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

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.

Shipbuilding gross margin steady at 20% 

  • 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).

HTM inching up 

  • 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.

Earnings boosted by other gains, more to come in 2H17F 

  • 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.

Confident of original US$1.5bn target, we think US$1.8bn doable 

  • 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. 

Net cash = one up vs. Singapore peers 

  • 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. 

Maintain Add with higher TP to S$1.66 

  • 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