Yangzijiang Shipbuilding - OCBC Investment 2017-08-10: To Continue Rerating?

Yangzijiang Shipbuilding: - OCBC Investment 2017-08-10: To Continue Rerating? YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding: - To Continue Rerating?

  • In line results.
  • Likely to meet US$1.5b new order target.
  • Recognition from the market.

Few surprises in results 

  • Yangzijiang Shipbuilding (YZJ) saw a 27% YoY rise in revenue to RMB3.8b and a 73% increase in net profit to RMB720m in 2Q17, such that 1H17 net profit of RMB1.4b accounted for 55% of our full year forecast, in line with our expectations. This was, however, higher than the street’s expectations (1H17 was 67% of Bloomberg FY17F consensus of RMB2.1b). Gross profit margin from the shipbuilding-related segment was 13.7% in 2Q17 vs. 15.9% in 2Q16.
  • Meanwhile, a shipbuilding order for one 82000 DWT bulk carrier was terminated in 2Q17.
  • US$832m orders YTD In 1H17, the group secured new orders of US$450m, with an additional US$381m in Jul, bringing YTD orders to US$832m. At this rate, management’s earlier guidance of US$1.5b new orders in 2017 looks attainable. 
  • In comparison, new orders for 2016 and 2015 were US$820m and US$2.25b, respectively.

Management has proven to be a steady hand 

  • YZJ’s share price has done very well so far this year, likely a recognition of the group’s good track record amidst a volatile environment and improvement in sentiment in the shipping sector, though management still sounds cautious with regards to the oversupply situation in the overall market. 
  • Margins are still pressured and vessel values remain low, but YZJ is likely to remain a survivor and even thrive amidst a consolidated market. 
  • Meanwhile, with more yards reporting declining earnings, the number of peers with meaningful P/E ratios has correspondingly decreased. As such, we change our valuation methodology to P/B for the shipyard segment, and by ascribing a P/B of 1.3x compared to the industry average of 1.2x (to account for YZJ’s strong management capabilities and healthier financial position), our FV rises to S$1.58.
  • Though there is still room for further P/B expansion with improving sentiment, a fair amount of new orders expectation is likely baked into the current share price. As such, buyers at current levels face a certain level of downside risk should new order flow momentum slow in the near term. 
  • Maintain HOLD; we prefer to be buyers around S$1.48.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-08-10
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 1.58 Up 1.180