Yangzijiang Shipbuilding - CIMB Research 2016-11-09: Still making money

Yangzijiang Shipbuilding - CIMB Research 2016-11-09: Still making money YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Still making money

  • YZJ is relatively stronger than peers. It has cash, profits and valuation is cheap.
  • 3Q16 NP of Rmb281m below our estimate and consensus due to higher tax charge. This would reverse in 4Q16 as YZJ obtained preferential tax status.
  • But order momentum is slower at US$650m won YTD. Management guiding down 2016 target to US$1bn. We expect some new orders in the short-term.
  • Working capital weakened with lesser orders and slower progressive payment. However YZJ’s balance sheet is stronger than peers as its net gearing is only at 6%.
  • Management aims to keep DPS for FY16 at S$0.035-0.045, translating into 4.7-6%. Yield. Maintain Add with lower target price of S$0.91.

One offs and tax expense 

  • Notable one-offs in 3Q16 include: 
    1. Rmb531m impairment for 13 owned and operated bulk carriers as value per ship fell from c.US$16m-17m in 2015 to US$13m-13.8m now, 
    2. Rmb219m general provision made on c.Rmb900m in Huaxi, and 
    3. Rmb434m income recognised from advanced payment due to cancelled contract. 
  • Tax expense had lower tax credit on impairment loss. New Yangzi yard has received the high-tech status and qualified for 15% preferential tax rate and we expect a reversal of c.Rmb130m by 4Q16.

Good execution, steady margins but cancellation risks remain 

  • Shipbuilding related gross margin improved qoq to 18% in line with higher number of vessels delivered (8 in 3Q16 vs. 7 in 2Q16). Six vessels were cancelled during the quarter. Work has not started for these vessels and YJZ has collected c.20% of deposits for the contracts.

Order outlook is a macro call 

  • YZJ has secured US$650m worth of new orders YTD, short of our target of US$1.8bn. It is now guiding to close 2016 with US$1bn with some contracts in the pipeline in the near term. We cut our order win assumptions to US$1.2bn in FY17 (previously US$1.8bn).
  • Order momentum largely depends on the global and China economy. Order book stood at US$4.4.bn, comprising 44 containerships, 37 bulk carriers, two LNG carriers and two Very Large Gas Carriers (VLGC).

Working capital weakens but balance sheet solid 

  • Operating cashflow was negative Rmb487m as a result of lower order and slower progressive payment from customers. However, YZJ still has Rmb5.8bn of cash and net gearing at 6% to finance constructions ahead, in our view. 
  • Investment in HTM reduced slightly qoq to Rmb11bn from Rmb12bn. Average return of investments is now at about 8%, with longer tenure and government-linked notes.

Keep for dividend 

  • 9M16 NP was below at 62% of our FY16 forecast due to higher taxes. Our FY16-18F EPS forecasts are cut by 11-19% to reflect our cut in orders and lower subsidy income.
  • We roll forward our target price to CY17, now based on 0.75x (previously 0.8x) P/BV in line with its ROE. 
  • Management is confident of paying dividend of S$0.035-0.045, which translates into a yield of 4.7-6%. 
  • Maintain Add. 
  • Key catalysts include stronger-than-expected order wins. 
  • Key risks include a major blow up in HTM investments.

Lim Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-11-09
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.91 Down 1.040