Yangzijiang Shipbuilding - CIMB Research 2015-12-09: Winter months ahead

Yangzijiang Shipbuilding - CIMB Research 2015-12-09: Winter months ahead YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI 

Yangzijiang Shipbuilding - Winter months ahead 

  • C.50% of YZJ’s US$4.8bn order book is dominated by bulk carriers which face heightened cancellation and deferral risks amidst recession in the dry bulk sector. 
  • We cut our order assumptions for FY16-17 from US$2bn p.a. to US$1.5bn. 
  • Earnings will continue to deteriorate in 2016-17 on lower margin jobs, deferral of deliveries, weak order momentum and investment in lower-return investments. 

Weak dry bulk shipping outlook 

  • The dry bulk shipping market will remain in recession in 2016-17, in our view, due to contracting demand for iron ore and coal, especially in China. 
  • Other than coping with lower order momentum, YZJ could also face deferrals and cancellation of the 71 units of bulk carriers on order, amounting to US$2.34bn. Some customers in Japan and the US have downsized their operations and may not be able to take on delivery. 
  • Management expects to see deferral of deliveries and cancellations in 2016. 

Containerships’ tough competition 

  • We believe larger containerships will dominate the future trend in the industry, and YZJ faces stiff competition from the Japanese and Korean yards, which have stronger track records and faster delivery timeframes. 
  • The weakening yen also serves as a competitive disadvantage for Chinese yards. 
  • Being new in the large-scale containerships segment, YZJ may need to sacrifice margins for contract wins. As such, we revise downward our shipbuilding margin estimates from 16% to 14.5% for FY16-17. 

Lower return from HTM investments 

  • Investment in held-to-maturity (HTM) financial assets will be gradually be replaced with equity stakes in venture capital funds / government-hybrid funds which yield lower return (c.10%, down from 15-20%). 
  • As such, investment income, which used to contribute c.40% of the company’s profit, is likely to slide, in tandem with shipbuilding profit, in our view. 

Maintain Hold 

  • We have reduced our EPS forecast by 3-14% for FY15-17 on the back of fewer orders and lower margin. 
  • Our target price (S$1.21, prev $1.35) is based on 0.9x P/BV, -1s.d. of its historical average, and a 10% premium over Singapore-listed smaller yards, which are struggling through an order drought. 
  • Potential re-rating catalysts could come from a shipbuilding sector turnaround or an upside surprise in China’s demand growth.

Lim Siew Khee CFA CIMB Securities | http://research.itradecimb.com/ 2015-12-09
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 1.21 Down 1.35