• While the spin-off of Yangzijiang Shipbuilding (SGX:BS6)’s investments business could be a near-term share price catalyst, we also point out that the company had a busy 1Q22 in delivering more than 12 vessels, an admirable job given that it was a holiday-shortened quarter with the Chinese New Year in February. In addition, we highlight that based on second-hand values of its 26 vessels,
• Yangzijiang’s shipping assets are worth double its current carrying value. Maintain BUY.

All Systems Go for the Yangzijiang's Investments Spin-off

• Yangzijiang Financial Holdings (YZJFH) will imminently be spun out from Yangzijiang Shipbuilding (SGX:BS6) via a distribution in specie wherein Yangzijiang Shipbuilding shareholders will receive one YZJFH share for every Yangzijiang Shipbuilding share they hold. According to the company, this represents a dividend distribution of RMB20b, equating to S$4.26b or S$1.09/share.
• Yangzijiang Shipbuilding has already obtained in-principal approval from SGX and is awaiting other regulatory approvals as well as shareholder approval from an EGM, which will be convened soon.

A Busy Quarter

• Our channel checks indicate that Yangzijiang Shipbuilding had a very busy 1Q22 with 12 vessels delivered; however the table below does not capture all of its vessel deliveries. Nevertheless, with a 2022 target of delivering 60 vessels, a simplistic calculation of the company’s run rate indicates that it is on target – especially accounting for the fact that 1Q22 was a shortened quarter given the Chinese New Year holidays in early February. We also note that two of these deliveries were for the larger class of containerships which should generate higher shipbuilding margins for Yangzijiang Shipbuilding.

Shipping Business Continues to Perform Well

• Yangzijiang Shipbuilding’s fleet of 26 vessels generated a solid 40% gross margin in 2021 on the back of a 32% y-o-y increase in revenue. Management expects this segment to continue to perform strongly in 1H22 and highlighted that with an average age of eight years, it is a young fleet. Our valuation of this fleet, based on current second-hand prices of similar ships, equates to over US$687m (Rmb4.4b) or S$0.24/share (see table below). This market-based valuation of its fleet is double that of Yangzijiang Shipbuilding’s disclosure that its shipping assets had a relatively low carrying value of RMB2.2b as at end-21.
• Note that in 2021, Yangzijiang Shipbuilding sold two vessels and recognised a profit of RMB70m.

Watching China’s Escalating COVID-19 Case Numbers

• According to management, the current COVID-19 movement restrictions have had some disruption on Yangzijiang Shipbuilding’s shipyard operations; however it believes that the financial impact is not material thus far.

No Earnings Forecast Changes at Present

• However, we highlight potential downside risk to earnings should China’s COVID-19 restrictions increase, given that Yangzijiang Shipbuilding’s shipyard assets are entirely located in Yangzijiang Shipbuilding which is nearly 9% higher than our current PE-based target price.

• Catalysts:
  • Evidence of margin expansion from 1H22 onwards.
  • New orders in higher-margin segments, eg dual-fuel containerships or LPG tankers.

Source: UOB Kay Hian Research - 6 Apr 2022