Maybank Kim Eng 2015-08-05: Yangzijiang Shipbuilding - 2Q15 Results. More margin downside; D/G to SELL.

More margin downside; D/G to SELL 

  • 2Q15 net in line, but as expected shipbuilding gross margin started to decline, dipping 6ppts QoQ to 14.8%. 
  • Change of strategy to focusing on winning new orders over margins.Core FY16/17E EPS cut by 16/27% for lower margins. 
  • Lowering SOTP-based TP from SGD1.35 to SGD1.12. D/G to contrarian SELL as we see further margin pressure. 

What’s New 

  • 2Q15 PATMI of CNY1,030.6m (-16.6% YoY, +45.8% QoQ) lifted 1H15 PATMI to CNY1,737.5m (-14.6% YoY), forming 66%/58% of our/consensus FY15F. 
  • Adjusting for other gains of CNY412.1m, results were in line. 
  • Shipbuilding gross margin fell to 14.8% (1Q15: 20.8%, 2Q14: 24.4%). 
  • YZJ disposed of property company Jiangsu Hengyuan for CNY1b, at a minor loss. 
  • It now has only one 50%- owned real-estate company, Jiangsu Huaxi Yangzi, which is involved in redeveloping its old yard into residential properties. 

What’s Our View 

  • YTD, it has secured USD880m of new orders vs YZJ’s target of USD2b. 
  • We forecasted USD1.6b initially. But YZJ communicated a new strategy to prioritise order wins over margins after losing out recently to Korean and Japanese shipbuilders on prices. 
  • It expects to achieve its USD2b target by Sep following this new strategy. 
  • We raise our target to USD2.1b accordingly but now see further pressure in shipbuilding gross margins. 
  • For held-to-maturity assets, YZJ said it has stopped investing in high-risk assets and it aims to reduce these to CNY10b by year-end. But we believe it does not have a strong commitment to do so. 
  • We raise FY15/16F EPS by 13/4% for one-off gains (added 2Q15 one-offs and CNY715m of gov’t compensation for FY16). 
  • But FY16/17F core EPS are lowered by 16%/27% as we cut FY16/17F shipbuilding gross margins from 15%/15% to 12%/11%. 
  • All in all, TP cut from SGD1.35 to SGD1.12. 
  • We now value shipbuilding at 0.9x P/BV, -1SD (from 1.3x at -0.5SD) on weaker prospects. 
  • Downgrade to SELL from HOLD. 

Analyst: Yeak Chee Keong, CFA