Yangzijiang Shipbuilding - CIMB Research 2017-08-08: Prime Candidate For New Orders

YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Prime Candidate For New Orders

Yangzijiang's 2Q17 net profit of Rmb720m is above our Rmb699m expectations. 1H17 net profit forms 56% of our FY17F and 67% of consensus full-year net profit.
Higher income from HTM and “other gains” of Rmb188m caused the outperformance.
July’s order wins of 14 vessels (US$381m) lifted YTD order wins to US$832m. This excludes the potential three units of 180k dwt bulk carriers (c. US$125m) in talks.

We up our 2017F order win forecast to US$1.8bn, from US$1.5bn, and see YZJ as a prime candidate for new wins, given its track record.
Our EPS is up by 16-34% for FY17-19F to reflect strength in 2Q17 and higher orders.
Maintain Add with a higher target price of S$1.66, still based on SOP.

Qoq, shipbuilding revenue was down by 22% to Rmb2.26bn as the yard delivered 7 vessels compared to 14 vessels in 1Q17.
Management expects to deliver 45 vessels in 2017, suggesting a slight pick-up in 2H17 revenue recognition.
Gross margins for core shipbuilding held firm at 20% and we expect this trend to remain in 2H17 as deliveries are likely to benefit from back-loaded topline recognition and margin lift from depreciated Rmb/US$. These contracts were largely clinched in 2015 (stronger Rmb).

Income from HTM was up 64% qoq and 32% yoy to Rmb341m thanks to higher average interest rates. The higher interest rate environment is likely to work in YZJ’s favour.
Impairment loss of HTM reduced 82% qoq to Rmb7.7m on better performance indicators including collateral values, as well as credit ratings, among others.
On an annualised basis, we expect HTM to achieve a higher ROE of c.10% vs. 8.5% in FY16.
Overall HTM balance was stable qoq at Rmb10.6bn.

YZJ chalked up Rmb188m of net “other gains” in 2Q17, comprising Rmb134m gains from dissolution of four shipping companies, Rmb121m gain from marked-to-market financial investments, offset by a forex loss of Rmb148m.
Going into 2H17, we expect to see more gains arising from
1. sale of vessels (two 92,500 dwt bulkers were sold in July at < US$50m profit), and
2. tax credit of c.Rmb80m from Xinfu yard’s preferential tax treatment from 25% to 15% for 2016.

According to industry reports, YZJ is in talks with Cargill’s unit Great Wave Navigation for 3+3 units of 180k dwt bulk carriers worth US$41.6m each, with a total order worth up to US$250m, pending refund guarantee from the yard.
Including Jul’s 14 vessels, YZJ has secured 33 vessels worth US$832m YTD. We think US$1.8bn is doable, as the yard is in advanced talks with a few customers on sizeable bulk carriers and containerships.

YZJ has a net cash of Rmb304m. Payment terms for new orders remain healthy at 30/70, generating positive operating cashflow of Rmb305m.
Compared to its Singapore and Chinese SOE peers, YZJ has clearly shown its capabilities in capital management, cost management and margin control.

We up our order target to US$1.8bn from US$1.5bn for 2017. In addition, we also adjusted a few assumptions including
1. higher ‘other gains’ and lower administrative expenses to reflect 2Q17,
2. lower finance costs on the back of lower borrowings.
We up our TP to S$1.66 from S$1.25, still based on SOP valuations, now pegging 1x P/BV to its HTM business on the back of upward ROE trend.
We also peg the shipbuilding business to 1.4x P/BV or +1sd of its 5-year mean in anticipation of heightened order wins.
Key catalysts include stronger-than-expected orders.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-08-08

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.66 Up 1.250