Yangzijiang Shipbuilding - CIMB Research 2017-04-28: Fortified Builder

YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Fortified Builder

1Q17 net profit of Rmb667m was 48% above our forecast and 40% above consensus on delivery of high-margin LNG vessels and resale of cancelled bulkers.
Shipbuilding gross margin was stable at 23% in 1Q17 vs. FY16’s 24%.
YZJ has proven to be a quality builder with the delivery of its maiden LNG vessels four months ahead of schedule, paving the way for more orders in this segment.

Enquiries on bulk carriers have improved yoy and management is confident of achieving US$1.5bn in orders for 2017.
Maintain Add with a higher TP of S$1.25, based on SOP (1x P/BV for shipbuilding and 0.85x for HTM business).

1Q17’s revenue of Rmb4.68bn (+73%yoy, -15% qoq) was 30% of our FY17 forecast.
Net profit was helped by lower-than-expected depreciation and interest expenses, offset by lower interest income. YZJ delivered 14 vessels, including 2 LNG vessels and 4 units of previously cancelled 82,500dwt bulk carriers. The resale bulkers were sold at Rmb550m (c.US$20m) slightly below market price of US$24m.
YZJ plans to deliver 37 vessels in 2017, including 2 in 2Q17 which could be bulkers that were cancelled in 2016.

The tail-end recognition of two 27,500 CBM LNG vessels and weaker Rmb vs. US$ had helped to keep shipbuilding margins steady at 23%. The maiden LNG vessels were secured in 2015 at a relatively high US$67.5m each.
YZJ executed the projects well and delivered the vessels four months ahead of schedule, helping to strengthen XZJ’s reputation in an LNG space dominated by the Japanese and Koreans. The final margins for the 2 LNG vessels were > 25% vs. bulk carriers of less than 15% at current market.

Management expects to clinch orders for VLOC-sized bulk carriers, LNG vessels and chemical tankers and is confident its US$1.5bn order target is achievable. YTD, it has new orders for 13 vessels worth US$318m. We up our order forecasts from US$1.2bn to US$1.5bn.
There were some cancellations in 1Q17 - 3 units of 36,500dwt bulk carriers and 1 unit of 10,000TEU containership. One bulk carrier has not started construction. An average of 20% down payment have been collected for these vessels.
Gift from the tax man Xinfu yard has obtained a preferential tax treatment with a 15% tax rate as a “High/New Technology Enterprise” for 3 years, which will reduce its effective tax rate from 2Q17 onwards.
There will also be a recognition of Rmb80m of tax reversal in 2Q17 as the finalisation of tax assessment completes.

While Singapore yards struggle with weak operating leverage and slower-than-expected order momentum, YZJ continues to shine.
Its balance sheet is also stronger with net cash of Rmb1.2bn. Operating cashflow was Rmb1.56bn with asset in HTM at Rmb10.5bn (4Q16: Rmb10.9bn).
We up our FY17-19F EPS on stronger order wins and lower tax rates.
Our SOP TP is raised to S$1.25.
Stronger orders could be the key catalysts.
Downside risks include sudden plunge in BDI which may implicate orders.

Lim Siew Khee CIMB Research | Cezzane SEE CIMB Research | http://research.itradecimb.com/ 2017-04-28

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