• Production at Yangzijiang Shipbuilding (SGX:BS6)’s shipyards have resumed with nearly 90% of its workforce having returned post COVID-19 containment measures. Thus, the company should meet its 2020 profit and production targets.
• The key risk is whether shipowners can take delivery of their newbuild vessels from Yangzijiang Shipbuilding, given travel restrictions.
• We also highlight a potential new bulk-carrier order.

Shipyards at Nearly-full Working Capacity

• We understand that as at end-March, Yangzijiang Shipbuilding has seen 80-90% of its workforce back at its shipyards with both central and local governments very supportive of the work resumption.
• Recall that at its post-results investors’ call on 28 Feb 20 (see report: Yangzijiang Shipbuilding - UOB Kay Hian 2020-03-02: 2019 Weaker Than Expected, But All Eyes On End-March For Resumption Of Shipbuilding Activity), the company said it needed to have at least 80% of its workforce back at its shipyards to achieve its profit and production targets for 2020.

Potential New Bulk-carrier Order

• According to industry sources, Yangzijiang Shipbuilding has likely secured an order of two 52,000dwt Supramax bulk carriers from China’s Shanghai Huayuan Shipping Co (SHSC) to add to its current fleet of six bulk carriers. SHSC is a domestic coastal and river bulk-shipping company and a subsidiary of Jiangsu Huayuan Logistics. Construction is expected to start in 4Q20 with delivery slated for 4Q21. Although no price was disclosed, we estimate this contract could be worth US$30m-40m which, while small, is nevertheless a good addition to the company’s orderbook.
• Yangzijiang Shipbuilding’s new order wins for 2020 stands at US$1.3b, assuming the eight options for the dual-fuel containership order from Tiger Group are exercised. Excluding the eight options, Yangzijiang Shipbuilding’s orderbook for this year stands at about US$370m while our forecast assumes US$1.5b, which is below the company’s own target of US$2b.

China Is Back in Business

• On 31 Mar 20, China’s National Bureau of Statistics (NBS) announced that the country’s manufacturing purchasing managers’ index (PMI) showed a reading of 52 in Mar 20, up materially from an all-time low of 35.7 in Feb 20. Backing this up, our channel checks with industry contacts in China indicate that business activity has significantly increased in March on a m-o-m basis. For example, a tollroad operator saw traffic increase by “high-single-digits” on a y-o-y basis in March vs February which saw an 80% y-o-y decline. While some of this is due to government declaration of toll-free travel, this nevertheness indicates a V-shaped recovery, in our view.

Debt Investments Not Showing Any Signs of Stress at the Moment

• Yangzijiang Shipbuilding’s non-core business of investing its excess cash in debt instruments has historically been a minor overhang on the stock, in our view. With China shutting down its economic activity in February due to efforts focused on containing COVID-19, we were concerned that the length of the economic disruption would lead to an increase in non-performing loan rates for its debt investments. However, these concerns have abated, in our view, given that the government’s efforts to shore up the economy have led to plentiful liquidity in its financial system while economic activity has since resumed.

What Are We Worried About? Vessel Deliveries Appear to be the Key Risk for 2020

• In our view, the key risk at the moment (apart from not getting new orders) is that Yangzijiang Shipbuilding will not be able to deliver their vessels to the owners.
• With China banning travellers from overseas countries, and with 60-80% of its current orderbook coming from international clients, the worry is that shipowners will not be able to take physical delivery of their vessels if final inspections and sea trials cannot take place.

Impact of Weaker Oil Prices on YZJ

• In the past two weeks, oil prices have plummeted to below US$20/bbl levels (WTI basis) as a result of the Russian-OPEC oil-price war that shows no signs of a détente. A weaker oil price generally benefits shipowners (and thus Yangzijiang Shipbuilding’s clients) as their input costs decrease, but negatively impact the oil & gas industry as activity levels decline due to cuts in exploration spending. However, the latter issue does not affect Yangzijiang Shipbuilding as its oil and chemical tanker orders comprise less than 3% of its current orderbook of US$3.4b (excluding the eight containership options).

Maintain BUY and Target Price of $1.25

• Our target P/B of 0.72x incorporates a 10% discount to take into account short-to medium-term risk-off market sentiment.
• Trough P/B valuation levels breached. We highlight that prior to Mar 20, Yangzijiang Shipbuilding’s trough P/B level since its IPO in 2007 was 0.52x. However, in Mar 20, we witnessed a new P/B low of 0.46x. As seen in the P/B chart on the right, this is only 7% away from -2SD level of 0.43x.

Source: UOB Kay Hian Research - 14 Apr 2020