Yangzijiang Shipbuilding - OCBC Investment 2016-11-10: Strong balance sheet an imperative

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YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Strong balance sheet an imperative

• Shipyard GPM still healthy.
• Six orders terminated.
• Div yield an indicator.

3Q16 core net profit within expectations 

• Yangzijiang Shipbuilding (YZJ) reported a 6% YoY drop in revenue to RMB3.88b but saw a 59% fall in net profit to RMB281m in 3Q16, impacted by RMB531m impairment loss on PPE and other one-off items. 
• We estimate core net profit to be about RMB414m in the quarter, such that 9M16 recurring net profit accounted for 80% of our full year estimate, which we judge to be within expectations. 
• Shipyard gross profit margin was relatively healthy at 18.1% in 3Q16 vs. 16.6% in 3Q15. The RMB531m impairment loss on PPE relates to 13 vessels by the group’s shipping arm, while an impairment provision of RMB219m was made for held-to-maturity investments. 
• Other income was boosted, however, by RMB434m advance payments from previous ship owners of contracts terminated. 
• Looking ahead, 4Q16 would see a one-off tax reversal which would bump up net profit.

New orders and cancellations 

• Six shipbuilding orders were terminated while three new orders of 1900 TEU containerships were secured in 3Q16. Three of the terminated orders have not started construction, and YZJ is seeking buyers for the remaining vessels. An average of about 20% down payment of contract value had been collected. YTD, YZJ has secured 13 shipbuilding orders worth about US$650m.
• This brings its outstanding order book to S$4.4b as at end 3Q16, comprising 85 vessels. Currently, the company’s current strategy is to chase for new orders as long as they are not loss-making.

Strong balance sheet 

• The group recognizes the need to maintain a strong balance sheet during these trying times, as well as the importance of a strong partner for shipowners looking to build vessels. 
• Indeed, going forward, working capital may rise as more back-ended loaded orders are executed. 
• In 3Q16, the group’s net gearing was low at 0.6%.

Monitor stock dividend yield 

• Management has guided that it also looks at the stock’s dividend yield when determining its dividend payout. 
• Recall that when the group declared its RMB4.5 cents dividend during its FY15 results, the stock was hovering around S$1, resulting in a yield of ~4.5%. 
• Maintain HOLD with unchanged fair value estimate of S$0.81.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2016-11-10

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.810 Same 0.810