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Analysts keep 'buy' on Yangzijiang as risk of defaults mitigated

Felicia Tan
Felicia Tan9/22/2021 06:27 PM GMT+08  • 5 min read
Analysts keep 'buy' on Yangzijiang as risk of defaults mitigated
CGS-CIMB and UOB have kept their target prices on Yangzijiang unchanged at $1.91 and $2.00 respectively.
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Analysts are remaining positive on Mainboard-listed Yangzijiang Shipbuilding amid the default risk concerns trigged by China Evergrande Group.

CGS-CIMB Research analyst Lim Siew Khee has maintained “buy” on Yangzijiang with an unchanged target price of $1.91.

In her report on Sept 21, Lim assessed the credit risks of the group’s RMB16.6 billion ($3.47 billion) as at end-1HFY2021, given China’s Evergrande’s rising default risks.

“We take comfort that Yangzijiang’s management is active in managing its credit risks given its acute understanding of borrowers’ background as well as the business environment in China,” she writes.

Lim has also compared Yangzijiang’s credit cost provision of 1.3% on average since 2013 to the 1% on average from Chinese banks.

She has also noted that the group’s credit cost spiked to 3.4% at RMB539 million in its profits & loss segment in 2020, mainly to account for higher specific provisions (SP) that were likely due to the Covid-19 pandemic.

However, a major portion of the cost was reversed in the 1HFY2021 due to the better repayment trend. The reversion resulted in an impairment write-back of RMB167 million. Excluding the amount from its 2020 credit costs, Yangzijiang’s credit cost growth that year would have been a lower 2.2%.

As at 1HFY2021, Yangzijiang’s general provision (GP) on performing loan stood at RMB751 million.

“We note that [the group’s] non-performing loan (NPL) formation was stable over the past 2 years at RMB861 million per annum,” says Lim.

As at end-1HFY2021, Yangzijiang’s share collaterals make up 22% of the debt amount and were 1.8 times covered.

The group would, in general, trigger a loan amount top-up if its coverage ratio drops to 1.2 times.

Of the collaterals, 43% are backed by “Others”, which are mostly government and some personal guarantees at a coverage ratio of 1 times.

“In estimating the worst case-scenario based on Yangzijiang’s 1HFY2021 disclosure, we assume a 50% loss given default (LGD) on personal guarantees (around 40% of “Others”) and reduced real estate exposure of 25%,” says Lim.

“Accounting for existing GP buffers of RMB751 million, our scenario would necessitate RMB2.8 billion of additional impairments. This could lower our TP by 7% to $1.77 from current target price of $1.91,” she adds.

Lim has identified the spin-off of its debt investment as a key re-rating catalyst while a plunge in freight rates and higher credit costs are downside risks.

UOB Kay Hian analyst Adrian Loh has also kept “buy” on Yangzijiang with the same target price of $2.00.

“At our target price, the company would trade at a price-to-book (P/B) of 1 times which we believe is fair. Yangzijiang remains inexpensive, after correcting 11% since its recent high of $1.67,” he writes in a Sept 20 report.

“We highlight that end-1HFY2021, potential net cash per share (ie net cash plus debt investments) is 81 cents, which equates to 55% of the company’s share price,” he adds.

The way he sees it, the group’s fundamentals remain strong. Its orderbook is currently full till 2024. The group has also stated that it is still receiving client enquiries for 2025 despite clarifying that any new orders will be delivered in 2025 as it is.

In the medium term, Loh notes that more shipowners will order dual-fuel ships instead of conventional ships, which may lead to an increase in prices and profit margins. The new order types are in light of the International Maritime Organisation’s (IMO) Energy Efficiency Design Index (EEDI),

Yangzijiang has also been converting its clients’ ships to comply with EEDI Phase 3.

“Given that its clients’ current assets have been generating plenty of cashflow, they are willing to spend which has resulted in higher margins compared with the original contracts,” says Loh.

On the input side, steel prices have stabilised since April after rising some 50% in the first four months of 2021. Meanwhile, iron ore prices on the Dalian Commodity Exchange have tumbled over 40% since mid-July.

The group’s management believes that steel prices should continue to remain stable for the rest of 2021 and potentially decline in 2022, which should bolster its margins.

In addition, Yangzijiang’s end customers have raised their guidance for the 3QFY2021 and FY2021 as continuing bottlenecks have led to higher freight rates.

The traditional year-end spike in consumer demand will also continue to support container rates with US retailers’ sales-to-inventory ratio at 30-year lows.

“As a result of this, the Far East to North America route, which has already seen rates increase 33% y-o-y, will remain robust in our view. In the longer term, the 2024-25 period will witness the delivery of the majority of the current record global orderbook of 3.3m TEUs of containerships; however, the shipping association BIMCO believes that higher long-term rates will ensure the profitability of these vessels,” says Loh.

Finally, new orders look to be on the horizon for Yangzijiang. According to industry sources, the group has US$565 million ($763.6 million) in containership and bulk carrier orders from Seaspan and Mitsui & Co that it has yet to announce.

Once active, this would bring the total number of orders won in 2021 to US$7.21 billion.

To Loh, the concerns on China Evergrande, given Yangzijiang’s exposure to Chinese property, are overblown.

“As at end-1HFY2021, 41% of Yangzijiang’s investments were backed by property as collateral; however, its loan-to-valuation is low at 30-40% and thus we remain sanguine about its property risks going forward. We also highlight that non-performing loans historically only constitute 1% of its debt investments business,” he says.

Shares in Yangzijiang closed 4 cents lower or 2.8% down at $1.39 on Sept 22, with an FY2021 P/B of 0.76 times and a dividend yield of 3.2%, according to CGS-CIMB’s estimates.

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