Yangzijiang receives RMB 139.5 million worth of government incentives and tax subsidies through Chinese subsidiaries
ï§ The Group received government incentives of RMB 20.8
million and tax subsidies of RMB 118.7 million through
subsidiaries in both Jingjiang and Jiangyin city, China till
date in 2011
ï§ Government incentives are based on government’s initiatives
while the tax incentive scheme will be valid till 2013
Yangzijiang Shipbuilding
Company Update Still the fairest of all
Yangzijiang Shipbuilding (YZJ) saw its share price retreating by more than 6% this week after its peer, Cosco Corp, dropped a bombshell on investors when it announced much weakerâthanâexpected 2Q11 results. Notwithstanding the lingering headwinds faced by the Chinese shipbuilders, YZJ is our preferred pick in the sector for its execution track record, leadership position in cost management as well as, undemanding valuation. Reiterate BUY with a lower target price of $1.80.
YZJ is confident of achieving at least 30% YoY growth for 1H11 (to be released on 11 August) in view of the timely delivery of its vessels. This puts it on track to meet our fullâyear earnings forecast. Nevertheless, it would imply earnings growth of just 6% YoY in 2Q11 (or net profit of RMB850m) given that the group has already reported a 62.8% increase in 1Q11. Cosco was hit hard by rising steel and labour costs, particularly with regard to its shipbuilding division. This was exacerbated by other macro uncertainties such as the appreciating renminbi against the US dollar and rising interest rates in China. We do not think YZJ will be immune to this predicament even though it is acknowledged as one of the more efficient shipyards in China.
We reckon YZJ should still be able to keep its gross margins steady at around 23% in FY11 (compared to 22.5% a year ago) as it continues to recognise highâmargin orders secured prior to the global financial crisis. However, due to the lowerâpriced new contracts, we have assumed slimmer margins going forward. We estimate that a 100bps decline in margin would cause net profit to contract by some 4.4%. Despite being a leading shipyard in China, YZJ’s stock trades at a steep 30% discount to its domestic peers. We believe its controversial RMB10b investment in financial assets is weighing on the share price. We are switching to the SOTP valuation methodology to better reflect the group’s dual earnings stream. Maintain BUY on its strong fundamentals.
Yangzijiang announced yesterday that it has secured RMB139.5m worth of government incentives (RMB20.8m) and tax subsidies (RMB118.7m) granted by the Jiangsu municipal government. While this represents only 4% of our FY11F earnings forecast, we believe the handout will help to offset some of the rising operating costs being borne by the group. According to management, the tax incentive scheme will be valid till 2013.
Last month, YZJ also issued an statement to clarify several investor concerns: 1) it has no immediate plan to issue convertible bond; 2) there has been increasing diversification in its order book towards Asian ship owners while existing longterm European customers have strong financial standing and payment track record; 3) it has renewed its share purchase mandate in April this year and will consider share buybacks to protect minority interests.
To better differentiate the contribution of its core earnings from income generated from heldâtoâmaturity investments, we apply a SOTP valuation using: (i) 13x FY12 PER for the shipbuilding business, in line with its bigger peers in the region, (ii) NPV of interest income from FY11â13F. Our new target price of $1.80 implied an undemanding PER of 11x. Maintain BUY.
The shadow money lenders – According to recent Financial Times article, there are a growing number of Chinese companies using excess cash to fund indirectly the country’s shadow banking system as Beijing’s credit tightening makes it extremely difficult for small and medium-sized firms to gain access to formal funding.
For example, China Mobile announced that it is setting up a finance arm to lend money last month, while PetroChina already has a number of financial vehicles in place.
The report also added that at least nine out of ten companies engaged in lending were state-owned, such as China Railway Group and the property arm of China’s food giant Cofco.
Closer to home, SGX-listed Yangzijiang had invested RMB10b in “held-to-maturity” assets, which generated about 27% of its 2Q11 pre-tax profits.
One Hong Kong-based analyst commented that this is quite the norm in China now but the only difference is that Yangzijiang does it in the listed entity, not at the group or parent level.
Even though the common argument for these companies is that they wanted to enhance returns than by just leaving the cash in the bank and earn a meager interest, we believe most shareholders would still prefer that any excess cash should be paid out as dividends.
Yangzijiang has been reported strong profit growth from its non-core business. Ok, so we can expect full-year profit to be higher than FY2010 and, more importantly, a final dividend equal to or more than before. For Fy2010, it paid 4.5 SG cent a share, which was higher than the 3.5 cent for fy2009.
So by my calculation, at the present stock price of 92 cents, the market considers the dividend yield of 4.9% to be fair. (There was no interim dividend payout).
Capital appreciation is another thing, so long as the Europeans continue to fumble their way thru the crisis. Then there is the YZJ investments in non-core businesses that investors don't feel comfortable about.
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