Yangzijiang Shipbuilding - CIMB Research 2016-02-29: Impaired quarter

Yangzijiang Shipbuilding - CIMB Research 2016-02-29: Impaired quarter YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI 

Yangzijiang Shipbuilding - Impaired quarter 

  • 4Q15 net profit of Rmb42m (-93% yoy, 94% qoq) was below our Rmb668m forecast and consensus’s Rmb660m estimate due to provisions/impairment. 
  • Weak rigs market and BDI resulted in impairment in 4Q15 – Rmb369m write-down of jack-up contract and Rmb360m impairment for bulk carriers. 
  • Final DPS of S$0.045 resulted in a higher yoy payout of 32% (FY14: 27%). Our -2% to +18% EPS changes reflect higher interest and shipbuilding margin. 
  • Upgrade from Hold to Add, on valuation grounds and yoy earnings improvement with more vessels delivery. It is trading at 0.7x P/BV vs. ROE of 11%. 

■ Expect more delivery in FY16 

  • 4Q15 revenue of Rmb3.1bn was in line with expectations. 
  • Shipbuilding revenue of Rmb2.93bn included delivery of six vessels in 4Q15 (3Q15: 9 vessels, FY15: 36 vessels). 
  • The yard targets to deliver 54 vessels out of its order book of 116 vessels. However, we keep our revenue forecast steady at c.Rmb14.5bn in FY16 to account for potential cancellation of orders or delayed deliveries. 
  • YZJ had two cancellations in FY15. 

■ Shipbuilding margins higher due to provision write-back 

  • 4Q15 shipbuilding gross margin spiked to 25% (9M15: 15.4%) mainly due write-back of provisions for warranty (2% of revenue and kept in its books for 3 years post-delivery). 
  • Gross margin should sustain at c.16-17% in FY16-17 as YZJ is likely to use a similar write-back policy, hence our higher EPS forecast for FY17. 

■ Jack-up rig written down to US$110m 

  • YZJ provided Rmb369m of impairment for the jack-up rig under construction (expected to be completed by Mar-16), writing down its contract value from US$175m. 
  • YZJ is likely to put the rig up for a distressed sale. 

■ Rmb360m impairment on bulk carrier fleet 

  • YZJ also made a Rmb210m impairment for bulk carriers owned and operated by its shipping arm, and Rmb150m provisions for finance lease receivables for vessels on bare-boat hire purchase (BBHP). 
  • YZJ has a fleet of 11 bulk carriers (2x 92,500dwt under BBHP with 8x 92,500dwt and 3x 64,000dwt self-managed). The carrying amount of these vessels is c.US$226m (US$21m each for 64,000dwt and US$20m for 92,500dwt). 

■ Order target lifted to US$2.5bn 

  • YZJ secured a 25% yoy increase in orders for FY15 at US$2.25bn. This could be due to the consolidation of shipbuilding industry in China as more yards were folded. As such, management is targeting new orders worth US$2.5bn on the back of increased market share in the industry. 
  • However, management is willing to compromise on margins as long as the new contracts are profitable, and keep its yard capacity busy. 

■ Valuation call – upgrade from Hold to Buy 

  • The stock is trading at 1 s.d. below its 5-year mean. We are only looking to trade the stock on a short-term basis. 
  • Industry challenges in shipbuilding and shipping remain. Higher-than-expected order wins could catalyse the stock. 
  • Our valuation is now based on 0.85x P/BV (previously 1x P/BV) for potential write-downs in jack-up rigs.  (TP: S$1.10)

Lim Siew Khee CFA CIMB Securities | http://research.itradecimb.com/ 2016-02-29
CIMB Securities SGX Stock Analyst Report ADD Upgrade HOLD 1.10 Down 1.21