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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 14 Nov 2019, 4:47 PM

 

Yangzijiang Shipbuilding - Recent Concerns Overblown – Near-term Order Wins May Take Centre Stage

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  • We recently met with YANGZIJIANG SHIPBUILDING (SGX:BS6)’s management for an update on the company’s operations and commentary regarding its chairman. In our view, the latter is a non-event as it does not involve the company or its funds, while the mid-term shipbuilding outlook appears positive.
  • Its inexpensive valuation of 0.56x P/B (-2SD below 5-year average) and potential near-term newsflow on order wins has led us to upgrade Yangzijiang Shipbuilding to a BUY with a P/B-based price target of S$1.46.

What’s New

“Corporate-governance issues” largely a non-event in our view.

  • A news report that the company’s executive chairman Mr Ren Yuanlin was “assisting” Chinese authorities in an investigation led to a 42% slump in the company’s share price over the 2-15 August 19 period. See Yangzijiang Shipbuilding’s share price.
  • Yangzijiang Shipbuilding pointed out that neither Mr Ren himself nor the company is under investigation – instead he is assisting the authorities as there is alleged financial impropriety at one of his China-based charities, managed by an individual who is not an employee of Yangzijiang Shipbuilding. As a result, Mr Ren is on leave from Yangzijiang Shipbuilding and presently does not have an active role in the company. See Yangzijiang Shipbuilding's announcements.

Current management has the experience and expertise.

  • Mr Ren Letian, the CEO of Yangzijiang Shipbuilding for the past five years and the son of Mr Ren Yuanlin, has been with the company since 2006 in various roles and importantly, he headed the company’s Yangzi Xinfu shipyard.
  • We understand that he is an extremely hands-on manager with detailed knowledge of shipyard and shipbuilding operations, and thus the core business will not be affected in the absence of the company’s chairman, in our view.

Positive shipbuilding outlook in the medium term.

  • Last week, Yangzijiang Shipbuilding announced a new order win for three 82,000DWT bulk carriers and two 325,000DWT bulk carriers. See Yangzijiang Shipbuilding's announcements.
  • While no contract value was disclosed, we estimate this order at approximately US$250m. Ytd order wins now total US$604m and is comfortably approaching our 2019 order-win estimate of US$1b. We forecast that order wins will improve to US$1.5b in 2020, driven by:
    1. market-share gains at the expense of Korean yards, helped to some extent by the cheaper renminbi, and
    2. shipowners complying with stricter International Maritime Organisation (IMO) environmental regulations that come into force in 2020.
  • Yangzijiang Shipbuilding noted that newbuild enquiries in 2H19 has been stronger compared to that in 1H.

Stock Impact

Where is the newbuild demand coming from?

  • In the medium to long term, IMO regulations regarding stricter sulphur content in fuel oil (moving from 3.5% sulphur content to 0.5%) will generate demand for large dual-fuel vessels that use both fuel oil and LNG. In our view, the very large dual-fuel vessels such as the 210,000DWT bulk carriers that ply the China-Australia route, or 23,000TEU mega container vessels, could witness new orders in the next 6+ months, and Yangzijiang Shipbuilding is one of the rare Chinese yards that is able to construct these types of vessels.
  • China’s shipbuilding industry still undergoing structural changes with many of its small yards either working at extremely utilisation low levels or closing down completely in the past few years. This has led to a loosening of labour conditions in China; Yangzijiang Shipbuilding stated that lately it is not witnessing wage pressure, and availability of experienced personnel has increased vs. 2-3 years ago.

Solid underlying 1H19 results

  • Yangzijiang Shipbuilding reported 1H19 profits in early Aug 19 that showed a 6% y-o-y decline, affected by the high base in 1H18 which saw exceptionally strong earnings due to timing of ship deliveries. We note that 1H19’s gross and net profit margins were flat y-o-y but remained at very healthy levels of 18% and 13% respectively.

Private-financing business still ongoing

  • Private-financing business still ongoing with around Rmb18.8b (S$3.7b or S$0.93/share) invested in debt instruments as at end-1H19. According to the company, this has since declined to Rmb16b (S$3.2b) as certain instruments have been successfully redeemed. While some investors take issue with the company’s use of its excess cash in this manner, we have a more sanguine view given that:
    1. it has developed a 40-strong team to oversee the operations and risk management practices of this business over the past five years, and
    2. historical non-performing loans have been < 1% as its strict loan-to-value parameters have ensured a healthy safety margin.

JV with Mitsui

  • In 3Q18, Yangzijiang Shipbuilding established a 51:49 JV with Mitsui to build commercial vessels – the former specifically mentioned the potential construction of LNG carriers at its Taicang yard in Jiangsu. Mitsui is a notable JV partner given its track record in constructing bulk carriers, oil tankers, and LNG carriers, as well as being Japan’s leading manufacturer of container cranes and marine diesel engines. This will allow Yangzijiang Shipbuilding to import its technical expertise.
  • Already, both companies have seconded management as well as engineering personnel to each other. Importantly, we believe that the JV will very likely attract shipbuilding orders from Japanese ship owners in the near and medium term.

Earnings Revision / Risk

Upgrade earnings forecasts.

  • We have upgraded our earnings forecasts by 25-32% for 2019-20 to take into account more bullish assumptions for new order wins as well as 1-2ppt increases in gross profit margin which held up well in 1H19.

Valuation / Recommendation

  • We resume coverage on Yangzijiang Shipbuilding with an upgrade to BUY recommendation with a higher price target of $1.46, in line with Yangzijiang Shipbuilding’s 5-year historical P/B of 0.84x. Due to the recent slump in Yangzijiang Shipbuilding’s share price, it is currently trading at a 2019F P/B of 0.55x which we view as inexpensive as it is nearly -2SD below the company’s 5-year historical P/B. We highlight that Yangzijiang Shipbuilding has never traded below 0.52x P/B.
  • Positive earnings revision momentum. Consensus has increased Yangzijiang Shipbuilding’s 2019 and 2020 earnings estimates by 14% and 10% respectively since the start of this year.

Share Price Catalysts

  • New ship-building order announcements, specifically from Japanese shipowners due to the positive synergistic effects of the Mitsui JV.
  • News that the chairman is no longer assisting in the Chinese authorities’ investigations.

Source: UOB Kay Hian Research - 10 Sep 2019

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