Yangzijiang Shipbuilding - UOB Kay Hian 2022-03-01: 2021 Better Than Expected Due To Non-Operating Items

YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding - 2021 Better Than Expected Due To Non-Operating Items

Yangzijiang Shipbuilding (SGX:BS6)’s PATMI of RMB3.7b (+47% y-o-y) was better than expected due to non-operating items. 2H21’s gross margin of 10.8% for shipbuilding should be the trough and we expect it to expand towards the 15% level towards 2H22.
Yangzijiang Shipbuilding’s 10% y-o-y earnings growth this year will be underpinned by a 20% increase in vessel deliveries and continued strong shipping performance. The company will spin off its investment arm via a 1:1 distribution in specie in 1H22.

Strong bottom line that beat our and consensus’ estimates. Yangzijiang Shipbuilding reported revenue of RMB17b (+13% y-o-y), which generated PATMI of RMB3.7b (+47% y-o-y) and exceeded expectations. The bottom line was helped by forex hedging gains, reversals of impairments and higher interest income. Yangzijiang Shipbuilding declared an in-line dividend of S$0.05 for 2021 (2020: $0.045).
Shipbuilding margins appear to have troughed. Yangzijiang Shipbuilding delivered 50 vessels during the course of 2021 (2020: 45 vessels) with 27 of these in 2H21. As expected, the company’s shipbuilding margins fell h-o-h in 2H21 to 10.8% (1H21: 13.5%) due to progressive construction of ships with lower margins, exacerbated by higher steel prices and a stronger RMB vs US$. As these ships are completed and delivered over the course of 2022, we expect shipbuilding margins to expand towards the 13-15% region.
Yangzijiang Shipbuilding is targeting delivery of 60 ships in 2022 which should well underpin its earnings growth.

On the results call, Yangzijiang Shipbuilding’s management pointed out that steel plate prices have presently stabilised at RMB6,000/tonne, below the peak of around RMB7,000/tonne. In 2022, it does not expect material price increases and thus its shipbuilding contracts, struck when steel prices were in the RMB6,500-7,000/tonne range, would be much more profitable.
Nevertheless, Yangzijiang Shipbuilding’s management guided for margins to remain in the low teens in 1H22 and once its low margin-contracts are completed, its margins should trend higher in 2H22.
Shipping business continues to perform well. Yangzijiang Shipbuilding’s fleet of 26 vessels generated a solid 40% gross margin in 2021 on the back of a 32% increase in revenue. Its management expects this segment to continue performing strongly in 1H22 and highlighted that with an average age of eight years, it is a young fleet. In addition, Yangzijiang Shipbuilding disclosed that this fleet has a relatively low carrying value of RMB2.18b, or only US$18m per vessel. Note that in 2021, it sold two vessels and recognised a gain of RMB70m (US$11.1m).

On a y-o-y basis, Yangzijiang Shipbuilding’s debt investment portfolio was flat at RMB16.6b. However, its interest income in 2H21 declined 7% h-o-h and 13% y-o-y as average interest rates continued to trend downwards.
Spin-off of its investment business YZJ Financial Holdings (YZJFH) onto the SGX Main Board appears to be on track, with the company having applied for listing by way of an introduction on 11 Feb 22. Yangzijiang Shipbuilding curve into private debt, credit and equities, as well as public credit and equities, and plans to invest around 40% of its portfolio outside China.

Slight changes. We have made very mild highlight that Yangzijiang Shipbuilding’s end-21 net cash per share was S$0.43, which equates to 31% of the current Yangzijiang's Share Price.
See
Catalysts include:
- Evidence of margin expansion from 1H22 onwards.
- New orders in higher margin segments, eg dual-fuel containerships or LPG tankers.
- Demerger of its debt investments business from the core shipbuilding business.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-03-01

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