• Executive Chairman retiring but retains advisory role.
• Shipyard operations almost back to normal.
• Sustainable DPS of at least 4 Scts, representing 4.4% yield.

Retirement of Executive Chairman

• Retirement of Executive Chairman, Mr Ren Yuanlin, who is turning 66 years old. Mr Ren will remain as Honorary Chairman of Yangzijiang Shipbuilding (SGX:BS6) and serve in an advisory role to the management team. His son, current CEO of the Group, Mr Ren Letian, will double as Executive Chairman with effect from 30 April 2020.
• We do not expect any material impact on operations. Mr Ren Letian has succeeded his father as CEO since Mar-2015, after rotating to manage various divisions of the shipyard for nearly 10 years prior to his appointment. The shipbuilding business has done relatively well in the past four years under his leadership as Chairman took a step back to focus on the Investment segment.
• The smooth operations during Mr Ren’s 5-month leave of absence last year is another testament to the new management team.

Shipyard Back in Full Force

• As management guided during last results briefing in early Mar, shipyard operations ramped up from 20-30% then to more than 80% by end Mar and is nearly operating at full capacity now.

Potential Impact From COVID-19

• While production activity has resumed, there could be potential short-term business impact from the COVID-19 global outbreak:
  • Finalisation of new orders could be delayed in view of the lockdown in the US / Europe; and
  • Risks of delivery rescheduling or contract cancellations by shipowners could heighten if pandemic is prolonged.
• We believe such an impact is short term and manageable as economic activities should gradually resume once the outbreak is under control.
• As the most well-run privately-owned shipyard in China which was established in the 1960s, Yangzijiang Shipbuilding has demonstrated its ability to weather through industry challenges and emerge stronger with a capable management team and robust balance sheet. In addition, the current global order backlog for ships is at a historical low level since 2004.

Stronger USD and Lower Steel Costs Are Mitigating Factors

• Yangzijiang Shipbuilding is a beneficiary of stronger USD as revenue is denominated mainly in USD, and only half is naturally hedged. The USD has been fairly strong, hovering at around the 7 Rmb/USD level. Every 1% USD appreciation could lead to a 1.5% increase in earnings.
• Meanwhile, steel cost has been softening since the middle of 2019, from Rmb4000/ton to Rmb3,800/ton at end-2019 and is Rmb3,600/ton currently. Every 1% drop in steel cost, which accounts for about 20% of COGS, could result in a 0.8% increase in earnings, with a 6-month lag.

Investment Income to Bolster Dividend Payments; Expect 4 Scts DPS Representing 4.4% Yield at Current Share Price

• Investment return from financial assets contributed ~Rmb1.8bn or 58% of PATMI in 2019 and a similar return can be expected in 2020F.
• Even if we assume zero profits from shipbuilding business, Investment income alone is more than enough to support 4 Scts dividend payout which amounts to Rmb780m or 43% of profit of Investment segment.

Yangzijiang Remains a Bargain

• Yangzijiang Shipbuilding remains a bargain, trading 13% below its net cash of ~S$1.05 per share, overly penalised by macro concerns. Trading at 0.5x P/BV despite superior financials of 8-9% ROE and sustainable DPS of at least 4 Scts (~4% dividend yield at current Yangzijiang Share Price), we believe the low valuation is unwarranted.
• Despite operating in a cyclical industry, Yangzijiang Shipbuilding has demonstrated its resiliency during industry downturns with decent profits and dividends.

Source: DBS Research - 9 Apr 2020