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Author: simonsg   |   Latest post: Tue, 17 Sep 2019, 9:11 AM

 

Yangzijiang Shipbuilding - Key Takeaways From Investor Conference Call

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  • CFO reassured investors that Chairman’s assistance in investigation does not relate to Yangzijiang Shipbuilding (SGX:BS6).
  • Business and operations functioning as usual; customers and bankers remain supportive.
  • Yangzijiang Shipbuilding share price overhang to persist till dust settles; uptick in order wins could help restore confidence to some extent.
  • Reiterate BUY; Target Price S$1.82.
  • During the investor conference call hosted by DBS, the CFO of Yangzijiang Shipbuilding, Ms Liu Hua, reassured investment community that Chairman’s assistance in investigation is not related to the Group and operations are carrying on as usual.

Key Takeaways From the Conference Call

Shipbuilding business is in good hands.

  • While Executive Chairman, Mr Ren Yuanlin, has been the prominent figure of Yangzijiang Shipbuilding, his son, Mr Ren Letian has succeeded him as CEO since Mar-2015, after rotating to manage various divisions of the shipyard for nearly 10 years prior to his appointment. The shipbuilding business has done well in the past four years under the new CEO’s leadership as Chairman took a step back to focus on the Investment segment.

Ability to secure contracts should not be impacted.

  • Existing shipbuilding customers who have expressed concerns over this incident involving the Chairman are comforted by the clarification. This is not expected to affect the shipyard’s ability to clinch newbuild contracts.
  • Management remains confident of securing US$1.5-2.0bn worth of new orders this year, despite slow YTD wins of ~S$209m. The order pipeline includes high-value mega vessels such as 13.9k / 23k TEU containerships and 210k dwt / 326k dwt bulk carriers with newbuild prices ranging from US$50-150m for each vessel.
  • Some potential contracts are in advanced to final negotiations and could conclude in 2H19.

Operations of JV yard with Mitsui officially starts in August.

  • The official commencement of the JV yard has taken several months due to the clearance from regulatory authorities such as licensing and anti-trust rule. Nevertheless, the parties started preparation work shortly after the formalisation of the partnership, such as LNG design, worker training and construction of bulk carriers at Taichang yard.
  • Cleaner energy vessels remain the longer-term growth strategy of Yangzijiang Shipbuilding. Not only does it have a more promising demand outlook, newbuild LNG carriers are also expected to yield double-digit gross margins as compared to single digit for conventional containerships and bulk carriers.

Investment portfolio is under control.

  • During the Chairman’s leave, CEO will assume his role in the investment arm. The CEO is probably even more prudent than his father and prefers to keep the size of the total portfolio at around Rmb10bn (vs current ~Rmb15-16bn) ideally. The returns from these investment hover around 10%, mostly backed by collateral.

Bankers are supportive.

  • Bankers have expressed confidence with Yangzijiang Shipbuilding. As far as we understand, this event should not trigger loan reviews etc.

Stock price seems to have over-reacted.

  • Management felt that the massive selldown on Yangzijiang Shipbuilding’s shares on market rumours was unwarranted. While most investors are understandably concerned, some shareholders in HK/China, who are more familiar with such events, have expressed their confidence in Yangzijiang Shipbuilding.

Our Thoughts

  • We maintain our view as highlighted in report: Yangzijiang Shipbuilding - DBS Research 2019-08-15: Clearing The Air On Chairman’s Assistance In Investigations.
  • We believe the clarification should alleviate some concerns but Chairman’s assistance in the investigation will likely remain as an overhang and cause volatility in share price, aggravated by short-sellers, until the dust settles. (See the daily short-sell transactions vs the daily volume as well as the share-buyback volume here.)

Share price tanked ~25% as the news unfolded and a further~25% upon resumption of trading.

  • While stock has since bounced off the low, it has lost almost one quarter of its market cap despite the yard’s non-involvement in the investigation as well as intact operations and fundamentals of the group at this point.
  • In our opinion, more clarity on Chairman’s investigation, and strong contract flows could restore investors’ confidence to remove the share price overhang. See Yangzijiang Shipbuilding share price.

Stock is now trading at 0.6x PB, near its cash level

  • Stock is now trading at 0.6x PB, near its cash level, representing 25% / 65% discount to its global and Chinese peers, notwithstanding its highest ROE and dividend yield.
  • We estimate that including financial assets, net cash accounts for 95 Scts out of its book value per share of ~S$1.55.
  • See also Yangzijiang Shipbuilding announcements; Yangzijiang Shipbuilding news.

Source: DBS Research - 21 Aug 2019

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