Carved out basis, cash rich, yield play
? With the successful spin-off of YZJFH, investors’ grouse of ‘shadow banking’
from its debt investments should dissipate, re-rating the stock.
? We adjust our model to ‘carve-out’ YZJFH, arriving at a new TP of S$1.63
(10x CY23F P/E and implied 1.7x FY22F P/BV, supported by its 15% ROE).
? Strong cash conversion cycle should put YZJ in Rmb4.9bn net cash by endFY22F. We pencil in a DPS of 5 Scts (39% payout) for FY22F, a 5.7% yield.
? Key investment thesis in YZJ now lies on its strong shipbuilding execution,
attractive valuations of 6x CY23F P/E, and potential higher dividend payout.
Comfortable room for higher dividend
We adjust our valuation model for YZJ, now based on a ‘carve-out’ model w hich excludes
its debt securities entity YZJ Financial Holding (YZJFH). We estimate the dividend payout
of YZJ’s historical shipbuilding to be in the range of 23-35% or 1.65-2.63 Scts. We estimate
FCF of Rmb0.94bn and net cash of Rmb4.9bn by end-FY22F. This means a comfortable
higher dividend payout of 39%, or Rmb0.24 or 5 Scts, is possible, in our view . We estimate
that given its strong order book of US$8.5bn as at Feb 22 and healthy cash conversion
cycle (30 days), YZJ should generate FCF of Rmb1bn/Rmb2.7bn in FY22F/FY23F. YZJ
could still end FY22F w ith Rmb9bn cash even w ith a 50% dividend payout (upside
potential). We have factored in a sustainable 40% payout for FY23F or DPS of Rmb0.31
(6.5Scts; dividend yield: 7%), backed by net cash of Rmb6.4bn in FY23F.
Rising steel costs potentially covered for
Average steel spot price in China has risen 8% YTD, according to the CDSPHRAV Index.
Although steel cost constitutes a sizeable portion (c.20%) of shipbuilding costs, w e believe
YZJ has factored in these costs into its contract negotiations. YZJ secured US$7.41bn
w orth of contracts in FY21, recording a higher average contract value/TEU in 2H22
(c.US$10.48k) than 1H21 (c.US$7.50k), a rise of c.40%. This could have captured the
c.10% rise in average steel prices in 2H21 to c.Rmb5,744/tonne vs. c.Rmb5,219/tonne in
1H21. Some of its contracts clinched in FY21 w ere based on steel costs assumption of
Rmb6k-7k/tonne. Most of the orders secured in FY21 are scheduled for delivery in FY23-
24, w hich means steel procurement could start in 2H22F. We have factored in GPM of
12.5%/16.5%/18% for FY22F/23F/24F (GPM averaged 19% in FY14-20).
Premium margin, 15% ROE but undervalued
Considering its earnings visibility through to FY24F, YZJ is heavily discounted, in our view.
It trades at 5.5x CY23F P/E and 0.96x CY22F P/BV. The most recent merger in the sector,
i.e. betw een KEP and SMM on 27 Apr 2022, valued KEP O&M at 3.8x FY21 P/BV based
on SMM’s closing price of S$0.12. YZJ is also cheaper than the Korean yards w hich trade
at c.1.4x CY22F P/BV w ith relatively patchy margin records – gross loss positions in FY21
and GPMs mostly below 10% of pre-Covid levels (Fig 3). Our TP is now based on 10x
CY23F P/E, 2-year average, or an implied CY22F P/BV of 1.7x (supported by 15% ROE).