Yangzijiang Shipbuilding - OCBC Investment 2016-08-08: Results below expectations

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YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Results below expectations

• Slow 2Q16 
• No more real estate exposure 
• Revise estimates lower 

Soft 2Q16 results 

• Yangzijiang Shipbuilding (YZJ) reported a 48% YoY fall in revenue to RMB 2.99b and a 60% drop in net profit to RMB 415.4m in 2Q16. 
• Stripping out one-off items, we estimate core net profit declined 41% YoY to RMB 453m in the quarter, such that 1H16 core net profit accounted for only 38% of our full year estimates, below expectations. 
• 1H16 total net profit represented 39% and 37% of ours and the street’s full year estimates, respectively.

Updates on shipbuilding orders

• Three shipbuilding orders were terminated in 2Q16, all of which production has not started yet. On a more positive note, seven out of the eight orders that were terminated in 1Q16 and one out of the two orders terminated in 2015 found new buyers in the quarter. For the remaining two orders, construction has not commenced. 
• Taken as a whole, we understand that the group did not make losses from these terminated vessels that were on-sold to new buyers. 
• Meanwhile, for the jack-up rig that it has built, delivery has been deferred to end July next year, and it is currently laid-up in Taicang.

Disposal of real estate assets...

• Another noteworthy development is the group’s disposal of its real estate development assets (50% equity interest in Jiangsu Huaxi Yangzi Real Estate Co) in 2Q16. After this disposal, YZJ has no business exposure in the real estate sector.

... with rise in HTM assets 

• RMB 900m worth of loans to Jiangsu Huaxi were also reclassified under the held-to-maturity assets segment; this was originally funds for the subsidiary which is now considered a 3rd party given the disposal. As such, held-to-maturity assets rose from RMB 10.6b in 1Q16 to RMB 11.7b in 2Q16.

Revise estimates lower; downgrade to HOLD 

• At the current pace in which the group is securing new orders (US$600m YTD), it could be tough for it to hit its new order target of US$2.5b by the end of the year. 
• Certain vessels that were originally scheduled to be delivered this year could now be delivered early next year as well. 
• We revise our earnings estimates lower, and tweak our SOTP-fair value estimate from S$1.04 to S$0.87. 
• Downgrade to HOLD.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2016-08-08

OCBC Investment SGX Stock Analyst Report HOLD Downgrade BUY 0.87 Down 1.040