Yangzijiang Shipbuilding - CIMB Research 2017-11-10: Aiming High

Yangzijiang Shipbuilding - CIMB Research 2017-11-10: Aiming High YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Aiming High

  • Yangzijiang Shipbuilding (YZJ)'s 3Q17 net profit of Rmb866m is in line with our expectation. 9M17 net profit of Rmb2254m at 78% of our full-year forecast but 95% of Bloomberg consensus. 3Q17 earnings were buoyed by Rmb309m gains.
  • Orders were extremely strong since Jul, totalling US$1.1bn in 3Q17, bringing YTD orders to US$1.59bn (FY16: US$823m), or 59 vessels (2016: 19 vessels).
  • Management is bullish on orders in 4Q17 and 1H18, and raised its order guidance to US$2bn from US$1.5bn. We follow suit and expect US$2bn (previously US$1.8bn).
  • We think YZJ, being among the last few strong yards in China, could ride the upcycle of improving sentiment in global trade and commodities. Our TP is raised to S$1.80.

3Q17 earnings lifted by “other gains” 

  • Yangzijiang Shipbuilding's 3Q17 earnings were lifted by Rmb309m gains - fair value gain of Rmb82m on financial assets, Rmb148m subsidy income, Rmb61m on the disposal of two shipping vessels, and Rmb95m from the disposal of its entire 50% equity interest in Jiangsu Huayuan Metal Processing Co Ltd, offset by an exchange related loss of Rmb102m. 
  • Excluding the gains, 3Q17 earnings would have been in line with Bloomberg consensus forecast.

Margins lower due to higher steel costs and Rmb 

  • Yangzijiang Shipbuilding delivered nine vessels in 3Q17 (2Q17: seven), bringing YTD delivery to 30 vessels. We expect it to deliver 38-40 vessels in FY17F. 
  • Shipbuilding gross margin was c.15%, vs. 20% in 2Q17 due to
    1. delivery of lower-value vessels,
    2. higher steel costs,
    3. Rmb appreciation, and
    4. upfront cost provision for a few newbuilding projects. 
    This could reverse in 4Q17F with the delivery of two high-value 11,800 TEU containerships to PIL.

Bullish on order outlook up to 1H18F 

  • After clinching 14 vessel orders in Jul 2017 (US$381m), YZJ has since secured another 24 vessel orders (US$754m). These are mainly bulk carriers (13x 82k dwt, 1x 180k dwt, 2x 45k dwt, 5x 208k dwt). 
  • As at end-3Q17, its orderbook stood at US$4.3bn for 103 vessels. 
  • Management raised its 2017 orderbook guidance to US$2bn and expects a similar strong trend in 1H18. Payment terms for newbuilds are still attractive at 30/70.

Owners are booking slots ahead 

  • Baltic Dry Index strength and emission control requirements set by International Maritime Organisation (IMO) are two drivers for stronger orders. Shipowners are booking delivery slots to avoid higher costs of construction; e.g. a newbuild 82k dwt bulk carrier for delivery after Jul 2020 (complying with the new NOx Tier III Emission Control Areas for nitrogen oxides) will cost US$1.8m extra to build. 
  • The delivery of two larger 11,800 TEU containerships to PIL has also drawn enquiries on YZJ’s (own design) on these vessels.

HTM income could benefit in a higher interest rate environment 

  • Held-to-maturity (HTM) investment balance in 3Q17 was stable at Rmb10.7bn. 9M17 interest received from HTM grew 16% yoy to Rmb777m as a result of higher proportion of the portfolio having better yield. We believe this trend is likely to continue in a high interest environment. 
  • 3Q17 net cash improved to Rmb429m (2Q17: Rmb304m) with more loan repayment in 3Q17 and proceeds from a recent c.S$209m share placement.
  • Pricing discussion is still ongoing to acquire the remaining 20% of Xinfu yard.

Maintain Add, raise Target Price to S$1.97, on unchanged SOP basis 

  • Yangzijiang Shipbuilding appears to be more resilient than Singapore peers (e.g. Sembcorp Marine SMM) in the terms of order momentum (SMM’s order ex LOI at S$270m), balance sheet (SMM is in net debt), and ROE of 12% (SMM: 0.8%). 
  • We think YZJ’s shipbuilding deserves to trade at 1.7x P/BV (+1.5 of mean). We keep a 1x P/BV valuation on HTM assets, in line with 1-yr average return of 10%. 
  • Stronger orders could be a key re-rating catalyst. Cost overrun is a risk.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-11-10
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.80 Up 1.660