Yangzijiang Shipbuilding - OCBC Investment 2017-11-13: Gross Margin Normalises

YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Gross Margin Normalises

Yangzijiang Shipbuilding (YZJ) registered a 13% YoY rise in revenue to RMB4.4b but saw a 23% decrease in gross profit to RMB674m in 3Q17.
Share of results of associated companies and JV was RMB31.3m in the quarter, compared to a loss of RMB95.8m in 3Q16; the group’s associated companies saw fair value gains of venture capital investments in 3Q17. Along with lower effective tax rate of 4% in 3Q17 (aided by factors such as tax refund), YZJ’s net profit was RMB866m in 3Q17 vs. RMB281m in 3Q16.
Stripping out these one-off items, results were within expectations.

Gross profit margin for the group fell to 15.4% in 3Q17, a new low in recent times. This compares with 22.4% in 3Q16 and 21.2% in 2Q17. Gross profit margin for the shipyard segment was 10.9% in 3Q17 compared to 18.1% in 3Q16 and 13.7% in 2Q17. The decline in gross margin is not surprising given the rise in labour costs, raw material costs (e.g. steel) and competitive pricing throughout an industry that generally still faces overcapacity.
In 4Q17, however, gross margin may be supported by the delivery of vessels with higher contract values and margins.
However, on a relative basis compared to other shipbuilders, YZJ has already fared well given strong management capabilities and execution.

As for its held-to-maturity assets, the total amount remained stable at RMB10.7b in 3Q17.
YTD, the group has secured new orders for 59 vessels with a total contract value of US$1.59b; this compares to US$0.8b in FY16 and US$2.3b in FY15. As at 30 Sep 2017, the group’s outstanding order book was US$4.3b, comprising 103 vessels.
Looking ahead, market conditions for the shipbuilding industry have continued to improve with the BDI recovering to a three-year high, though it will still take time for the overcapacity in the shipping industry to be resolved.
We roll forward our valuations to FY18 numbers and after tweaking our estimates, our FV rises from S$1.48 to S$1.63. Maintain HOLD.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-11-13

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 1.63 Up 1.480