|Subsequent to UOB's publication of the report below, we understand from YZJ that now almost all its workers are back at work. In addition, they are working six-day weeks to make up for lost time caused by restrictions during the Covid-19 saga.
Excerpts from UOBKH report
Analyst: Adrian Loh
Yangzijiang Shipbuilding (Holdings) – BUY
|Production at YZJ’s shipyards have resumed with nearly 90% of its workforce having returned post COVID-19 containment measures.
The key risk is whether shipowners can take delivery of their newbuild vessels from YZJ, given travel restrictions.
We also highlight a potential new bulk-carrier order. Maintain BUY. Target price: S$1.25.
• Potential new bulk-carrier order. According to industry sources, YZJ has likely secured an order of two 52,000dwt Supramax bulk carriers from China’s Shanghai Huayuan Shipping Co (SHSC) to add to its current fleet of six bulk carriers.
SHSC is a domestic coastal and river bulk-shipping company and a subsidiary of Jiangsu Huayuan Logistics.
Construction is expected to start in 4Q20 with delivery slated for 4Q21. Although no price was disclosed, we estimate this contract could be worth US$30m-40m which, while small, is nevertheless a good addition to the company’s orderbook.
• YZJ’s new order wins for 2020 stands at US$1.3b, assuming the eight options for the dual-fuel containership order from Tiger Group are exercised.
Excluding the eight options, YZJ’s orderbook for this year stands at about US$370m while our forecast assumes US$1.5b, which is below the company’s own target of US$2b.
Backing this up, our channel checks with industry contacts in China indicate that business activity has significantly increased in March on a mom basis.
For example, a tollroad operator saw traffic increase by “high-single-digits” on a yoy basis in March vs February which saw an 80% yoy decline. While some of this is due to government declaration of toll-free travel, this nevertheless indicates a V-shaped recovery, in our view.
• Debt investments not showing any signs of stress at the moment. YZJ’s non-core business of investing its excess cash in debt instruments has historically been a minor overhang on the stock, in our view.
With China shutting down its economic activity in February due to efforts focused on containing COVID-19, we were concerned that the length of the economic disruption would lead to an increase in non-performing loan rates for its debt investments.
However, these concerns have abated, in our view, given that the government’s efforts to shore up the economy have led to plentiful liquidity in its financial system while economic activity has since resumed.
• What are we worried about? Vessel deliveries appear to be the key risk for 2020. In our view, the key risk at the moment (apart from not getting new orders) is that YZJ will not be able to deliver their vessels to the owners.
With China banning travellers from overseas countries, and with 60-80% of its current orderbook coming from international clients, the worry is that shipowners will not be able to take physical delivery of their vessels if final inspections and sea trials cannot take place.
|• Impact of weaker oil prices on YZJ. In the past two weeks, oil prices have plummeted to below US$20/bbl levels (WTI basis) as a result of the Russian-OPEC oil-price war that has only recently abated.
A weaker oil price generally benefits shipowners (and thus YZJ’s clients) as their input costs decrease, but negatively impact the oil & gas industry as activity levels decline due to cuts in exploration spending.
However, the latter issue does not affect YZJ as its oil and chemical tanker orders comprise less than 3% of its current orderbook of US$3.4b (excluding the eight containership options).
• No change to our earnings estimates for now.
• Maintain BUY and target price of $1.25. Our target P/B of 0.72x incorporates a 10% discount to take into account short- to medium-term risk-off market sentiment.
• Trough P/B valuation levels breached. We highlight that prior to Mar 20, YZJ’s trough P/B level since its IPO in 2007 was 0.52x. However, in Mar 20, we witnessed a new P/B low of 0.46x. As seen in the P/B chart on the right, this is only 7% away from -2SD level of 0.43x.
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• Announcement of new contract wins, and safe and on-time delivery of vessels to owners
Full report here.