YANGZIJIANG SHIPBUILDING

Tuesday, 26 February 2013 13:20

YANGZIJIANG SHIPBUILDING has proposed a first and final cash dividend of 5.0 Singapore cents per share for FY2012 in spite of a 10% decline in net profit attributable to shareholders.

The 5-cent dividend works out to a dividend yield of 5%, based on its recent stock price of 98 cents. This year, its dividend payout ratio of 27% is higher than the 26% for FY2011. The shipbuilding industry has not come out of the current downcycle. Yet, the leading PRC shipyard is able to keep up with its dividend payment because of a successful diversification strategy and proactive cash management. Group revenue was Rmb 14.8 billion for FY2012, down 6% year-on-year. In spite of the challenging environment in the shipbuilding industry, the Group maintained gross profit margins at 31%.

The Group’s core revenue driver, shipbuilding and related activities, contributed about 91%, or Rmb 13.5 billion. This was down 7.7% year-on-year. The remaining revenue contribution of 9% came from investment segment (interest income from financial assets, held-to-maturity assets and micro finance business). This increased 20% y-o-y to Rmb 1.3 billion. This increase of about Rmb 200 million was driven by increased investments in held-to-maturity financial assets and higher loans to third parties in the micro finance business. Investment in held-to-maturity assets increased to RMB11.4 billion as at 31 December 2012.The Group’s balance sheet remained in a strong position with cash holdings of RMB6.3 billion and low gearing of 7.0%. Its diversification activities include: ship demolishing, steel fabrication, offshore oil and gas, and vessel chartering. The Group’s outstanding order book is US$3.4 billion, comprising of 64 vessels. In addition, the Group also secured a contract to build a Jackup Drilling Rig worth US$170.0 million, with an option for another similar rig.

Below is a summary of questions raised at the Group’s FY2012 analyst briefing and the replies provided by executive chairman Ren Yuanlin and CFO Liu Hua.

Q: Why are your held-to-maturity (HTM) investments growing when you have previously said that you intend to reduce it?

Our cash management policy is a long term one. We expect 2013 to be a challenging year for shipbuilders. As such, we have more than enough cash for working capital because of the decrease in newbuilding orders. When shipbuilding activities increase in the future, our HTM investments may decrease. Secondly, banks are willing to finance the construction of vessels that take place at our yards. So, we don't need to use our cash reserves. Our borrowing rate is only about 3% compared to 6% to 7% for commercial loans taken in China. Thirdly, the return from our HTM investments helps us retain our 30% dividend payout policy even during shipbuilding down-cycles.

Q: What is the tenure of the HTM investments?

We prefer to lend to government bodies as such investments are less risky. However, these types of investments have a longer holding period and lower return.

Q: How much lower is the return?

In the earlier years when we lent to commercial companies, returns could reach 12% to 15%. The return on loans to government bodies range from 10% to 12%.

Q: Have you written back on your provisions?

We write back provisions on all financial investments that have matured. Apart from provisions on financial investments, we also had provisions for vessels under construction. These provisions are written back when the vessel is fully sold, or when we receive a banker's guarantee for the job.

Q: Are you surprised there are no defaults with yields on HTM investments as high as 10% to 15%?

There were three to four incidents of default and we sold off the collateral within a short time. The total amount defaulted on is less than Rmb 500 million. We require a high collateral to loan ratio of about 2 times. There is why there are no bad debts on our balance sheet. Also, we have over 20 advisors on our investment and legal teams. These advisors are well-qualified individuals who hold important positions in the banking industry.

Q: What kind of land is provided as collateral?

All the land parcels we have accepted as collateral are located in Jiangsu. They are bare land licensed for commercial real estate development.

Q: What was the reason for the warrant issue?

In Singapore, the average daily value traded in Yangzijiang shares is slightly more than S$10 million. I feel that this is not active enough. Even though Yangzijiang is one of the most profitable yards in the world, our PE is only 5 times. The warrant issue will create more investment depth. Secondly, the government of China has said it wants the top 10 shipyards in China to contribute 70% of the country's shipbulding output. The warrant proceeds will help us expand and retain our position as one of the top 10 PRC yards.