Still A Compelling Story
While the spin-off of YZJ’s investments business could be a near-term share price
catalyst, we also point out that the company had a busy 1Q22 in delivering more than
12 vessels, an admirable job given that it was a holiday-shortened quarter with the
Chinese New Year in February. In addition, we highlight that based on second-hand
values of its 26 vessels, YZJ’s shipping assets are worth double its current carrying
value. Maintain BUY. Target price: S$1.95.
WHAT’S NEW
• All systems go for the investments spin-off. YZJ Financial Holdings (YZJFH) will
imminently be spun out from Yangzijiang Shipbuilding (Holdings) (YZJ) via a distribution in
specie wherein YZJ shareholders will receive one YZJFH share for every YZJ share they
hold. According to the company, this represents a dividend distribution of Rmb20b, equating
to S$4.26b or S$1.09/share. The company has already obtained in-principal approval from
SGX and is awaiting other regulatory approvals as well as shareholder approval from an
EGM, which will be convened soon.
• A busy quarter. Our channel checks indicate that YZJ had a very busy 1Q22 with 12
vessels delivered; however the table below does not capture all of its vessel deliveries.
Nevertheless, with a 2022 target of delivering 60 vessels, a simplistic calculation of the
company’s run rate indicates that it is on target – especially accounting for the fact that 1Q22
was a shortened quarter given the Chinese New Year holidays in early February. We also
note that two of these deliveries were for the larger class of containerships which should
generate higher shipbuilding margins for YZJ.
• Shipping business continues to perform well. YZJ’s fleet of 26 vessels generated a solid
40% gross margin in 2021 on the back of a 32% yoy increase in revenue. Management
expects this segment to continue to perform strongly in 1H22 and highlighted that with an
average age of eight years, it is a young fleet. Our valuation of this fleet, based on current
second-hand prices of similar ships, equates to over US$687m (Rmb4.4b) or S$0.24/share
(see table below). This market-based valuation of its fleet is double that of YZJ’s disclosure
that its shipping assets had a relatively low carrying value of Rmb2.2b as at end-21. Note
that in 2021, the company sold two vessels and recognised a profit of Rmb70m.
STOCK IMPACT
• Watching China’s escalating COVID-19 case numbers. According to management, the
current COVID-19 movement restrictions have had some disruption on YZJ’s shipyard
operations; however it believes that the financial impact is not material thus far.
EARNINGS REVISION/RISK
• No earnings changes at present. However, we highlight potential downside risk to
earnings should China’s COVID-19 restrictions increase, given that YZJ’s shipyard assets
are entirely located in China. Should shipyard operations be affected, this would hamper the
company’s ability to deliver on its target of 60 ships that it has planned for 2022, thus
negatively impacting the company’s profitability as milestone payments would then be
delayed.
VALUATION/RECOMMENDATION
• Maintain BUY with a target price of S$1.95 based on a target PE multiple of 9.3x (+1SD
above YZJ’s five-year average) which is applied to our 2022 EPS estimate. At our target
price, the company would trade at a P/B of 0.9x which we believe is fair. We continue to
believe that YZJ remains inexpensive as it is trading at 2022 multiples of 6.2x PE and 0.6x
P/B. We highlight that end-21 net cash per share was S$0.43, which equates to 27% of the
company’s share price.
• What would a sum-of-the-parts valuation look like? In the table below, we have used a
10x and 5x multiple for its shipbuilding and trading & other business segments respectively,
thus arriving at a S$1.41 and S$0.08/share valuation for these two segments. By using
publicly-sourced replacement cost for its shipping assets, we value this segment at Rmb4.4b
which is double that of the company’s carrying cost of these assets. Lastly, we have used
YZJ’s disclosed net tangible assets of Rmb20b or S$1.09/share for its investments segment.
All these result in a total valuation of S$2.12/share for YZJ which is nearly 9% higher than
our current PE-based target price.