• Yangzijiang Shipbuilding announced a slew of containership and bulk carrier orders worth US$1.3b with most of the orders coming from China-based clients.
• We raise our Yangzijiang's 2021 earnings forecasts by 3% for 2021 given that most of the new orders are containerships which attract higher gross profit margins.
• Maintain BUY. Target price: S$1.17.

A Great Way for Yangzijiang to Start Off the Year

• Yangzijiang Shipbuilding announced yesterday that it had won US$1.3b worth of orders comprising of 22 containerships and seven bulk carriers. This number excludes another two options for two bulk carriers of 31,800dwt each. Two positive takeaways from the announcement were:
  • The company continues its successful marketing efforts with China-based clients as 10 of the containerships (4,600TEU each) were from Shanghai Zhonggu Logistics, one of the largest domestic shipping liners in China with a market cap of US$3b and revenue of US$1.5b in 2019.
  • The bulk of the order win comprised of containerships which attract a higher gross profit margin of around 13-14% compared with bulk carriers at around 10%.

Building Upon a Solid 2020 Performance

• Yangzijiang Shipbuilding (SGX:BS6) had already outperformed our expectations with US$1.8b worth of new orders in 2020, despite it being a tough year given the COVID-19 pandemic. It is therefore heartening to see that the company continues to rake in new orders with yesterday’s US$1.3b order, a 39% q-o-q increase from the US$936m won during 4Q20.
• We continue to expect Yangzijiang to build on this momentum and have upgraded our order win expectations to US$2.5b for 2021 from US$1.8b previously.

Results Preview

• Yangzijiang's 4Q20 results should be strong given that the company's new order wins peaked during the quarter at nearly US$1b. In addition, results may be bolstered by a potential tax write-back at the end of 2020 as its new shipyard may qualify as a new high-tech enterprise, thus attracting a lower tax rate of 15% vs the current 25% tax rate that Yangzijiang has provisioned for. This would equate to a tax write-back of around RMB100m which we have not factored into our current forecasts.
• Looking ahead, we also expect Yangzijiang's 1Q21 earnings to be much stronger y-o-y given the large order wins that were announced yesterday.

Share Buy-back Program Paused – for Now

• During 4-7 Jan 21, Yangzijiang spent S$3.9m in a continuation of its share buy-back programme from last year. Under the current mandate, Yangzijiang has repurchased 70.3m shares, representing around 1.8% of outstanding shares.
• We understand that Yangzijiang has temporarily paused the share buy-back programme given that its 2020 financial results will be announced on or around 25 February, and it may resume this share buy-back programme after that.

Upgrading Earnings Forecast for 2021

• While our numbers for 2020 remain unchanged, we have upgraded our Yangzijiang's 2021 earnings forecast by 3% to RMB2.68b.
• Prior to this, we had already factored in a y-o-y gross profit margin expansion from 10% for 2020 to 12% in 2021. However, we have now increased our 2021 margin to 13.5% post yesterday’s order win given that Yangzijiang traditionally generates higher margins from constructing containerships compared to bulk carriers.

We Believe That Yangzijiang Remains a Compelling Stock for This Year

• We believe that Yangzijiang remains a compelling stock for this year as its valuations remain undemanding, with 2021 EV/EBITDA and P/B multiples of 2.5x and 0.54x respectively, a PEG ratio of 0.45, and net cash of S$0.22/share (or 23% of the current Yangzijiang Share Price).

Shipbuilding business for free

• In addition, if we add its net cash debt investments of RMB13.6b as at end-3Q20, this would be equivalent to its current market capitalisation of S$3.5b. This implies that investors are essentially getting Yangzijiang's shipbuilding business for free.
• Reiterate BUY and target price of S$1.17 based on a 10% discount to the company’s 5-year average P/B of 0.7x. Eliminating the discount could see our target price increase to S$1.29.
• Catalyst:
  • Continued new order wins its debt investments portfolio.
  • Strong 4Q20 and 2020 results as well as industry outlook comments from Yangzijiang's management at its 2020 results briefing on 26 February.

• Yangzijiang is one of the UOBKH's Singapore Stock Alpha Picks for Feb 2021.

Source: UOB Kay Hian Research - 10 Feb 2021