Yangzijiang Shipbuilding - CIMB Research 2016-08-05: Slower vessel construction progress

YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Lower revenue but expect 2H16 to be stronger

1H16 net profit of Rmb86m (US$129m) formed c.37% of our FY16F and consensus.
2Q16 revenue (-48% yoy,11% qoq) was below our expectations, as only seven vessels were delivered (1Q16:11 deliveries).
Progress on vessel construction was slower due to deferrals and cancellations that required some reshuffling of order book.

Three vessels were cancelled in 2Q16 as a result of existing customers taking up vessels that were terminated in 4Q15 and 1Q16. These vessels are near completion and will be delivered in 2H16, resulting in back-loaded revenue recognition in FY16.

Core shipbuilding gross margin remained stable qoq at 24% in 2Q16 (1Q16:23%) but this could trend lower in 2H16, diluted by revenue recognised for cancelled vessels above.
Eight of the 13 cancelled vessels since 4Q15 have been resold at 25% discount, taking into account the forfeited deposit (30-40%), resulting in a c.5% gross margin.
Overall shipbuilding gross margin fell qoq at 16% in 2Q16 (1Q16:18%) as ship chartering gross losses widened due to depressed bulk carriers market and freight rates.

Order book stood at US$4.8bn at end-2Q16, comprising 42 containerships, 47 bulk carriers, two LNG carriers and two VLGC. We cut our order forecast to US$1.8bn (from US$2.5bn) for 2016-18.
We believe the trend of feeder containerships (<3,000TEU) will dominate in near term.
82% of the 22 containerships ordered from Chinese yard in 2016 are feeder sized. There is a trend of liners refocusing on smaller vessels to cater to intra- region trade. Feeder containers accounted for only 10% of global fleet capacity now.

YZJ’s net gearing stood at 6% at end-2Q16, relatively stronger than those of the Singapore yards ( >50%). Even if we strip out the HTM investments of Rmb11.6bn (US$1.74bn) from its book, net gearing would still be low at 14%.
We believe this could sustain FY16 dividend payout of at least S$0.04, translating into 4.4% yield.

Our EPS is cut by 24-31% for FY16-18F to reflect lower revenue, margin and order assumptions.
Our target price is also reduced to S$1.04, still based on 0.8x CY16 P/BV (in line with 8% ROE).
Key catalyst could come from stronger order wins.
Earnings upside could also come from preferential tax status approval by end 2016 or 2017, which would reduce tax rates from 25% to 15%.
Downside risks include a flurry of cancellations and prolonged order drought.

Lim Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-08-05

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