• While Yangzijiang Shipbuilding’s US$102m order win last week was small, we note that the company continues to add to its orderbook in a difficult year. The company now has 16 options worth nearly US$1.2b if exercised, with ytd orders totalling US$531m.
• In the medium term, Yangzijiang Shipbuilding's share price will likely be supported by its S$0.045/share dividend which we do not believe is at risk of being cut.
• Maintain BUY. Target price: S$1.22.

New Orders: Slow But Steady

• Last week, Yangzijiang Shipbuilding (SGX:BS6) won a US$102m order for two LNG-tank carriers from Tiger Gas and two 56,000dwt bulk carriers from Shanghai Ganglu Shipping.
• Tiger Gas is a subsidiary of the Tiger Group that had awarded the company LNG containership orders (2 firm and 8 option) earlier this year at US$115m per vessel. While the US$102m order is admittedly small relative to other orders in the past or vs its current orderbook of about US$2.5b, it is still positive to note that the company continues to add to its orderbook in a difficult year.
• Yangzijiang Shipbuilding’s total new order wins for 2020 stand at US$531m, excluding 16 options for dual-fuel vessels from the Tiger Group. Should Tiger Group exercise all these options, it would add US$1.168b to the company’s orderbook for this year.
• Our current forecast assumes US$1b in new orders for 2020, while the company’s target is US$2b.

High Chance of Options Being Exercised

• In management’s view, chances of Tiger exercising its options are high, given that it has a good track record. Its strategy is to market its existing two vessels to end users and once the end customers are keen, the remaining eight options will then be exercised. We expect Tiger to exercise the options two at a time.

No Risk to Dividends

• We are forecasting a 17.7% y-o-y decline in 2020 net profit. However, we do not expect dividends to be negatively impacted, unlike other companies in the same sector or even in sectors which traditionally have been viewed as ‘safe’.
• In 2019, Yangzijiang Shipbuilding paid a final dividend of S$0.045/share and we forecast the company to pay a similar dividend this year.
• We forecast the company to have net cash of S$0.44/share as at end-20, which represents 45% of current Yangzijiang Shipbuilding's share price.

Debt Investments to Earn Lower Returns This Year

• 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. The worry at the start of the COVID-19 pandemic was an increase in non-performing loan rates, however, the Chinese government’s efforts to shore up the economy has led to plentiful liquidity in its financial system and thus NPLs are not a concern, in our view.
• That said, the excess liquidity in the system has resulted in debt instruments commanding lower rates of 10% p.a. vs > 12% historically.

Vessel Deliveries Not An Issue in 2020 Thus Far

• In Mar 20, we had highlighted a key risk being Yangzijiang Shipbuilding’s inability to physically deliver vessels to owners due to COVID-19-related travel restrictions. However, this worry has not eventuated. Yangzijiang Shipbuilding said extra efforts have been required from the shipyard and shipowners to facilitate vessel deliveries.
• In particular, the local government has been very supportive by allowing special approval for shipowners travelling in from overseas. As a result, Yangzijiang Shipbuilding appears to have managed the disruption well and thus its 2020 deliveries totaling 45 vessels appear to be on track.

Maintain BUY

• Maintain BUY and target price of S$1.22, based on 0.78x P/B, which is a 10% discount to its 5-year average P/B multiple.
• While Yangzijiang Shipbuilding's share price drivers appear to be thin on the ground at present, we believe the business conditions faced by Yangzijiang Shipbuilding will trough over the next four months. We believe its current share price up to at least S$1.10 should be protected by its 2020F yield of 4.6%, which we view as reasonably secure.
• As at end-1Q20, Yangzijiang Shipbuilding had net cash of Rmb4.7b, or S$946m, which equates to S$0.24/share.
• Share price catalyst:
  • New order wins.
  • Lower exposure to debt investments.

Source: UOB Kay Hian Research - 29 Jun 2020