• Yangzijiang Shipbuilding is a deep-value stock as its potential net cash is greater than its current market capitalisation. In effect, a privatisation could see an investor walking away with the company’s four world-class shipyards for free.
• We also point out that Yangzijiang Shipbuilding recently won US$183m of new orders, bringing its total order wins ytd to US$714m - this is greater than Keppel Corp (SGX:BN4)’s and Sembcorp Marine (SGX:S51)’s ytd combined order wins.
• Maintain BUY on Yangzijiang Shipbuilding. Target price: S$1.17.

Yangzijiang Shipbuilding - An Attractive Privatisation Candidate

• We view Yangzijiang Shipbuilding (SGX:BS6) as an attractive buyout candidate, given that the value of the current portion of its debt investments plus its net cash are more than its current market capitalisation.
• Yangzijiang Shipbuilding's potential net cash (net cash plus debt investments) is S$3.72b or S$0.94/share (see table in PDF report attached below) vs its current market capitalisation of S$3.64b or share price of S$0.93. This means investors are potentially buying Yangzijiang Shipbuilding’s shipyards for free.

Good News on New Orders Front

• On 31 Aug 20, Yangzijiang Shipbuilding announced SITC had placed an order for 12 feeder containerships with six of the 1,800TEU vessels being firm orders and the remaining six being options. The six firm orders are worth US$126m, or US$22m per vessel, with delivery dates from April to Oct 22. The options for the remaining six vessels may be exercised in three separate tranches (ie two vessels a time), according to SITC.
• In addition to these feeder containerships, Yangzijiang Shipbuilding also disclosed it had won a US$57m order for two 82,000dwt dry bulk carriers.

YTD order wins now total US$714m.

• This excludes the options worth US$1.3b that Yangzijiang Shipbuilding has on hand. Our current estimate for Yangzijiang Shipbuilding to win US$1b of new orders in 2020 remains unchanged.

SITC – an old client.

• In 2H18, SITC signed shipbuilding deals for three 2,700TEU containerships for a total of US$87.9m after a mid-18 order for two feeder containerships for US$58m. In total, SITC has placed orders for 15 containerships with Yangzijiang Shipbuilding worth a total US$372m.

China Showing Signs of Tightening Liquidity – Positive for Yangzijiang Shipbuilding’s Debt-investments Business

• According to industry reports, China is currently experiencing a liquidity shortage despite the PBOC’s injection of funds in August which was the largest fund injection since Jan 20. China’s seven-day repurchase rate - the benchmark indicator of interbank borrowing costs - rose to its highest since May and has stayed elevated since then. Following its COVID-19 shutdown, Chinese banks have invested Rmb1.1t (US$160b) in government bond issuance to help rebuild the economy. As a result, banks are hoarding cash (see chart in PDF report attached below: China Banks’ Excess Liquidity Ratio) and charging higher lending rates to each other.
• With lower liquidity in the system and borrowing costs spiking, we believe Yangzijiang Shipbuilding’s debt investments could potentially earn higher returns in the next 3-6 months. Note that during its 2Q20 results briefing, Yangzijiang Shipbuilding had conservatively guided it expects the annual interest on its bond investments to range 10-12% vs historical levels of 13-15%.

Yangzijiang Shipbuilding - Valuation & Recommendation

Maintain BUY and target price of S$1.17.

• Our Yangzijiang Shipbuilding's target price is based on 0.68x P/B, which is a 10% discount to its 5-year average P/B.
• On a P/B basis, Yangzijiang Shipbuilding is trading below its - 1SD level of 0.57x, while on a PE basis, the company is trading 13% below its 10-year average of 8x which we view as undemanding.
• Yangzijiang Shipbuilding restarted its share buy-back programme on 4 Sep 20. As at 8 September, it had bought back 9m shares (or 0.23% of the company’s total shares outstanding) for a total of S$8.5m, or around S$0.93-0.94/share.

No risk to dividends, in our view.

• While we forecast a 17.7% y-o-y decline in 2020 net profit, 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’.
• As at end-1H20, Yangzijiang Shipbuilding’s net cash of Rmb4.4b translates into S$0.22/share.
• Yangzijiang Shipbuilding is also one of the UOBKH's Singapore Stock Alpha Picks for September 2020.
• Share price catalyst: new order wins and lower exposure to debt investments.

Source: UOB Kay Hian Research - 9 Sep 2020