Yangzijiang Shipbuilding - UOB Kay Hian 2021-11-30: The Spin-Off Journey Begins With A Single Step

SGinvestors.io

YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding - The Spin-Off Journey Begins With A Single Step

• Yangzijiang announced that it is exploring the possibility of spinning off its investments business into a separate entity which will then be listed. While this process may take 6- 12 months, we view this move in a positive light as it should remove some of the discounts that investors had arguably placed on the company, given the size of this non-core business.
• Maintain BUY call on Yangzijiang Shipbuilding (SGX:BS6).

Some clarity given on possibility of spin-off of Yangzijiang's investment business.

• After market closed on 29 Nov 21, Yangzijiang Shipbuilding announced that it is “exploring the possibility of undertaking a plan to spin-off the group’s investment segment via the transfer of existing investments to a newly-incorporated company (NewCo)”. Yangzijiang Shipbuilding then intends to list NewCo, although no details were provided as to whether NewCo would follow Yangzijiang Shipbuilding and be listed on the Singapore Stock Exchange, or whether it would be listed in an exchange in China where its investments are.
• A cleaner business and shareholding structure. The announcement should not come as a surprise to the market given that management had stated previously that it was undertaking a strategic review of its debt investments business. With separate listed companies containing the shipbuilding business and the debt investments business, Yangzijiang Shipbuilding will look to deliver sharper operational focus, enable more targeted capital allocation, and have more strategic and financial flexibility to pursue its own growth opportunities.

What is the debt investments business?

• This segment’s key activities include micro-financing, debt investments at amortised cost, and other investments. More importantly, these investments have collateral backing the loans, with land comprising 43% of all collateral held by Yangzijiang Shipbuilding, and shares making up another 21% as at end-3Q21 (other forms of collateral include receivables, vessels and others). Historically, this segment has generated about 95% gross profit margins, non-performing loans of 1% or less, and as at end-3Q21 had a net balance of RMB10.9b (S$2.34b) in investments.

Market reaction should be positive, in our view.

• While the proposed spin-off is still at a preliminary stage, with targeted completion in 6-12 months, we believe that this news should be seen in a positive light by the market given the frequent prior criticism that has been levelled at the management regarding the lack of focus and excessive time taken up by a non-core business segment.
• Lacking details at the moment, but direction is positive. We were slightly disappointed that the announcement was not more concrete with potential valuation parameters and/or valuation ranges given; however, given the cross-border nature of this transaction, the tax implications for the major shareholders will likely be the main issue to contend with. Furthermore, there will also be the requisite approvals needed from various regulatory authorities as well as the board of directors and shareholders.

Orderbook full until 2024.

• During its 1H21 results briefing, Yangzijiang Shipbuilding stated that any new orders will be delivered in 2025 but in spite of this, it is still receiving client enquiries for 2025. Ytd in 2021, the company has garnered order wins for 124 vessels worth US$7.41b.
• Recently in Oct 21, Yangzijiang Shipbuilding won orders for two 82,300dwt and four 45,000dwt bulk carriers with a total contract value of over US$200m. More notably, 2021 saw the company achieve a significant breakthrough in the signing of a contract to build a number of 40,000m3 liquefied petroleum gas (LPG) carriers and liquefied natural gas (LNG) dual-fuel 7,000TEU containerships.

Maintain BUY call on Yangzijiang.

• No view, underlines management’s belief that its business prospects are bright, and specifically that its lower-than-expected 3Q21 profit margins should head higher over the next few quarters.
• See
  • Yangzijiang's Share Price,
  • Yangzijiang's Target Price,
  • Yangzijiang's Analyst Reports,
  • Yangzijiang's Dividend History,
  • Yangzijiang's Announcements,
  • Yangzijiang's Latest News.
• Catalysts:
  • Evidence of margin expansion from 2H21 onwards.
  • New orders in higher margin segments, eg dual-fuel containerships or LPG tankers.
  • Potential demerger of its debt investments business from the core shipbuilding business.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-11-30

SGX Stock Analyst Report BUY MAINTAIN BUY 2.000 SAME 2.000