Yangzijiang Shipbuilding - CGS-CIMB Research 2021-04-30: Queue Up For Slots

YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding - Queue Up For Slots

We raise our FY21-23F earnings per share forecast for Yangzijiang Shipbuilding by 5-15% to factor in higher order wins of US$5bn in 2021 and stronger shipbuilding margins. Target price raised to S$1.63.
Yangzijiang Shipbuilding beat our and consensus expectations in 1Q21 mainly due to reversal of impairment, with reported profit at RMB761m.
Order momentum could take a breather as yard capacity is full till 2023/2024 but catalysts remain for higher dividend and vessel sales. Maintain ADD.

Yangzijiang (SGX:BS6)'s shipbuilding revenue was lower q-o-q and y-o-y, forming 14% of our full-year forecast at Rm2.1bn (-16% q-o-q, -29% y-o-y) with 12 vessels delivered during the quarter. However, overall profit of RMB780m (-2% q-o-q, +88% y-o-y) was above our expectation of ~Rmb610m, thanks to
1. net forex gains of RMB212m and
2. reversal of impairment for asset held to maturity (HTM) worth RMB154m.
The reversal of impairment for HTM assets was mainly due to more redemption. Provision for HTM decreased from RMB2bn at end-FY20 to RMB1.85bn as at 1Q21, which resulted in a net reversal of impairment provision.

Shipbuilding gross margin of 15% was below 2H20’s ~25% and slightly below our 18% forecast. Management attributed this to recognition of lower-value contracts secured a few years ago. We believe steel price could play a part.
Contracts secured recently have buffered in a steel price of ~Rmb6,500/tonne vs 2020’s RMB5,500/tonne. Steel price movement is typically not passed through. However, management alluded that all of Yangzijiang Shipbuilding’s contracts locked in at lower steel prices are still profitable.
China government’s plan to scrap tariffs on certain steel products and raw materials starting 1 May could help to curb iron ore consumption/steel price ahead. With ~71% of Yangzijiang Shipbuilding’s order book dominated by containerships (better margin with less steel component), we believe margins could sustain at ~17% for FY21F.

Yangzijiang Shipbuilding has contracts for 75 vessels worth US$4.01bn, including 51 containerships worth ~US$3.36bn. Order book stood at US$6.6bn as of today, close to the peak in 2008 (US$6.9bn). Management is still hopeful to close the year with US$5bn of new wins, although cited that industry remained competitive from small yards.
Yangzijiang Shipbuilding has dominated recently, securing ~50% of the new orders from Chinese. Main yard capacity is full with delivery stretched till 1Q24 for large ships and 3Q23 for smaller ships. Changbo, which will start operations in 2Q21, is also filled with orders till 2023.
While the Shanghai Containerized Freight Index (SCFI) index remains high at peak levels of ~2,900, we think shipping clients could be pressed for slots and look to alternative yards for newbuilding

We raise our order assumption to US$5bn for 2021F (from US$3.5bn) and keep our US$2.3bn target for 2022. We now expect a dividend of S$0.05 per Yangzijiang Shipbuilding share on the back of strong profit recovery.
Yangzijiang Shipbuilding's net cash as of 1Q21 stood at RMB8.8bn (S$0.47/share). Our target price is based on 1x P/BV or +1 standard deviation from 6-year average (5-year average previously).
See
Risk: order cancellations.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-04-30

SGX Stock Analyst Report ADD MAINTAIN ADD 1.63 UP 1.540