviation above the company’s past five-year average P/E ) and pegged to our 2022 earnings per share estimate.
- Our target P/B multiple of 0.9x is 1 standard deviation above Yangzijiang Shipbuilding’s past 5-year average resulting in a P/B valuation of S$1.62.
- See
Container market updates have continued to be bullish.
- For example, AP Möller-Maersk’s 1Q21 update said that the container market may grow by between 5-7% in 2021, up from its prior forecast of 3-5%. Maersk’s own cargo volumes climbed 5.7% y-o-y in 1Q21 while its average freight rates surged 35% y-o-y.
A more prolonged cycle than expected?
- Yangzijiang Shipbuilding believes that the COVID-19 pandemic has spurred some of the near-term orders that it has received. In our view, the container building cycle may have longer-than-expected legs given favourable conditions in the global shipping market, low prices for new larger vessels and the availability of cheap financing.
- The number of container vessels on order is at a 14-year low, with particularly low orders in recent years due to low freight rates and new IMO emission requirements which left shipowners uncertain about their preferred options for compliance.
SHARE PRICE CATALYST
- Continued new order wins, especially from China-based clients.
Adrian LOH
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-05-03
SGX Stock
Analyst Report
1.760
SAME
1.760
