September 10, 2019

A news report that the company’s executive chairman Mr Ren Yuanlin was “assisting” Chinese authorities in an investigation led to a 42% slump in the company’s share price over the 2-15 August 19 period. Yangzijiang (YZJ) pointed out that neither Mr Ren himself nor the company is under investigation – instead he is assisting the authorities as there is alleged financial impropriety at one of his China-based charities, managed by an individual who is not an employee of YZJ. As a result, Mr Ren is on leave from YZJ and presently does not have an active role in the company.

Mr Ren Letian, the CEO of YZJ for the past five years and the son of Mr Ren Yuanlin, has been with the company since 2006 in various roles and importantly, he headed the company’s Yangzi Xinfu shipyard. We understand that he is an extremely hands-on manager with detailed knowledge of shipyard and shipbuilding operations, and thus the core business will not be affected in the absence of the company’s chairman, in our view

Last week, YZJ announced a new order win for three 82,000DWT bulk carriers and two 325,000DWT bulk carriers. While no contract value was disclosed, we estimate this order at approximately US$250m. Ytd order wins now total US$604m and is comfortably approaching our 2019 order-win estimate of US$1b. We forecast that order wins will improve to US$1.5b in 2020, driven by: a) marketshare gains at the expense of Korean yards, helped to some extent by the cheaper renminbi, and b) shipowners complying with stricter International Maritime Organisation (IMO) environmental regulations that come into force in 2020. YZJ noted that newbuild enquiries in 2H19 has been stronger compared to that in 1H.

In the medium to long term, IMO regulations regarding stricter sulphur content in fuel oil (moving from 3.5% sulphur content to 0.5%) will generate demand for large dual-fuel vessels that use both fuel oil and LNG. In our view, the very large dual-fuel vessels such as the 210,000DWT bulk carriers that ply the China-Australia route, or 23,000TEU mega container vessels, could witness new orders in the next 6+ months, and YZJ is one of the rare Chinese yards that is able to construct these types of vessels.

China’s shipbuilding industry still undergoing structural changes with many of its small yards either working at extremely utilisation low levels or closing down completely in the past few years. This has led to a loosening of labour conditions in China; YZJ stated that lately it is not witnessing wage pressure, and availability of experienced personnel has increased vs. 2-3 years ago. • Solid underlying 1H19 results. YZJ reported 1H19 profits in early Aug 19 that showed a 6% yoy decline, affected by the high base in 1H18 which saw exceptionally strong earnings due to timing of ship deliveries. We note that 1H19’s gross and net profit margins were flat yoy but remained at very healthy levels of 18% and 13% respectively.

Private-financing business still ongoing with around Rmb18.8b (S$3.7b or S$0.93/share) invested in debt instruments as at end-1H19. According to the company, this has since declined to Rmb16b (S$3.2b) as certain instruments have been successfully redeemed. While some investors take issue with the company’s use of its excess cash in this manner, we have a more sanguine view given that: a) it has developed a 40-strong team to oversee the operations and risk management practices of this business over the past five years, and b) historical non-performing loans have been <1% as its strict loan-to-value parameters have ensured a healthy safety margin.

In 3Q18, YZJ established a 51:49 JV with Mitsui to build commercial vessels – the former specifically mentioned the potential construction of LNG carriers at its Taicang yard in Jiangsu. Mitsui is a notable JV partner given its track record in constructing bulk carriers, oil tankers, and LNG carriers, as well as being Japan’s leading manufacturer of container cranes and marine diesel engines. This will allow YZJ to import its technical expertise. Already, both companies have seconded management as well as engineering personnel to each other. Importantly, we believe that the JV will very likely attract shipbuilding orders from Japanese ship owners in the near and medium term.

Due to the recent slump in YZJ’s share price, it is currently trading at a 2019F P/B of 0.55x which we view as inexpensive as it is nearly -2SD below the company’s 5-year historical P/B. We highlight that YZJ has never traded below 0.52x P/B. We resume coverage on YZJ with an upgrade to BUY recommendation with a higher price target of $1.46.  – UOB KayHian

Yangzijiang Shipbuilding Holdings Limited closed at: S$1.01