Yangzijiang Shipbuilding seems to be sailing on calm waters, despite the choppiness brought on from the uncertainty of the Covid-19 pandemic.
Calling the counter a “distinctive economic moat,” DBS Research Group analyst Ho Pei Hwa notes that it has “demonstrated earnings resilience during downturns, bolstered by a strong balance sheet with stable investment income”.
The shipbuilder’s earnings came in at RMB595.2 million ($118.8 million) for 3Q2020 ended Sep 30, down 17% from the previous year due to impairments and forex losses of RMB367 million.
See: Yangzijiang 3Q earnings down 17% y-o-y to RMB585.2 mil
Excluding these losses, Yangzijiang would have had “a stellar quarter with stronger-than-expected shipbuilding margins,” mulls Ho.
Core shipbuilding revenue plunged 21% year-on-year to RMB 2.5 billion, with 9 vessels delivered in the quarter.
Still, the segment raked the highest gross margin of 27% - up from 15% in 1H2020 – as it recognised more revenue from large vessels that were nearing completion.
“Even as we adjust for the effect of reversals/provisions for expected losses, core shipbuilding margin remains commendable at 23.6%, expanding 3.8 percentage points quarter-on-quarter and 14.8 percentage points year-on-year,” says Ho.
She notes that the provision for onerous contracts and warranty provisions stood at RBM491 million as at end September.
Meanwhile, the trading revenue plunged 69% from the previous quarter and 79% from the year before to RMB312 billion. “This is lower than our expectations,” says CGS-CIMB Research Securities analyst Lim Siew Khee.
She adds that the shipbuilder’s collective net profit of RMB1.8 billion over the past nine months forms 62% of her FY20F earnings consensus.
Even so, she believes the China-based company is en route to meeting its target to deliver 51 vessels this year. So far, it has delivered 37 vessels.
Presently, Yangzijiang has secured US$1 billion ($1.34 billion) in new orders, with around US$334 million having come in after August.
More recently on Nov 5, the company announced US$198 million in new orders for five 3,500 TEU containerships from a Japanese ship owner.
It also has the option to have another five units at a similar cost, which Lim estimates will amount to US$198 million, if exercised. These orders are scheduled for delivery from November 2022.
"We estimate YZJ to have U$1.4 – 5 billion of unexercised options and an order book of US$2.6 billion, sustaining the yard operations visibility for 1.5 years,” mulls Lim.
Against this backdrop, DBS’ Ho reckons the counter “stands a good chance to return to optimum capacity utilisation next year,” especially since it took preventive measures such as downsizing operations in the ongoing 2H2020 and reducing capacity by up to 25% in response to the slow contract flow in the first half of the year.
“If the company is able to achieve its order win target, and momentum continues to pick up, it may resume those capacity in 2021,” she notes.
Interestingly, Ho believes that Yangzijiang’s investment will bolster its dividend payout – which is expected to be 4 cents or at a yield of 4.4%.
“Investment return from financial assets contributed around Rmb1.8bn or around 58% of PATMI 2019 and a similar return could be expected in 2020F. The Investment income alone is more than enough to support a 4 cent dividend payout which will amount to Rmb780m or 43% of the Investment segment’s profit,” she elaborates.
To this end, both CGS-CIMB’S Lim and Ho have posted a ‘buy’ call on Yanzijiang at a target price of $1.37 and $1.40 respectively.
This represents upsides of 45.4% for Lim’s call and 49% for Ho’s.
As at 4.26pm, shares of Yangzijiang were flat at 94 cents.
See:Yangzijiang secures new orders worth $269.5 mil, brings year-to-date new order wins to $1.40 bil