• Potential 2+6 mega containership contract worth up to US$880m could be in the bag.
• Yard activity level has risen substantially this week, led by government’s push to resume economic activities.
• Share buyback should lend support to share price; CEO’s recent acquisition of shares a vote confidence.
• Overly penalised for macro concerns; trading 18% below cash; BUY for 74% upside to our S$1.50 Target Price.

Yangzijiang Is a Bargain, Trading 18% Below Its Net Cash of ~S$1.05 Per Share

• Yangzijiang Shipbuilding (SGX:BS6) is a bargain, trading 18% below its net cash of ~S$1.05 per share, overly penalised by macro concerns. Trading at a 40% discount to regional peers at 0.5x P/BV despite superior financials - 8-9% ROE and sustainable ~4% dividend yield – we believe the low valuation is unwarranted.
• Yangzijiang Shipbuilding is set for a rebound as:
  1. A contract for 2+6 mega containerships worth up to US$880m could potentially be in the bag;
  2. Yard activity level has surged this week with the government’s strong push to resume work;
  3. Share buyback exercise typically resumes when share price falls below 95 Scts per share. The CEO’s recent acquisition of ~4% stake in the company is another vote of confidence on Yangzijiang Shipbuilding’s prospects.

One of the World’s Best-managed and Profitable Shipyards

• Core shipbuilding revenue is backed by its order backlog of US$2.9bn (~1.5x revenue coverage) as at end 2019. Investment segment provides stable recurring income.
• As the largest and most cost-efficient private shipbuilder in China, Yangzijiang Shipbuilding is well positioned to ride on the sector consolidation and shipbuilding recovery. The company’s strategy to move up into the LNG/LPG vessel segment strengthens its longer-term prospects.

Mega Containership Contracts in the Bag

• Yangzijiang’s share price has corrected ~30% from recent high of S$1.19 in early Jan on economic slowdown concerns, exacerbated by COVID-19. This drop is overblown given Yangzijiang Shipbuilding’s 1.5-year order backlog and solid balance sheet. We believe recent positive developments in Yangzijiang Shipbuilding are overlooked:
  1. Clinching mega containership contract despite COVID-19 fears;
  2. Rising yard activity level this week, backed by government’s eagerness to resume economic activity;
  3. Potential re-activation of share buyback exercise with share price now below 90 Scts, lending support to stock price;
  4. CEO’s acquisition of ~4% stake in early March is a vote of confidence

Securing 2+6 Units of 14k TEU Containerships From Tiger Group Worth Up to US$880m

• Tradewinds reported on 5 Mar that Yangzijiang Shipbuilding has bagged up to eight dual-fuel 14k TEU containerships from Tiger Group at US$110m each. This involves two firm orders plus six options. Yangzijiang Shipbuilding has yet to make any official release on this. If the article is true, we surmise that the contract is probably signed but pending downpayment to be effective.
• This will be a remarkable win amid the COVID-19 outbreak. It marks the first dual-fuel mega containership order for Yangzijiang Shipbuilding, making it the third Chinese yard to build such vessels, following state-owned Jiangnan Shipyard and Hudong Zhonghua shipyard.
• Assuming all options are exercised during 2020, the contracts will account for ~44% of Yangzijiang Shipbuilding’s order target of ~US$2bn for this year. Typically, containerships command better margins than other vessel type for Yangzijiang Shipbuilding.
• Tiger Group is a Hong Kong-based shipping investment firm that currently owns approximately ~30 ships comprising largely bulk carriers, chemical tankers and feeder containerships. It is founded by Canadian investors Graham Porter and former Seaspan CEO, Gerry Wang. Seaspan is a long-standing customer of Yangzijiang Shipbuilding as well.

Shipyard Activity Levels Improving on Government’s Strong Support to Resume Economic Activities

• While management guided that activity level was only at 20-30% in February, we understand that this has improved substantially in the first week of Mar. It was reported on local news that some companies in Jiangsu have resumed 100% of business activities this week. The ramp up of yard utilization will ensure timely delivery as well as enhance efficiency and profitability of shipyard.

Potential Share Buyback

• Historically, Yangzijiang Shipbuilding activates its share buyback exercise when its share price falls below 95 Scts. This will lend some support to share price, in our view.

CEO Bought a 4% Stake in Company

• Yangzijiang Shipbuilding uploaded a SGX filing on 2 Mar that CEO Ren Letian’s deemed interest in the company has risen from 0.05% to 4.23% through the acquisition of Hengyuan Asset Investment (Hengyuan).
• Yangzijiang Shipbuilding issued ~11% of stake to Hengyuan in exchange for its minority interest in New Yard during IPO in 2007. The investor has pared down its stake over the years.

Sustainable 4-5 Scts Dividend Payout

• Yangzijiang Shipbuilding has been paying an average DPS of ~4.5 Scts on Rmb3bn profit level in the past 10 years. This translates to 5% dividend yield at current share price.
• We believe 4-5 Scts DPS or ~Rmb800-900m is sustainable, backed by its steady recurring investment returns of > Rmb1bn a year, which has helped the shipyard weather through the shipbuilding downturn.

Source: DBS Research - 6 Mar 2020