Yangzijiang Shipbuilding - OCBC Investment 2016-05-03: Hard to beat the tide

SGinvestors.io

YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI 

Yangzijiang Shipbuilding: Hard to beat the tide 

• Eight order cancellations
• Stock up 13% from mid Jan 
• Downgrade to HOLD 

Soft 1Q16 results 

• Yangzijiang Shipbuilding (YZJ) reported an 11% YoY fall in revenue to RMB2.7b and a 36% drop in net profit to RMB448m in 1Q16, accounting for 18% of both our full year top and bottomline estimates; hence below expectations. 
• Shipbuilding revenue was 13% lower as vessels delivered in the quarter were relatively smaller in terms of vessel size; interest income from the group’s held to maturity (HTM) assets was also lower at RMB200m vs. RMB266m in 1Q15, due to the reduced investment portfolio size. 

Core shipbuilding still delivering; gross loss in other segment 

• Gross profit margin for shipbuilding, however, remained healthy at 23%, higher than 21% in 1Q15, and this is mainly due to the reversal of RMB40m warranty provision upon expiry of warranty for vessels delivered previously. 
• Other shipbuilding related businesses (sale of scrap metal and the shipping segment) registered a gross loss of RMB14m. 
• Meanwhile, YZJ’s HTM assets rose slightly from RMB9.98b in 4Q15 to RMB10.6b in 1Q16. 

Order cancellations in 1Q16 

• Eight vessel orders were cancelled in 1Q16, and this comprises six 82,000DWT and two 64,000DWT bulk carriers. 
• One of these vessels has yet to start construction, and YZJ has found prospective buyers for four other vessels. 
• 10- 30% down payment of the contract value had been collected for the contracts, and we understand that the customers for the cancelled orders are mainly US funds. 
• In the event that no buyers can be found for the remaining three vessels, the group is likely to park them under its shipping business. 

Downgrade to HOLD 

• The group has been faring relatively well despite the poor industry dynamics, but it is also hard to beat the tide. 
• On its part, YZJ, which is known for its effective cost control, has cut senior management salary by 20%, and laid off about 5% of its labour force. There is also a target to cut procurement costs by about 5% this year. 
• Meanwhile, we tweak our sum-of-parts valuation such that our fair value estimate is lowered slightly from S$1.06 to S$1.04. 
• As the stock is already up 13% from its low of S$0.88 in mid Jan, we downgrade our rating to HOLD.

Low Pei Han CFA OCBC Securities | http://www.ocbcresearch.com/ 2016-05-03

OCBC Securities SGX Stock Analyst Report HOLD Maintain BUY 1.04 Down 1.06