Yangzijiang Shipbuilding - Risk of Defaults Mitigated

Date: 21/09/2021

Source  :  CIMB
Stock  :  YZJ Shipbldg SGD       Price Target  :  1.91      |      Price Call  :  BUY
        Last Price  :  0.95      |      Upside/Downside  :  +0.96 (101.05%)

  • Yangzijiang’s 2013-1H21 average credit cost p.a. of 1.3% was comparable to China banks’ 1%. NPL formation stable over the past 2 years at ~Rmb861m p.a.
  • Default risk for Yangzijiang’s debt securities is mitigated by its > 1x collateral coverage ratio – 2.6x in land, 1.8x in shares (min. coverage required: 1.2x).
  • We understand that its proportion of real-estate borrowers has reduced from 41% since 1H21 due to redemption/expiry. Reiterate ADD rating on Yangzijiang, with S$1.91 target price.
  • Assuming worst-case scenario of 50% LGD for 1H21 collaterals by personal guarantee and real estate, our target price for Yangzijiang would dip to S$1.77 (still 22% upside).

Yangzijiang Shipbuilding’s Debt Securities Credit Costs Vs China Banks’

  • Given the default risk concerns triggered by embattled China Evergrande Group, we attempt to assess the credit risks of Yangzijiang Shipbuilding (SGX:BS6)’s RMB16.6bn debt securities (as at end-1H21). Yangzijiang does not have any exposure to the group. We take comfort that Yangzijiang’s management is active in managing its credit risks given its acute understanding of borrowers’ background as well as the business environment in China.
  • Next, we compare Yangzijiang’s credit cost provision of 1.3% on average since 2013 to Chinese banks (1%). In 2020, Yangzijiang’s credit cost spiked to 3.4% (Rmb539m in P&L), mainly to account for higher specific provisions (SP), likely due to COVID-19. However, a major portion of that was reversed in 1H21 on the back of better repayment trend, resulting in an impairment write-back of RMB167m; excluding this amount from its 2020 credit costs, its credit cost growth that year would have been a lower 2.2%. Yangzijiang's general provision (GP) on performing loan stood at RMB751m as at 1H21. We note that NPL formation was stable over the past 2 years at ~Rmb861m p.a.

Reduced Exposure in Real Estate Since 1H21, Land Coverage at 2.6x

  • As at end-1H21, 41% of its debt securities borrowers were from the 2.5x historically (since 2015).

Analysing Other Collaterals and Estimating Risks

  • Yangzijiang reviews its collaterals’ fair values half yearly. Share collaterals dominate 22% of the target price for Yangzijiang is based on SOP (1x CY21F P/BV of debt securities and 1.1x CY21F P/BV on shipbuilding business).
  • The spin-off of debt investment is a key re-rating catalyst.
  • Downside risks: plunge in freight rates and higher credit costs.

Source: CGS-CIMB Research - 21 Sep 2021

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Chart Stock Name Last Change Volume 
YZJ Shipbldg SGD 0.95 -0.005 (0.52%) 9,512,500 

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