• Yangzijiang Shipbuilding continues to execute well, delivering 18 vessels in 2Q22 to date. In our view, this operational performance is impressive given the challenges that the company has faced due to China’s “dynamic zero-COVID” strategy. As a result, Yangzijiang Shipbuilding should be able to hit or even exceed its target of delivering 60 vessels this year.
• Trading at 2022F P/E of 5.4x and yielding 4.7%, Yangzijiang Shipbuilding is a compelling and defensive stock. Maintain BUY.

Executing Well in 2Q22

• Our channel checks indicate that Yangzijiang Shipbuilding (SGX:BS6) has had a very busy 2Q22 to date with 18 vessels having been delivered (see table overleaf). Importantly, we note that three of its 2Q22 deliveries were for the larger class of containerships (i.e. larger than 10,000TEU), which we believe should generate higher shipbuilding margins for Yangzijiang Shipbuilding in 2022.
• Impressive operational performance, especially in light of external hurdles. In our view, these deliveries are even more impressive in light of the challenges that it and its suppliers have faced due to China’s “dynamic zero-COVID” strategy with disruptions and delays to the domestic and international supply chain as well as labour issues. Yangzijiang Shipbuilding had previously disclosed that it has a target of delivering 60 vessels in 2022 – given that 34 of these vessels have been delivered thus far, the company could potentially exceed this and achieve its stretch target of 70 vessels.
• New Changbo yard at full capacity. Yangzijiang Shipbuilding disclosed that its Changbo yard, restarted at the beginning of 1H21, is already working at full capacity. Being a smaller yard, it has been deployed towards the construction of smaller-sized vessels. In the past 12 months, the yard has completed and delivered two 1,800TEU containerships with a third one tentatively scheduled for 27 Jul 22.
• 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.
• New order wins. According to industry sources, Yangzijiang Shipbuilding may be in line to win new orders for LNG or dual-fuelled neo-Panamaxes (12,000-14,000TEU containerships), 64,000dwt bulk carriers and possibly LNG carriers.

Yangzijiang Shipbuilding Completed the Spin-off of Yangzijiang Financial Holdings

• Yangzijiang Shipbuilding completed the spin-off of Yangzijiang Financial (SGX:YF8) in Apr 22 via a distribution in specie, representing a dividend distribution of RMB20b (S$4.26b) or S$1.09/share by Yangzijiang Shipbuilding itself.
• Post its listing, Yangzijiang Financial has no debt and around S$4.2b in cash and short-term investments. At its current 2021 P/B of 0.5x, it is trading at the low end of its peers’ P/B trading range of 0.5-2.1x.
• Yangzijiang Shipbuilding has historically generated strong operating cash flows from its debt investments business, which should support its proposed dividend policy of at least 40% of net profit after tax.

Yangzijiang Shipbuilding - Earnings Estimates and Recommendation

• Our earnings estimates have been adjusted due to the demerger of the debt investments business. However we have not made any changes to our profit margin or earnings assumptions for the shipbuilding, ship chartering or trading business.

• Maintain BUY call on Yangzijiang Shipbuilding with an SOTP-based target price of S$1.16, which has been adjusted down post the demerger of its debt investments business into Yangzijiang Financial.

• We have used a 8x and 5x multiple for its shipbuilding and trading & other business segments respectively, thus arriving at a S$1.13 and $0.08/share valuation for these two segments. By using publicly-sourced replacement cost for its shipping assets, we value this segment at RMB4.4b or $0.24/share – this is double that of the company’s carrying cost of these assets, or approximately 3x higher than its book value of $0.09 as at end-21. At our target price, Yangzijiang Shipbuilding would trade at a 2022F P/E of 6.7x which we do not view as stretched.

• Inexpensive valuations. Yangzijiang's share price currently trades at a 2022F P/E of 5.4x which is a 17% discount to, and 1 standard deviation below, its 5-year average of 6.6x. While its 2022F P/B of 1.1x is higher than its past 5-year average of 0.7x, we highlight that the company is forecast to increase its ROE from 10.8% in 2021 to 12.8% in 2022.

• In addition, assuming that Yangzijiang Shipbuilding maintains a payout ratio of 25% for 2022 (2021: 26%), the stock would yield 4.7% and thus provide downside support to the share price.

• Share 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 - 29 Jun 2022