SINGAPORE (Oct 12): Yangzijiang Shipbuilding's joint venture agreement with MES-SC and Mitsui to establish a new shipbuilding company to tap the fast-growing gas carrier market is a positive development for the company, says DBS Group Research.
See: Yangzijiang partners MEX-EC, Mitsui to construct commercial vessels
The registered share capital of the JV will be up to US$99.9 million ($137.2 million) and total capital expected to be employed could amount to US$299 million. Yangzijiang will hold a 51% stake in the JV.
"The JV is a win win partnership," says DBS analyst Ho Pei Hwa, given Mitsui’s branding and expertise will enable Yangzijiang to make forays into the large LNG carrier market while shifting production base to China enhances Mitsui’s cost competitiveness.
The base for the JV will be at Yangzijiang’s existing Taicang yard in Jiangsu. The facility was initially acquired for offshore rigbuilding projects but the plans were abadoned after it completed its only jackup rig project. The initial capital will be used to upgrade the facility and for working capital purposes.
The yard is expected to start operations next April. Meanwhile, the JV could jointly develop and market for large LNG carrier contracts (170-180,000 cubic metres) which are typically worth US$180-200 million.
"Assuming two new contracts are secured, it could lift Yangzijiang’s new wins from typical US$2 billion to US$2.4 billion or ~20% increase next year," says Ho.
Ho reckons earnings contribution will be relatively small in the initial years given the learning curve, production ramp up, longer delivery lead time of more than three years for large LNG carriers and prudent margin recognition for the initial projects.
Assuming two 170-180,000 cubic metres LNG carrier newbuild contracts a year, Ho says Yangzijiang might see 3-5% bottomline boost in 2020. And the contribution should be much bigger thereafter upon successful on time on budget delivery and scaling up its LNG carrier building capability.
To recap, Yangzijiang’s share prices have done very well the past three months, rising 50% from its low of 85 cents in mid-July. Given current market jitters, we could see profit-taking pressure on the stock in the near term.
"Nevertheless, we remain optimistic on Yangzijiang’s earnings delivery as a beneficiary of stronger USD and prospects especially after this JV would pave the way into the LNG carrier market," says Ho.
DBS is reiterating a "buy" with $1.82 target based on undemanding 0.8-0.9 times book against 10% ROE and 4% dividend yield.
Year to date, shares in Yangzijiang are down 16.6% at $1.26.
