<Results Analysis> FY21 results above; investment spin-off on track

  • 2H21 headline profit above; lifted largely by forex gains from hedging.
  • Shipbuilding margins and earnings set to grow on record high order backlog of 3.1-years
  • Declared final dividend of 5 Sct, translating into 3.6% yield. 
  • Progressing on plan to spin off investment arm; more details on growth strategies

RESULTS PREVIEW

2H21 headline profit above; lifted largely by forex gains from hedging. Yangzijiang’s net profit rose 26% h-o-h and 54% y-o-y to Rmb2.1bn in 2H21. This brings full year net profit to Rmb3.7bn, beating the street’s expectations of Rmb3.1bn. 

Beside higher shipbuilding revenue and shipping profit, the outperformance was aided by fair value gain on hedging contracts of Rmb625m, arising of weakened USD during the period. 

The group also registered higher interests, dividend and subsidy income as well as reversal of expected contract losses (Rmb205m), which was offset by fair value losses on financial assets of Rmb464m. 

Shipbuilding gross margin at ~11% in 2H21, contracted marginally from 13.5% in 1H21, as group continues to execute old projects at lower pricing, and impacted by high steel price and weaker USD (which offset by fair value gains from hedging contracts below the gross profit line).

On a positive note, revenue crept up to Rmb8.4bn in 2H, from Rmb4.5-5bn levels previously. Shipbuilding margins are expected to bottom out from 1H, as operating leverage improves with increase in yard activities and commencement of higher priced new orders secured since end 2020.

Shipbuilding margin to bottom out from 2022 

Source: Company, DBS Bank

Yangzijiang Shipbuilding Holdings Ltd        
Currency  RMB$        
FY Dec (m)1H182H181H192H191H202H201H212H21
Sales12,926.8 10,311.5 13,324.1 10,273.1 8,265.3 6,575.9 6,600.2 10,167.7 
Cost of Goods Sold(10,505.3)(8,621.2)(10,959.1)(8,309.6)(6,281.4)(4,337.7)(4,913.9)(8,223.7)
Gross Profit2,421.4 1,690.4 2,365.0 1,963.6 1,983.9 2,238.2 1,686.3 1,944.0 
Other Operating Income235.3 477.3 201.8 116.7 34.2 (28.6)488.8 531.5 
Other Operating Expenses(494.7)(385.4)(324.7)(315.1)(471.0)(867.5)(84.1)(319.8)
EBIT2,162.1 1,782.3 2,242.1 1,765.2 1,547.1 1,342.1 2,091.0 2,155.8 
Interest Income67.1 118.4 144.0 105.2 157.2 107.5 128.3 215.1 
Interest Expense(47.5)(86.3)(96.8)(90.3)(57.7)(17.5)(36.1)(33.8)
Share of Associates’ or JV Income 8.8 (94.6)50.4 66.8 49.3 162.0 68.3 293.2 
Pretax Profit2,190.4 1,719.8 2,339.6 1,846.9 1,695.9 1,594.1 2,251.5 2,630.2 
Tax(423.3)(406.8)(522.8)(367.4)(489.1)(182.8)(568.4)(586.3)
Minority Interests (177.1)167.4 (56.4)(134.9)(29.0)(72.6)(44.2)15.8 
Net Profit1,590.0 1,480.3 1,760.5 1,344.6 1,177.8 1,338.7 1,638.9 2,059.7 

Record-high YTD wins of US$7.4bn. This is ~48% higher than previous peak of US$5bn in 2007. 

Revenue coverage raised to 3.1-years.  Yangzijiang’s orderbook has increased from US$3.09bn as of end-2020 to ~US$8.5bn as of end-2021, surpassing its peak of ~US$7bn in 2007/2008. Based on Yangzijiang’s revenue maximum run rate of c. US$2.8bn a year, current orderbook implies ~3.1-years revenue coverage, which is at the upper end of its ideal range of 2-3x. 

As it is already filling up delivery slots for 2025, Yangzijiang is more selective on orders ahead given the relatively full order backlog and potential to negotiate for higher newbuild prices.

Steel cost and forex are manageable; some upward revision in prices of existing orders to comply with more stringent emission regulation. Steel plate price in China rose from ~Rmb4,000/t in Nov-20 to Rmb4,500 by end 2020 and 10% a quarter through 3Q21 to the ~Rmb5,500-6,000/t level, before moderating to Rmb5,000/t level. Management believes that we have seen the peak of steel prices in this cycle last year though it may stay elevated. 

Yangzijiang has also entered forward contracts to hedge 40-50% of USD exposure at Rmb6.7-6.9/USD to manage forex volatility. 

For contracts secured earlier this year, a number of customers have come back to ask for engine upgrades, which allows the shipyard to price up those orders, positive for margins. 

Building greener vessels. Signing of first dual-fuel containership order last year is testament to Yangzijiang’s R&D capability, marking a remarkable breakthrough into dual fuel containership market that has been dominated by Korean yards. These vessels are expected to fetch higher margins as well.

Declared final dividend of 5 Sct, implying 27% payout ratio. This translates to 3.6% yield. We expect higher dividend of 5.5-6 Sct ahead on the back of earnings increase.

INVESTMENT SPIN OFF

Applying listing of Investment arm. Yangzijiang has obtained pre-clearance from the Singapore Exchange Securities Trading Limited (‘SGX’) to spin off its investment arm (‘the Spin-off Group’) for listing on the Mainboard of SGX on 24 Jan 2022. Hence, it has proceeded to apply for listing on the Mainboard of the SGX-ST by way of an introduction on 11 February 2022. 

Dividend-in-specie to shareholders. Upon a successful listing following regulatory approvals, the group will offer dividend-in-specie shares of investment listing to existing shareholders on a one-to-one basis.

The investment spin-off, Yangzijiang Financial Holding (Yangzi Financial), will be led by a separate board of directors to achieve strong governance, transparency and independence.  

Broaden investment scope and region. Yangzi Financial will expand into fund and wealth management business and geographical footprint in the Greater China and Southeast Asia region. 

It will broaden investment asset class into equity, fixed income / mezzanine and other securities, assets and funds with sector focus on ESG, new economy, healthcare, real estate etc. 

Yangzi Financial – Overview of growth strategies 

Source: Company